EXPLAINED: should I trust all those "End-of-Year Tax Saving Tips"?

[Michael Plaks]

This is a revision of my popular post from 3 years ago. See, the older I get (don't ask), the more annoyed I get with the endless "I WILL SHOW YOU HOW TO CUT YOUR TAXES in DECEMBER" emails, posts, webinars, podcasts, TikToks, YouTubes and whatnot. Here is a fresh example, and it actually came from another tax firm (not mine) specializing in real estate.

Let me briefly tell you why I crossed out their pitch:
Strategy 1: depends on your 2025 projected net income vs your 2024 net income, among many other factors
Strategy 2: can backfire amidst the uncertainty of future tax rules regarding bonus depreciation, and also ignores alternatives
Strategy 3: no rush to do it before December 31st

If you decide to continue reading, I will give you a high-level overview of the most common EOY tax strategies, obviously without an actual discussion of each one. If you discover one that sounds potentially relevant, and you have not explored it - see if you can still get hold of your accountant before 12/31 and ask them. It's always case-by-case.

GROUP 1: Not tax strategies at all, but for some reason often promoted as such

Organize your records. Sure, I'm all for it. How is it a tax strategy though? Oh yeah, if you did not record it, you will not deduct it on your taxes. Not rocket science. Frankly, if you don't keep track of what you spend for business, real tax strategies is not your problem at the moment. Stop reading and start organizing.

Buy more properties. Wow, this is powerful. You've never thought of this one, have you? Aren't you glad that some antisocial media influencer brought this "tax strategy" to your attention? By the way, buying a property in late December will probably not change your taxes for this year. By all means, buy more properties, just not for taxes. Buy them to grow your portfolio, and buy good properties.

Form an LLC. An LLC by itself does not change anything for taxes. You don't get more deductions or lower your taxes with an LLC. You might have a good reason to create one, but it's almost never for tax reasons.

"Deduct everything." It's a sad state of affairs when this phrase passes as a tax strategy. It is often used by the likes of Uncle G (who, having an accounting degree himself, should know better) to suggest claiming personal expenses as business deductions. Things like your vacations, entertainment, toys, food, clothes, housekeeping, pets, guns etc. There is some room for creativity here, but it takes careful planning and execution, and there is only so far you can push it before crossing the line from aggressive but legal to reckless and punishable.

GROUP 2: Legitimate tax strategies, just not for the EOY to-do list

Form an S-corporation. The tax benefits of S-corporations are widely misunderstood and over-promoted. Maybe it can help you in your specific situation, it depends. But if so, you don't have to convert your LLC to an S-corp (or create one) in December. Doing it in December will not save you any taxes anyway. While on the topic, an S-corp will never save you anything on your rental properties, among other problems it may create, so don't place rentals into an S-corp.

Form a C-corporation. It is far more complicated than an S-corporation. (Think "S" means "Simple", and "C" means "Complicated") Don't try it at home. Get C-ompetent help, not just S-omeone. And it is not something you do retroactively anyway, only proactively.

Contribute to retirement plans. Yes, 401(k) plans, IRAs, SEP-IRAs and all other kinds of retirement plans are still the backbone of your wealth accumulation, especially if they are self-directed. For the most part, they all can be created and funded next year, with a few exceptions. Could be too late to form the more complex plans for 2024, so plan for 2025.

Start an HSA plan. You cannot just casually start this medical expense plan, it's not an IRA. You need to carry a special type of health insurance, not the traditional kind. And you needed to have an HSA-compatible insurance on December 1st, otherwise it's too late for this year. And there're restrictions on how you can use these accounts. For example, you cannot fund your HSA account and then turn around and reimburse yourself for expenses previously paid. Maybe consider an HSA for next year.

Hire your wife, kids and other relatives. First, this is not (just) a tax move. It changes the family dynamics, and not always for the better. But if employing your family works for you and for them - great, go ahead. Hire them next year. Yes, TikTok tax wizards teach you to start payroll on the last week of December and pay your family lump sum for the work they supposedly did during the last 12 months. Aka fraud.

Accelerated depreciation, bonus depreciation, Section 179. All of these are legitimate tax concepts. They may or may not help you however, it is case-by-case. Either way, there is nothing you need to do - now in December or later on. Your accountant will do it for you at tax time if applicable. Here is an intro to depreciation: https://www.biggerpockets.com/forums/51/topics/1121063-expla...

Cost segregation. It is actually just a tool to create the already mentioned accelerated depreciation. If this strategy can help you, you don't have to rush. To apply cost segregation to your 2024 taxes, you need to do it at any time before you file your taxes, not before the New Year's champagne toast. More on cost segregation: https://www.biggerpockets.com/forums/51/topics/1075919-five-...

Home office. It's great if you qualify, it has many benefits. It's not a strategy though, at least not something you do in December. You either had a home office in 2024 or not. If not, consider establishing one for 2025, after learning the rules. And answering your phone calls while watching the games does not turn your living room into a home office. Sorry to rebuff your favorite influencer with an office at their parents' kitchen.

