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Year-End Tax Planning
It’s time to do tax planning for the end of the year. There are opportunities to save on taxes and tax traps to avoid. With less than two months left before 2024 comes to a close, this story focuses on actions you can take to cut your federal tax bill. We’ll delve into individual planning, investments, retirement accounts, gifts, business taxes and more.
Individual tax planning
On individual tax planning, look at the overall impact on 2024 and 2025. The end game is to cut your taxes over both years. And because the tax provisions affecting individuals in the 2017 Tax Cuts and Jobs Act don’t expire until after 2025, you can expect that the income tax rates and deductions for 2025 will be similar to those for 2024. Any big tax changes that President-elect Donald Trump and Congress pass next year will likely first take effect in 2026.
Most people will benefit taxwise by accelerating write-offs from 2025 into 2024 while deferring taxable income. Others should consider the opposite approach. Itemizers have the most flexibility in shifting write-offs, as shown here.
Home interest: If you pay your January 2025 mortgage bill before year-end, you can deduct the mortgage interest portion on Schedule A of your 2024 federal tax return.
State and local taxes: If under the $10,000 cap and your locale allows it, pay the property tax bill due in January 2025 in December of this year so you can deduct it.
Medical Expenses: If your medical expenses have topped or are near the 7.5% of adjusted-gross-income threshold, consider incurring more medical costs before year-end. Check out IRS Publication 502. The list of eligible medical expenses is broader than you think. It includes doctor and dentist bills, hospital stays, glasses and hearing aids, health insurance, the unreimbursed costs of long-term care and many home improvements to accommodate a disability or illness.
Charitable contributions: People who claim charitable deductions have the most flexibility in shifting write-offs.
- Bunch into 2024 charitable gifts you would usually give over multiple years.
- Give to a donor-advised fund to help maximize your charitable write-off.
- Contribute appreciated property, such as stocks or shares in mutual funds. If you’ve owned the property for more than a year, you can deduct its full value in most cases if you itemize. Neither you nor the charity pays tax on the appreciation.
- Don’t donate assets that have dropped in value. If you do, the loss is wasted.
- Beware of this rule if you plan to donate lots of your income to charity: Cash contributions are deductible only to the extent total write-offs don’t exceed 60% of your adjusted gross income. The AGI limit for donations of capital-gain property is generally 30%. Any excess contributions can be carried forward for five years.
- Keep good records if you volunteer for charity. You can deduct 14¢ per mile for charitable driving. Other expenses incurred for charitable work are also deductible.
- Heed the timing rules for charitable donations and other tax-deductible items. Put checks in the mail by year-end to lock in a 2024 deduction. For charges made with bank credit cards, you can claim the write-off in the year you charged the expense.
Some filers can work the standard deduction by switching in and out between it and itemized deductions to maximize overall tax deductions for two years. If 2024 itemizations won’t hit the standard deduction amount, delay incurring them and bunch them into 2025. If your itemizations are just over the standard deduction, accelerate some to this year and itemize, and then take the standard deduction in 2025. The 2024 standard deduction is $29,200 for couples (and $1,550 per spouse 65 and up), $14,600 for singles (plus $1,950) and $21,900 for household heads (plus $1,950). The 2025 standard deduction amounts are $30,000, $15,000 and $22,500 (plus $1,600 or $2,000 if 65 and up).
Here's a tip for people on Medicare: If you have Medicare, consider how taxes could affect the monthly premiums you pay for Parts B and D. Joint filers with modified adjusted gross incomes exceeding $206,000 and single filers with over $103,000 of modified AGI pay higher premiums for Parts B and D coverage in 2024. Premiums for 2026 will be based on modified AGIs reported on your 2024 tax returns. So consider how any tax moves you make now could push your premiums up or down in 2026.
