Year End Tax Planning Guide
This year-end tax guide is here to help business owners and individuals save money through simple and effective planning. With the end of the year approaching, now is the time to make smart financial decisions. You can still find opportunities to save in today’s challenging economy, marked by high interest rates and inflation. For example, gifting strategies can help with philanthropy or transfer assets tax-efficiently. A little planning now can reduce your taxable income, maximize charitable deductions, and lower your future taxes. It’s a great way to make the most of your money.
If you have experienced capital losses during the year, consider selling investments to offset capital gains in your portfolio. Capital losses can directly reduce your taxable capital gains, potentially lowering your overall tax liability. If your losses exceed your gains, you can apply up to $3,000 of excess loss to offset other income. This strategy, known as tax-loss harvesting, is particularly useful during volatile markets.
Planning for High-Net-Worth Families
High-net-worth families face unique challenges and opportunities as they plan for the sunset of the historically high estate and gift tax exemptions. By 2026, the current exemption of $12.92 million per individual ($25.84 million for married couples) is set to revert to approximately $6-7 million per individual. This impending change necessitates immediate action to take full advantage of the current higher exemptions. Proactive strategies, such as creating trusts or making significant gifts, can help preserve wealth and minimize tax exposure.
Timing Is Everything — Deferral or Acceleration?
The timing of income and deductions can have a substantial impact on your tax liability. Traditionally, deferring income and accelerating deductions were common strategies. However, in today’s complex tax environment, it’s essential to tailor these actions to your individual circumstances.
Income Deferral Strategies
Deferring income to the following year can be an effective strategy for reducing your current tax liability. This approach may involve:
- Delaying year-end bonuses or commissions.
- Postponing the collection of business payments, such as rent or service fees.
- Timing the sale of assets to defer capital gains taxes.
By deferring income, you may fall into a lower tax bracket in the current year, resulting in immediate savings. However, it’s essential to assess how this strategy aligns with your overall financial goals.
Deduction Acceleration Strategies
Accelerating deductions into the current year can help offset taxable income. Key areas to consider include:
- Prepaying property taxes or mortgage interest.
- Making charitable contributions before December 31.
- Bunching medical expenses to exceed the 7.5% Adjusted Gross Income (AGI) threshold for deductibility.
By front-loading deductible expenses, you can maximize your itemized deductions and reduce your taxable income.
Factor in the Alternative Minimum Tax
The Alternative Minimum Tax (AMT) affects fewer people than before but is still relevant for higher-income earners in 2024. The AMT operates as a separate tax system with its own rules, ensuring everyone pays at least a minimum amount of tax.
Some triggers for the AMT include using incentive stock options (ISOs), earning tax-free interest on certain municipal bonds, and adjustments from Schedule K-1s. One significant planning opportunity with AMT calculations is optimizing the exercise of ISOs. By carefully coordinating the exercise of ISOs with your regular tax liability, you can potentially minimize your overall tax burden. If you’ve already exercised ISOs resulting in a significant AMT, consider selling some ISOs within the same year to increase your regular tax liability and offset the AMT.
Stay informed about the AMT exemption, which is indexed for inflation. For the 2024 tax year, the AMT exemption amount increased to $133,300 for married filing jointly taxpayers and $85,700 for single filers. Keep in mind that the exemption phases out if your adjusted gross income (AGI) exceeds certain thresholds.
Special Concerns for High-Income Individuals
High-income individuals face unique tax considerations due to higher tax rates and additional taxes imposed on certain types of income. Be aware of these factors when planning your tax strategy.
In 2024, individuals with significant investment earnings or dividends exceeding $250,000 (single filers) or $500,000 (married filing jointly) may be subject to the 20% capital gains tax. Additionally, they could face a 3.8% net investment income tax and a 0.9% Medicare payroll tax on wages above specific limits.
When planning for retirement, take advantage of tax-advantaged retirement savings vehicles such as traditional IRAs and employer-sponsored plans like 401(k)s and workplace retirement plans. IRA contributions to traditional IRAs and some employer-sponsored plans, including individual retirement accounts, are tax-deductible, providing immediate tax benefits.
However, remember that qualified distributions from Roth IRAs are tax-free, making them an attractive option for tax-free retirement income. One of the best ways for you to prepare for the future is by making an April contribution to an Individual Retirement Account (IRA).
