Personal CDs
When Should You Start Tax Planning?
Most people want to mitigate their tax bill as a part of their financial planning. If you share this goal, you'll need to plan ahead and make changes in this calendar year that will impact how much you owe when you file your tax return next year.
That's why the end of the calendar year is a great time to take actions that can help manage your tax liability.
There’s no specific tax planning strategy that works for everyone, so it’s a good idea to speak with your tax advisor to determine a plan that will work best to help achieve your particular goals and objectives.
Consider these strategies that might help lower your tax liability when you file your 2024 tax return next year.
Deductions to Take Before the New Year
If you haven't maximized your allowable tax deductions during 2024, now is the time to review the range of deductions for which you might qualify.
Here are 10 common year-end tax considerations:
1. Understand and manage deductions
The Tax Cuts and Jobs Act of 2017 nearly doubled the allowable standard deduction amounts. At the same time, the Act eliminated miscellaneous itemized deductions, capped the state and local income tax and real property tax deductions at $10,000, and limited mortgage interest deductions to loan balances of up to $750,000.
The cap on state and local income taxes (SALT) has made it more difficult to use these deductions to reduce tax liability. In high tax states such as California and New York, this so-called SALT cap has had huge tax implications for high-income taxpayers.
Due to multiple failed attempts to repeal the cap in Congress, many states have enacted a workaround allowing certain pass-through entities (such as S corporations and partnerships) to be taxed at the entity level for state taxes, and the ability to deduct such tax payments at the federal level.
Basically, this allows owners of S corporations and partnerships to bypass the federal cap limitation. If you think this workaround might apply to you, check with your tax advisor regarding the specific requirements and limitations in your state.
2. Consolidate Your Charitable Contributions
The deduction amount you may claim for charitable gifts in a given tax year is based on the type of asset gifted, your adjusted gross income (AGI) and the type of charity receiving your gift. Any unused portion of the charitable deduction can be carried forward for up to five years.
In 2024, if you donate cash to a public charity, including a donor advised fund or community foundation, you are entitled to take a charitable deduction against it up to 60% of your AGI.
For example, let's say a donor whose AGI is $200,000 provides a cash gift of $20,000 to a donor advised fund and makes no other gifts. In this case, the donor would receive in 2024 the lesser of $20,000 or $120,000 (60% of $200,000 AGI) as a charitable deduction.
For a non-cash gift, the charitable deduction is up to 30% of AGI. Using the example above, if this donor makes a gift of $65,000 of appreciated securities to a public charity, the donor would be entitled to a 30% deduction against their AGI, or $60,000.
By donating stocks rather than cash, some taxpayers get a triple tax benefit because they don't just get the charitable gift deduction, but there is also no gift tax on that donation and they also avoid capital gains on the stock's appreciation.
3. Consider a Roth Conversion
To determine the tax benefits that you might experience from making changes to your retirement accounts, it’s important to understand the differences between a Roth IRA and Traditional IRA.
Additionally, it's important to know limits associated with both types of IRA accounts.
One of the benefits of a Traditional IRA is that contributions to it can be deducted from taxable income in the year they were made, if your income is under a certain threshold. However, if you only made tax deductible contributions to your Traditional IRA, all distributions you take during retirement will be fully taxed as ordinary income. Theoretically, your income could be lower after you stop working, and so could your tax bracket.
In contrast, Roth IRAs do not provide an upfront tax benefit, but distributions taken during retirement from qualified Roth accounts are received tax-free. In addition, Roth IRAs do not require you to take minimum distributions by a certain age, as Traditional IRAs do. Therefore, a Roth IRA may be especially beneficial if you wish to manage your taxable income during retirement.
Utilizing a Roth Conversion
If any of your retirement savings are currently held within Traditional IRAs, it is possible to move your Traditional IRA assets to a Roth IRA using a Roth conversion. While you'll have to pay taxes in the year of conversion on the entire converted amount, withdrawals in the future are not mandatory, and will be completely tax-free.
To make tax-free withdrawals, you must be at least age 59 ½ and you must wait five years after the initial contribution or conversion to your Roth account.
If you are currently in a higher tax bracket, you may want to consider the impact of paying taxes on the converted assets versus the benefit of any market appreciation that may accrue in your Roth IRA in the future.