Electric Vehicles: Don't forget about the tax credit for buying an EV. Many new EVs qualify for a credit of up to $7,500. The break is up to $4,000 if buying a used EV. Some high-cost EVs aren’t eligible. The manufacturer’s suggested retail price can’t exceed $55,000 for sedans and $80,000 for vans, SUVs and pickup trucks. There is also an income limit. Modified adjusted gross income can’t exceed $300,000 for couples, $225,000 for household heads or $150,000 for singles. For used-EV buyers, the modified AGI thresholds are $150,000, $112,500 and $75,000, respectively.
Eligible buyers of qualifying EVs can take advantage of point-of-sale tax rebates. They can monetize the EV tax credit by transferring it to the dealer at the time of purchase, thus lowering the amount the buyer pays for the car. This allows you to take immediate advantage of the credit instead of having to wait until you file your federal income tax return. Buyers who opt for this advance credit to lower the cost of their EV will have to repay it when filing their Form 1040 next year if their modified adjusted gross income exceeds the limit for taking the credit.
If pondering home upgrades, go green to claim one of two tax credits.
The residential clean-energy property credit is for people who install an alternative energy system in their home that relies on a renewable energy source, such as solar, wind, geothermal, or fuel cell or battery storage technology. Think solar panels, solar-powered water heaters, geothermal heat pumps, wind turbines, fuel cells, etc. The credit is equal to 30% of the cost of materials and installation.
The smaller energy-efficient home improvement credit applies to insulation, boilers, central air-conditioning systems, water heaters, heat pumps, exterior doors, windows and the like that meet certain energy efficiency ratings. There is a general $1,200 aggregate yearly credit limit, but some specific upgrades have lower monetary caps, while others have larger ones. If planning for multiple upgrades, think about staggering them over 2024 and 2025 to maximize the tax savings.
Pocket tax-free cash by doing a short-term rental of your home. The proceeds from a personal residence that is rented out 14 days or less in a year are non-taxable and aren’t reported on your return, no matter the rent charged.
Gifts and estates
Use your annual gift tax exclusion. You can give each person up to $18,000 this year, $36,000 if you are married, without paying gift tax, filing a gift tax return or tapping your lifetime estate and gift tax exemption, which is $13,610,000 for 2024. Also, recipients aren’t taxed on gifts. Any unused amount is gone forever. You can't give extra next year to make up for it.
Here's an example. Say you're married with two kids and one grandchild. The two of you can give each of your children and your grandchild up to $36,000 ($108,000 total) this year in excludible gifts.
Larger gifts are a smart tax move this year. You will have to file a gift tax return on gifts over $18,000 per donee, but you won't owe tax unless you use up the lifetime estate and gift tax exemption. Also, most tax-free gifts you make now won’t trigger post-2025 estate tax bills. Estates can use the higher lifetime exemption for gifts to calculate post-2025 estate taxes. After 2025, the lifetime exemption amount is scheduled to fall to about $7 million unless Congress acts to extend the higher figure.
Help your kids or grandkids with college. Here are two ways to help your kids or grandkids with their college education. First, you can pay tuition directly to the school. The payment is nontaxable to the student, it doesn’t count against the $18,000 gift tax exclusion, and it reduces your estate.
Second, you can contribute to a 529 college savings account. You can shelter from gift tax up to $90,000 in contributions per beneficiary this year ($180,000 if your spouse agrees). If you put in the maximum, you’ll be treated as gifting $18,000 (or $36,000) to that beneficiary in 2024 and in each year of the next four years — 2025 through 2028.
IRAs and plans
Required minimum distribution (RMD) rules for traditional IRAs. Pay attention to the rules. People 73 and older must take annual payouts. To arrive at the 2024 RMD, start with your IRA balances as of December 31, 2023, and use the tables in IRS Publication 590-B. The amounts can be taken from any IRA you pick.
If 2024 is your first RMD year, you have until April 1, 2025, to take the RMD, though the amount is still based on your total IRA balance as of December 31, 2023. If you opt to defer your first RMD to 2025, you will be taxed in 2025 on two payouts: the deferred one for 2024 and the RMD for 2025. This will increase your 2025 taxable income and could put you in a higher tax bracket.