IRA contributions to a traditional IRA are typically tax deductible, and as of 2024, you can receive that deduction for contributions up to $7,000 for those under age 50 or $8,000 for those age 50 or older. Read our blog to learn more about IRAs.
Retirement Planning
Retirement planning remains a cornerstone of overall financial planning. Tax-advantaged retirement savings vehicles, such as traditional IRAs and 401(k)s, provide immediate tax benefits and are crucial for long-term savings.
For 2024, the maximum contribution limit for 401(k) plans is $23,500. Contributions to traditional and Roth IRAs are capped at $7,000 (or $8,000 if you’re 50 or older). While traditional IRA contributions are tax-deductible, Roth IRA contributions offer tax-free qualified distributions in retirement.
Required minimum distributions (RMDs) remain a critical consideration for retirees. Starting in 2024, the RMD age is 73, allowing individuals to delay withdrawals for additional growth. Failure to meet RMD requirements could lead to penalties, reduced to 25% and further reduced to 10% if corrected promptly.
Key Tax Considerations From SECURE 2.0
Congress passed the SECURE 2.0 Act in 2022, which builds upon the reforms of the original SECURE Act of 2019. SECURE 2.0 focuses on increasing Americans’ readiness for retirement by expanding coverage, increasing savings, and simplifying retirement plan rules.
One significant change brought about by SECURE 2.0 is the increase in the starting age for required minimum distributions (RMDs) from retirement accounts. Starting January 1, 2023, the age for RMDs is 73, up from 72. This change allows individuals to delay taking distributions from their retirement accounts, potentially allowing for additional growth.
The legislation also reduces the penalty for failing to take RMDs from 50% to 25%, with a further reduction to 10% if the failure is corrected in a timely manner. This change provides relief for individuals who inadvertently miss their RMDs.
Another important provision of SECURE 2.0 includes qualified charitable distributions (QCDs) from IRAs. QCDs allow individuals who are 70½ or older to make direct transfers of up to $100,000 per year from their IRAs to eligible charities. These transfers are tax-free and can satisfy RMD requirements.
Roth Conversions
A Roth conversion involves converting funds from a tax-deferred savings vehicle, such as a traditional IRA or a 401(k), into a Roth account. This conversion generally triggers a tax liability in the year of the conversion, except for any nondeductible after-tax contributions.
When considering a Roth conversion, it’s crucial to evaluate the timing of the conversion. If you anticipate being in a lower tax bracket this year compared to future years, converting funds to a Roth account and paying taxes at a lower rate may be advantageous now.
It’s also essential to consider the availability of net operating losses (NOLs) to offset the tax liability of a Roth conversion. If you have NOLs available, they can help reduce or eliminate the impact of conversion on the Internal Revenue Service tax.
SECURE 2.0 introduced several changes that affect Roth accounts, including the treatment of catch-up contributions and matching or nonelective contributions. Starting in 2026, all catch-up contributions must be made to a Roth account in after-tax dollars, with specific exemptions based on income.
Additionally, SECURE 2.0 requires employers to allow participants in certain retirement plans to receive matching or nonelective contributions as designated Roth contributions. Reducing exposure to future taxes through Roth IRA conversions is another important consideration for year-end tax planning.
Business Travel and Meals
As business travel resumes and economic activity picks up, it’s important to consider the tax implications of business travel and meals. Mileage reimbursement rates for business travel increased to 66 cents per mile for 2024. However, the temporary 100% deduction for business meals expired at the end of 2022, returning the deduction to 50%.
If your business travel has increased this year, take advantage of mileage reimbursements to minimize your tax liability. Additionally, be sure to keep track of business-related meals and entertainment expenses, as they may still be partially deductible.
Virtual Currency/Cryptocurrency
Virtual currency, also known as cryptocurrency or digital assets, has become increasingly popular in recent years. It’s crucial to understand the tax implications of virtual currency transactions to ensure compliance with tax laws.
Cryptocurrency transactions, including selling or exchanging virtual currencies and using them to pay for goods or services, generally have tax impacts. The IRS has increased its scrutiny of virtual currency transactions, and it’s important to report these transactions on your tax return accurately.
Different types of virtual currencies exist, such as bitcoin, ether, and non-fungible tokens (NFTs). Each type may have specific tax considerations. For example, stablecoins, which are tokenized dollars, are subject to capital gains or income tax treatment. DeFi (decentralized finance) transactions often involve both capital gains and income components, requiring proper cost-basis tracking for tax compliance.