A qualified financial or tax professional can help you understand whether the conversion process makes sense for you based on your circumstances. A tax professional can also help you calculate the ultimate cost of the conversion and ensure that you are not inadvertently moved into a higher tax bracket as a result, if that is not your intent.
4. Harvest Capital Losses to Offset Capital Gains
If you are an investor with large capital gains, consider talking with your advisor to determine whether harvesting capital losses may help you offset gains this year.
If you own stocks with a built-in loss, you may sell them before the end of 2024 and deduct losses up to $3,000 (or $1,500 if married and filing separately) against ordinary income on your federal tax return. If you held the stock for more than one year, then you may instead deduct your 2024 capital losses dollar for dollar against your 2024 capital gains.
As the end of the year draws closer, it's an excellent time to review your investments with your financial advisor and determine if you should sell stocks or other assets that are not performing well and reinvest the proceeds in new investments that may perform better.
Beware of the Wash-Sale Rule
If you do this, however, make sure you're not violating the “wash-sale rule." This rule disallows you from taking a tax loss if you purchase the same or a very similar stock within 30 days before or after the sale of that stock was completed. If you decide to sell a stock at a loss, consider adding a note on your calendar for when the 30-day period ends. That will remind you not to repurchase the stock too soon after it appreciates so you won’t inadvertently violate the wash-sale rule.
5. Max Out Tax-Deductible or Tax-Deferred Accounts
Contributing to a qualified 401(k) or health savings account (HSA) plan on a pre-tax basis can help reduce your taxable income for 2024.
Individuals and married couples can make 2024 contributions to traditional IRAs, SEP-IRAs, SIMPLE IRAs and HSAs all the way up to and including April 15, 2025. Note that the extended timeframe does not apply to contributions to 401(k)/profit-sharing plans, which require contributions to be made during the calendar year, no later than Dec. 31, 2024.
Pre-tax contributions to a 401(k) are limited to $23,000 for 2024. However, workers 50 and older can make an additional $7,500 in catchup contributions to their plans, increasing the maximum contribution to $30,500 total.
If you own a business or are an independent contractor, you may consider establishing a Simplified Employee Pension Plan or SEP-IRA. You can contribute the lesser of 25% of your compensation (including bonuses) or $69,000 (in 2024) to your SEP every year. You have until the date you file your taxes (April 15 or Oct. 15, if extended) to make the SEP contribution. These rules also apply to participants in profit-sharing defined contribution plans.
If you participate in a qualified high-deductible family health insurance plan, you can deduct up to $8,300 in contributions to an HSA in 2023. Individuals with self-only coverage can deduct up to $4,150. In addition, those aged 55 or older are eligible for an additional $1,000 catch-up contribution.
6. Wait to Purchase Mutual Funds
It's a good idea to avoid purchasing mutual funds at the end of the year if the funds will be held in a taxable account. This is because buying a mutual fund immediately before its year-end distribution may result in an unexpected tax bill due to selling by the fund to cover the year-end distributions.
If you buy shares before Dec. 31, you could receive a Form 1099 for year-end dividends even if you did not own the fund when the dividends were earned. Part of the dividends would be treated as ordinary income, and part would be treated as capital gains.
Essentially, this means you could pay taxes on a profit from which you never received a benefit. To avoid paying additional taxes, speak with a tax or investment advisor before making a purchase to figure out when fund distributions will be made.
7. Defer Income to Next Year
If you believe you will be subject to a higher income tax bracket for the 2024 tax year, then you may wish to consider deferring some income to a later time, or even to retirement.
You can do this through various nonqualified deferred compensation plans, such as a supplemental executive retirement plan (SERP), a defined benefit plan (such as a cash balance plan) or certain life insurance strategies that allow employees to defer income to a later year. The goal with any deferred compensation plan is to postpone income to lower your taxes in years where your compensation is high and push it into the future, to a time when your taxable income will likely be lower (typically in retirement).
On the other hand, if your 2024 income is lower due to market conditions or change in circumstances, you may wish to accelerate income to this year so it can be recognized when you're in a lower tax bracket.
Income may be accelerated in various ways, including doing partial or total Roth conversions of Traditional IRAs (as discussed above) or exercising vested nonqualified stock options, which are treated as ordinary income.
If you're a small business owner or contractor and want to defer income, consider delaying client billing until late December. That way, you can ensure that clients pay you in 2025 rather than 2024, reducing your 2024 tax liability.