14-day free rent aka Augusta rule loophole. It's a good little loophole for a short-term rental of your home, including renting it to your own separate business. If it's something that can help you, then plan to implement it next year. Manufacturing it retroactively for the current year sounds too much like fraud.

GROUP 3: Tax strategies that really are for EOY consideration

Place rental properties in service. If your property is ready for occupancy in December, should you officially place it in service now or wait until 2025? If you place it in service in 2024, you can potentially benefit from depreciation this year, including cost segregation and bonus. Otherwise you have to wait. As I will illustrate later, sometimes you are better off waiting.   

Buy an STR and rent it in December. Oh yes, the famous STR loophole. Here is an STR 101 if you're not familiar with this strategy: https://www.biggerpockets.com/forums/51/topics/1122635-the-s...  Unfortunately, December is probably too late for this, as explained here: https://www.biggerpockets.com/forums/51/topics/1220969-expla...  

Delay receiving income into January. Yes, it will delay your taxes on this income for another year. And I will always be against delaying the receipt of money. No exceptions, including for tax reasons. You never know what will happen or not happen tomorrow. I have stories for a book or two. Get you money ASAP, period.

Prepay your expenses in December. Yes, it might give you the deduction for 2024, one year sooner than if you wait. For example, you can prepay for your marketing, your entire office rent for next year, your insurance premiums, your property taxes, your attorney's and accountant's fees, and so on. Before you do so, make sure that it will, in fact, reduce your current year's taxes. Often it won't, so there's no point to prepay. By the way, credit card expenses count when charged, not when the credit card bill is paid.

Buy more stuff. This popular advice really irks me. If you buy a computer for $1,000 and write it off of your taxes, it is not free to you! You simply get a discount on this purchase, equal to your tax rate/bracket. Only buy stuff that you actually need, and only if you need it now or soon. And remember: if you bought it now, you won't be buying it next year, so you basically rob your next year of this tax deduction. You usually end up with the same amount of taxes over two years, you just get your Amazon package and your tax deduction one year sooner.

Buy a new car. Argh. Maybe, but... First: see above about buying more stuff in general. It won't be a free truck. So, do you need a new truck? Like, right now? Second: writing off the full cost of a new car is badly overhyped. It's not just any kind of car, and even if you buy the "right" vehicle, it has to be used 100% for business, which is rare. Otherwise, you can only write off its business portion. Third: even if your new toy qualifies for a huge depreciation deduction, your allowable deduction may be limited, and may even be zero. Fourth: even if the entire deduction is available, it results in much smaller automobile deductions in future years and extra taxable income when you sell the vehicle or trade it in. No, you cannot "write off a new truck every 3 years" as those YouTube professors suggest.

Prepay or delay personal itemized deductions. This has to do mainly with the timing of property tax payments for your own home (not for your investment properties) and your charitable donations. It is very much case-by-case and requires understanding of the current tax regime for personal itemized deductions, as well as gambling on the proposed changes to this regime by the next administration. Very large out-of-pocket medical expenses are also part of this game.

Balance gains and losses on your investments. The goal is legitimate: due to complex tax rules, you have opportunities to game the system by selling some of your investments and intentionally generating either gains or losses. However, I shudder at the popular suggestion to sell some of your investments for tax purposes, often coming from commission-based brokers and financial advisors. Very wrong approach! You sell your investments whenever it no longer makes business sense to hold them, not when you "need" it for tax reasons! Sell only when the timing is right from an investment angle. Wait to sell for tax reasons - and watch your investment suddenly lose value. Sell too soon for tax reasons - and pull your hair watching this investment climb up while you no longer own it.

Harvest investment gains or losses. This is a variation of the above strategy, except you do not dump the investment. You sell it and immediately buy it back. Why? Because it allows you to "harvest" the accumulated gain or loss for tax purposes while still holding the investment. You need to be careful around the risks of sudden price changes, market stoppages and watch for transaction fees. Most importantly, harvesting losses is only possible if you reinvest in a similar but not the same exact investment. And it has its own risks.

Harvest crypto losses. Unlike investments in stocks and mutual funds, crypto investments allow loss harvesting without the 30-day "wash sale" rules. Due to the extreme volatility of crypto and potentially high transaction costs, you need to be real careful with harvesting crypto losses.

Pick tax-efficient investments. In my book (not yet written, in case you ask), this is the worst kind of advice. Example: invest in syndications / short-term rentals / oil & gas wells / solar projects / conservation easements, and so on, due to the tax losses they generate. Or, the opposite: avoid such and such investments because you pay a lot of taxes when they grow. Huh? My tombstone should read: pick efficient investments, not tax-efficient investments. Whether it's stocks, real estate or any other investment: focus on their cash flow, appreciation/growth potential and risks, not on their taxation. Don't miss the forest for the trees.