It’s important to stay informed about the tax implications of virtual currency transactions and consult with a tax professional to ensure accurate reporting.
Other Tax Items to Note
In addition to the major considerations discussed above, there are several other tax items to note when planning for the year-end:
- Personal exemptions have been eliminated, while standard deductions have increased for the 2024 tax year.
- The annual gift tax exclusion for 2024 is $18,000 per individual or $36,000 per married couple per “donee.”
- Deductible medical and dental expenses are subject to a threshold of 7.5% of your AGI.
- The deduction for state and local income, sales, and property taxes is limited to a total of $10,000.
- Mortgage interest deductions are subject to certain limits, with the prior limits still applying to mortgage debt incurred before December 16, 2017.
- Miscellaneous expenses subject to the 2% floor, such as investment expenses and unreimbursed employee business expenses, are no longer deductible.
- First-year bonus depreciation is available for business property and equipment placed in service in the calendar year.
- NOLs are generally eligible to be carried forward but not back, except for farming losses.
Tax Planning Action Items
As you navigate year-end tax planning, consider the following action items to optimize your tax strategy:
- Explore loss harvesting opportunities to offset capital gains.
- Inform your tax advisor about any major life changes that may impact your tax situation.
- Consider making charitable gifts to offset income tax liability.
- Maximize contributions to tax-advantaged retirement savings vehicles.
- Plan for required minimum distributions (RMDs) and potential charitable distributions.
- Evaluate the benefits of grantor trusts and their potential impact on income tax planning.
- Utilize the benefits of spousal exemptions for gifting strategies.
- Update your estate planning documents and review trust distribution powers.
- Consider life insurance as part of your estate planning and asset diversification strategy.
Gifting
Gifting can serve multiple purposes, from reducing income tax liability to creating a family legacy. When considering gifting strategies, it’s important to understand the available options and their potential tax benefits.
Charitable gifts can offset income taxed at the highest tax bracket, providing immediate tax savings. Consider “bunching” two years of contributions into one tax year to increase the tax impact of this deduction.
Gifting to public charities Deductible contributions can be made to IRS-qualified public charities, such as religious organizations and art museums. Cash gifts are limited to 60% of your AGI, while appreciated property can be deducted up to 30% of your AGI.
Gifting to donor-advised funds Donor-advised funds allow individuals to contribute cash or appreciated property to a fund and recommend grants to be distributed to various public charities. Contribution limits are the same as those for other contributions to public charities.
Gifting to private foundations Private foundations have their own contribution limits, with cash gifts limited to 30% of your AGI and gifts of appreciated property limited to 20% of your AGI. Private foundations require additional administration and have annual distribution requirements.
Qualified charitable distributions (QCDs) QCDs allow individuals who are 70½ or older to make direct transfers from their IRAs to eligible charities. These transfers are tax-free and can satisfy RMD requirements.
Charitable split-interest trusts Split-interest trusts, like charitable remainder trusts and charitable lead trusts, are ways for donors to help themselves and charities. In charitable remainder trusts, donors can give assets and receive a regular payment from the trust. With charitable lead trusts, donors can give to the trust, receive a big tax deduction, and receive regular charity payments. These trusts let donors support causes they care about and receive some financial benefits at the same time.
When making charitable gifts, ensure proper substantiation of the donations and consider the holding period of donated property to maximize your tax deduction.
Wealth Transfer Planning
Wealth transfer planning is a crucial aspect of comprehensive financial planning. With potential changes to estate and gift tax laws on the horizon, evaluating your estate tax exposure and considering strategies to minimize your tax liability is important.
The TCJA increased the lifetime exemption for estate and gift taxes, allowing individuals to pass a significant amount of assets tax-free, including their lifetime estate. The exemption for the 2024 tax year is $13.61 million per person ($27.22 million per married couple). However, this exemption is set to sunset in 2026, reverting to $5 million per person ($10 million per couple), indexed for inflation.
Consider making taxable gifts to reduce your estate tax exposure to take advantage of the current exemption. By making large gifts, either outright or in trust, you can shift future appreciation out of your estate and potentially avoid paying gift and estate taxes.