8. Review Retirement Distribution Requirements
After you reach a certain age, the IRS requires you to take annual distributions from any traditional IRAs or 401(k) plans. In late 2022, Congress passed new legislation that raised the age that you have to start taking required minimum distributions (RMD) from 72 to 73 years old starting in 2023. It is set to increase again to age 75 beginning in 2033.
If you turned 73 in 2024, you'll have to take your first RMD by April 1, 2025, and you'll need to take another one by the end of 2025. However, you don’t have to take the first RMD in early 2025. You can take it by year-end 2024 to avoid taking two RMDs in 2025.
Each year, the amount of your RMD changes based on your age and the balance in your account. To calculate your RMD for the current year, you divide your account balance at the end of last year by your life expectancy. The IRS provides tables that show you which life expectancy numbers to use based on your age and whether you are sharing your RMD with a spouse.
9. Consider a Qualified Charitable Distribution
The Qualified Charitable Distribution (QCD) is an often-overlooked planning tool; however, if you are charitably inclined and have a large IRA, you may wish to explore this option.
Even though the age for required minimum distributions (RMDs) has shifted to 73, taxpayers can still make a QCD out of their Traditional or inherited IRA upon reaching 70 1⁄2. Taxpayers who are 70 1⁄2 or older may make a direct contribution of up to $100,000 per tax year, adjusted for inflation starting in 2024 (i.e., $105,000 in 2024) from their IRAs to a qualified charitable organization. This type of distribution from your IRA counts toward your required minimum distribution and is not included in your taxable income. However, an income tax charitable deduction cannot be claimed for a QCD.
10. Consider Life Insurance Tax Implications
Now is also a great time to revisit your life insurance policies.
On a yearly basis, you should perform the following life insurance checkup:
Request an "in-force ledger" from your insurance company which shows how your policy will perform based on current and guaranteed interest rate assumptions.
Check or confirm the beneficiary designations on each of your policies.
Determine if you need more or less life insurance based on any major life changes (such as marriage, divorce, a liquidity event, etc.).
If the life insurance is owned by an Irrevocable Life Insurance Trust (ILIT), make sure you follow all the legal steps necessary to ensure that the policy will not be included in your taxable estate, such as sending out what are known as "Crummey notices." to the trust beneficiaries. If a policy is not owned within an ILIT, you may wish to consider transferring the policy to an ILIT.
A Crummey notice is a letter letting a beneficiary know that assets (in most cases cash) have been added to a trust and informing the beneficiary of their right to withdraw those assets within a period of time, if applicable.
11. Education planning — 529 plans
The income tax benefits offered from 529 plans make them an attractive option for parents, grandparents and other family members to save for college or K-12 private school tuition. Earnings accumulate with taxes deferred and qualified withdrawals are tax-free at the federal level. Some states also offer tax incentives to their residents.
A 529 plan can be funded using your gift tax annual exclusion amount of $18,000 per year in 2024 ($36,000 per married couple), per contributor. Contributions in excess of the annual exclusion should be reported on a gift tax return and would use some of your lifetime federal exemption amount of $13.61 million in 2024 ($27.22 million per married couple).
You can front-load up to five years of the gift tax annual exclusion into a 529 plan to contribute up to $90,000 ($180,000 for married couples) at once; however, that means you cannot make an annual exclusion gift to the plan’s beneficiary for the next four years absent any increase in the annual exclusion amount.
In addition, there are aggregate contribution limits that vary by state — approximately $200,000 to $500,000 per beneficiary.
Some states offer certain tax incentives, so check with your tax advisor to find out whether you can benefit from any educational tax incentives.
If you have overfunded your child’s 529 plan, you can change the plan’s beneficiary as long as the new beneficiary is a family member (sibling, spouse, parent, first cousin). In addition, under legislation known as SECURE 2.0 starting in 2024, the beneficiary may be able to transfer up to $35,000 of the 529 account to the beneficiary’s Roth IRA.
Elementary and secondary school tuition expenses of up to $10,000 per year are considered qualified expenses for federal tax purposes. This additional flexibility may allow earlier access to the 529 plan for private school tuition.