Set up last-minute payroll. If you operate as a separate business entity - S-corp, C-corp or a partnership - you may be required to have formal compensation for yourself: either a W-2 salary or so-called guaranteed payments. If none has been set up yet, it may be urgent, depending on your situation.

Reimburse the owners for business expenses. If your business entity has an accountable plan for business expense reimbursements, make sure to issue the appropriate reimbursements in December. If you do not yet have such a plan, create one ASAP. Why bother? Without an accountable plan, an owner of an S-corporation has no way to deduct his personally-paid expenses such as business use of his car/truck. This can really hurt.

Convert IRAs and 401(k) to Roth. In the long run, Roth-style retirement accounts beat the Traditional retirement accounts. In other words, you're better off with Roth. If you have non-Roth retirement accounts, consider converting them to Roth accounts. You can always do it with your own IRAs, however your employer's 401(k) may or may not have such an option. Since conversion to Roth creates a one-time tax hit, it should be carefully planned. Timing matters, and there're some aggressive strategies for self-directed accounts. If you want your Roth conversion to count for 2024, it must be completed in December, so hurry up.

Take RMDs. If you're over 72, you may have to take Required Minimum Distributions (RMDs) out of your retirement accounts by the end of the year - or pay stiff IRS penalties. Your IRA custodian should have advised you by now and calculated the amount for you. If you have self-directed accounts and are your own custodian, this burden is on you.

Use your employer's tax-advantaged benefits. Depending on your employer's plans, you may have to use some of your "use it or lose it" benefits urgently.

Save for college. There're various financial plans designed to help with college financing, and some of them come with tax benefits. More than a tax strategy, these are education planning tools, and they need to be addressed in a broader context than just taxes. Many of those plans have a December 31 deadline for annual contributions. Unless you believe that our government should and will provide free education for all.

Give to charities. If you have substantial (usually means 5 digits or more) donations, tax planning opportunities can get very complex. Get professional advice before donating.

Gift to family and others. There are no tax deductions for such gifts, however you have a $15k per recipient annual gift limit that avoids the chore of filing a gift tax return. Gifts don't have to be in cash. Large gifts, including real estate, may benefit from structuring around this limitation.

Cancel bad debts. If you have some debts owed to you that you gave up on, you may want to establish them as uncollectible in December. This way, you may be able to write off the losses on your 2024 tax return. The exact steps depend on the nature of the defaulted debts and on your local laws.

State income tax planning. Depending on your state and your business, you may have some unique and potentially urgent opportunities. They include purchasing state tax credits and prepaying state income tax via pass-through entities: S-corporations and partnerships. Definitely requires professional advice from someone familiar with your state tax laws.

To be or not to be? 2024 or 2025?

Say, there is something you do need to buy/pay for. You can do it in December 2024 or January 2025. December 2024 will speed up your deduction by a year, so you will get your money back much faster. A no-brainer, yes? Not at all!

Let's tax our brains a little bit more here. What if this $1,000 deduction saves you $120 in 2024 but saves you $240 in 2025? Twice as much! How is it possible? Very possible if your income is significantly higher in 2025 than in 2024. Business growth, job bonus, severance pay, properties sold, syndications closed, Roth conversion - the list of factors that can drastically change your taxable income is endless.

Well, do you want $120 now or $240 a year later? Not so simple any more, is it? Especially since $120 now is fairly certain, while $240 a year from now is merely an expectation (read: guess) as of today.

Yeah, this was super clear and helpful, I know.

Preparing for Trump 2.0

I wrote a separate post about it. If you're curious - read it here: https://www.biggerpockets.com/forums/51/topics/1221700-rant-...

In closing: The dangers of shifting the timing (of your income, expenses, and business transactions.)

A purely mathematical exercise may indicate some beneficial timing for this or that. Before implementing such timing manipulations, consider the risks:

1. You may not be able to receive the money later
2. You may not be able to close the deal later
3. You may not be able to buy the goods or services later
4. Even if you are able to do it, you may not be able to keep the same price or the same timeline
5. You may miss other opportunities meanwhile

Now tell me - are these risks worth potential tax savings? Does it matter how much you could have saved on taxes if your deal fell apart while you waited? Did Covid teach you anything about predictability?

And besides, you usually do not save taxes by these timing maneuvers. You simply delay them for a year.

But wait - there is more! Next year, your income may change; your family or tax situation may change; tax laws may change. As a result, you might end up increasing your taxes by delaying income and accelerating deductions.

Did I miss something?

You bet I did. There're quite a few more opportunities/strategies to consider, especially for high-net-worth and/or high-earnings investors. There're also many narrow scope planning opportunities that are less common than those I listed. And some good ones I may have overlooked unintentionally. Feel free to add yours in the comments.

PS. This post is a generic overview for educational purposes. It is not tax advice for your situation, which I have no way of evaluating. All real tax advice should be custom and one-on-one.

PPS. "What about my situation?" I answer these questions for my clients, year-round. Get your own accountant/tax strategist. And here is my post on finding one: https://www.biggerpockets.com/forums/51/topics/1222774-expla...