It’s important to update your estate planning documents and ensure they align with your objectives. Review your wills, trusts, and advanced healthcare directives to reflect any changes in your circumstances or preferences. Confirm that trust assets are properly titled to avoid probate.
Additionally, consider the benefits of grantor trusts, which are treated as disregarded entities for income tax purposes but exclude trust assets from your estate. Grantor trusts offer flexibility and tax advantages, allowing you to pay the trust’s income taxes without gift tax implications.
Irrevocable Life Insurance Trusts
Irrevocable Life Insurance Trusts (ILITs) play a significant role in many estate plans. While their popularity has declined in recent years, they still offer valuable benefits, particularly in light of potential decreases in estate tax exemptions.
If you already have ILITs in place or serve as a trustee for one, it’s crucial to review and evaluate the policies held by the trust regularly. Ensure that the policies are functioning as intended and that ownership and beneficiary designations are up to date.
Consider pre-funding several years’ worth of premium payments for ongoing ILITs to maximize the benefits of these vehicles. However, consult with a tax professional to review the tax status of each ILIT before making any gifts to avoid unintended income tax consequences.
Take the opportunity to discuss life insurance as part of your overall estate plan. Life insurance can serve as both an asset class and a means of diversification. It’s essential for protecting your family and ensuring the smooth transfer of wealth to future generations.
Understand Your Goals and Motivations
When it comes to tax planning and overall financial planning, it’s crucial to understand your goals and motivations, including the potential impact on your affiliates. Take the time to reflect on why you do what you do and what’s important to you. This deeper understanding will guide your tax planning strategies and help you align your actions with your values and the interests of your affiliates.
Tax planning should be an ongoing, collaborative process involving regular meetings with your tax professional, estate planning attorney, and financial advisor. By maintaining open lines of communication and sharing your family’s values and objectives, you can develop a tax strategy that truly reflects your unique circumstances.
Reach out to your estate planning team today and establish a regular meeting schedule to align your plan with your goals. Staying proactive and engaged positions you better to seize opportunities, navigate potential tax law changes, and achieve long-term financial success.
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Conclusion
The end-of-year planning guide for taxes is a critical component of overall financial planning. Taking proactive steps to manage your tax liability can optimize your financial well-being and achieve your long-term goals. Consider the various tax planning considerations and strategies discussed in this guide, and work closely with your tax professional to develop a plan tailored to your unique circumstances.
Remember, tax planning isn’t a single occurrence but an ongoing journey. Stay informed about changes in tax laws and regularly review your financial situation to ensure your tax strategy remains effective. By making informed decisions and taking advantage of available opportunities, you can navigate the complex tax landscape and achieve financial success. AGI is adjusted gross income and where to find it on your return is often a question.
Visit Akron Income Tax Co. and discover how hassle-free tax filing can be. Let us help you navigate the complexities of taxes while maximizing your returns. Don’t wait—start planning for a brighter financial future today!
FAQs
What are the important tax deadlines to keep in mind at the end of the year?
Important tax deadlines to remember at the end of the year include December 31st for tax planning, December 15th for estimated tax payments, and January 31st for filing W-2 and 1099 forms. It’s crucial to stay organized and meet these deadlines to avoid penalties and ensure a smooth tax season.
How can you maximize your retirement contributions before the end of the year?
To maximize your retirement contributions before the end of the year, make sure to contribute the maximum amount allowed to your 401(k) or IRA. Take advantage of catch-up contributions if you’re over 50. Consider contributing to a Health Savings Account (HSA) or a Flexible Spending Account (FSA) as well.
What should you do if you haven’t made estimated tax payments throughout the year?
If you haven’t made estimated tax payments throughout the year, you should consider making a lump-sum payment before the year-end deadline to avoid penalties and interest. Consult with a tax professional to determine the amount you should pay and to ensure compliance with tax regulations.
How can you avoid penalties for underpayment of taxes?
To avoid penalties for underpayment of taxes, you can make estimated tax payments throughout the year based on your expected tax liability. By accurately estimating and paying your taxes quarterly, you can avoid any penalties or interest charges that may be incurred for underpayment.
What are some tax-saving tips for year-end planning?
Some tax-saving tips for year-end planning include maximizing your retirement contributions, reviewing your investment portfolio for tax-loss harvesting opportunities, taking advantage of tax credits and deductions, and organizing and documenting your financial records for easy tax preparation.