Other End-of-Year Tax Considerations
Make Gifts to Family Members Before Year's End
For 2024, the IRS allows taxpayers to make gifts of up to $18,000 to any person without the money being subject to federal gift tax. For married couples, this annual exclusion from gift tax grows to $36,000 ($18,000 per spouse). If you plan to make gifts to family members, you will need to complete the gift before Dec. 31, 2024, in order to take advantage of the annual gift tax exclusion.
Pay State and Local Taxes Early
If you will owe state income taxes or local property taxes in 2025, you could consider paying those tax bills before the end of the year. That way, you can deduct the state or local tax payments from your federal taxable income for 2024.
Standard Deduction vs Itemized Deductions
In 2024, the standard deduction for married couples filing jointly is $29,200, $21,900 for head of household and $14,600 for single filers. If your itemized deductions would be lower than the standard deduction amount for which you qualify, it makes sense to take the standard deduction and avoid itemizing.
Bunch Itemized Deductions
To itemize deductions such as medical and dental expenses, deductible taxes, charitable contributions and mortgage interest, your expenses in each category must be higher than a certain percentage of your AGI.
In 2024, for example, for most taxpayers, medical expenses must equal at least 10% of your AGI in order for you to take the itemized deduction. If you or your spouse is 65 or older, the threshold for deducting medical expenses is 7.5% of AGI through 2026.
If you have unpaid medical or dental expenses or planned charitable contributions that won't get you to the minimum threshold for deducting in 2024, consider holding those until 2025. This practice of delaying some expenses to a future tax year in order to qualify for itemized deductions is known as “bunching" deductions.
Spend Any Remaining FSA Funds
If you contributed to a flexible spending account (FSA), remember to spend the funds in your account prior to Dec. 31, unless your employer allows you until March 2025 to finish using the money. While an FSA saves you money on your taxes, the money in the account is typically “use it or lose it," so it should be used before it expires.
Tax Credits
You may qualify for a number of tax credits in 2024.
Some of the most commonly claimed credits include:
Child Tax Credit. Parents or guardians of dependent children can get a tax credit of $2,000 per qualifying dependent child if your AGI is $400,000 or below for married couples filing jointly or $200,000 or below for all other filers
Education tax credit. The American Opportunity tax credit is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student.
Earned income tax credit. Qualifying taxpayers can get a tax credit of up to $7,830.
Electric vehicle tax credit. People who buy new electric vehicles may be eligible for a tax credit of up to $7,500, and used electric car buyers may qualify for up to $4,000.
Energy efficiency tax credit. If you make home improvements for energy efficiency, you may qualify for an annual tax credit up to $3,200.
Visit the IRS page on credits and deductions to learn more.
How Do High-Income Earners Reduce Taxes?
High-income earners typically reduce their tax liability by employing some of the strategies mentioned above, such as maxing out tax-advantaged accounts like HSAs, IRAs and 401k plans. They also make more charitable contributions and make gifts to family members within the allotted gift tax exclusion ($18,000 per recipient in 2024).
Investment allocation offers additional options for reducing tax liability. Because some investments are more tax-efficient than others, it’s important to make sure you’re allocating assets in the right places. For example, it might make sense to keep more tax-efficient mutual funds and exchange-traded funds in a taxable account, while reserving assets with higher tax impacts for your 401k or IRA. Savvy investors also use tax-loss harvesting to offset capital gains and reduce taxes.
Meet With Your Tax Advisor to Discuss Specific Tax Strategies
Congress did not pass new tax legislation in 2024 that dramatically changed tax rules. But you will still benefit by developing an income tax plan for the end of 2024 and beyond.
The provisions of the Tax Cuts and Jobs Act of 2017 are scheduled to expire on Dec. 31, 2025 unless Congress passes new legislation that is signed into law by the president to extend it.
If the 2017 Act provisions expire, the following will occur:
Estate, gift and generation-skipping transfer (GST) exemptions will return to the prior exemption levels, indexed for inflation. This will be calculated as the prior exemption of $5 million indexed for inflation, or an estimated $6.8 million. This is nearly half of the 2024 exemption amount of $13.61 million.
The top income tax rate would increase from 37% to 39.6%.
You should consider these factors, along with your unique financial situation, when determining ongoing tax-savings strategies that might work for you. Consider meeting with your tax advisor now to help you understand how to best accomplish your specific goals for this year's tax season and beyond.
Top