Similar rules apply to 401(k)s. However, people who work past age 73 can generally delay taking RMDs from their current employer’s 401(k) until they retire. Additionally, if you have multiple 401(k)s, an RMD must be taken from each account.
Inherited IRAs: Be sure that you know the rules for nonspousal beneficiaries of IRAs inherited after 2019. There is generally a 10-year clean-out requirement. The funds must be fully distributed within 10 years after the owner's death. Eligible designated beneficiaries are exempt from this rule. They include surviving spouses, minor children (until 21), beneficiaries who are disabled or chronically ill, and people who are no more than 10 years younger than the decedent. These people can do stretch IRAs. A spouse can also take an IRA as his or her own.
The 10-year rule is tricky. If the owner dies before his or her RMD start date, beneficiaries needn’t take annual payouts. They can opt to wait until year 10 to take funds, get yearly payouts, or skip years, provided the IRA is depleted by year 10.
If the owner dies on or after the RMD start date, yearly payouts are required. In this situation, the beneficiary figures annual RMDs based on his or her own life for years 1 through 9, with the rest of the account fully depleted by year 10. Of course, the beneficiary can take larger amounts from the account if desired. There’s relief on this RMD rule for 2021-24. Beneficiaries aren’t penalized for not taking RMD during these years. They needn’t make up for the missed RMDs, but must start taking them in 2025.
Though RMDs from post-2019 inherited IRAs may not be mandated this year, this doesn’t mean you shouldn’t take a distribution from the account. Taking nothing or even the minimum RMD may not be a smart tax-planning strategy if waiting until year 10 to take the remainder would push you into a high tax bracket.
Charitable donations made directly from a traditional IRA can save taxes. People 70½ and older can transfer up to $105,000 in 2024 from IRAs directly to charity. Qualified charitable distributions (QCDs) can count as RMDs, but they’re not taxable and they’re not added to your adjusted gross income. The QCD strategy is a good way to get tax savings from charitable gifts for taxpayers taking standard deductions instead of itemizing. Note that if you do a QCD, you can't deduct the amount as a charitable contribution on Schedule A.
Most IRA custodians will require you to fill out a form requesting the charitable payout. The custodian will then either send a check directly to the charity or make a check payable to the charity and send it to you to mail. In either circumstance, get a receipt from the charity.
In a QCD, the money must generally go to a 501(c)(3) charitable organization. But the SECURE 2.0 law provides an easing to this rule. IRA owners can do a one-time (not annual) qualified charitable distribution of up to $53,000 through a charitable remainder annuity trust, a charitable remainder unitrust, or a charitable gift annuity. Many private colleges with charitable gift annuity programs tout this QCD option, so you may hear about it from your alma mater.
Max out your 2024 401(k) and IRA contributions. You have until Dec. 31 to put money in 401(k)s and other workplace retirement plans, and until April 15, 2025, to contribute to an IRA for 2024. You can stash up to $23,000 in a 401(k), $30,500 if age 50 or up. The 2024 pay-in cap for IRAs is $7,00, plus $1,000 more if 50 or older.
Is it the right time to convert a traditional IRA to a Roth IRA? You’ll have to pay tax on the converted amount, but future earnings are tax-free.
There are many factors to consider in making your decision. Here are some of them.
- First, the income tax rates for 2024 and later years are key. If you expect the rate you will pay in retirement to be the same or higher than the rate on the conversion, then switching to a Roth can pay off taxwise, provided you don't have to tap IRA funds to pay the tax bill on the conversion. If your income tax rate in retirement will be lower, tax-free Roth payouts are less advantageous.
- Second, Roths don’t have required minimum distributions, unlike traditional IRAs. Keep in mind, though, that if you are 73 or older at the time of the conversion, you must first take your RMD from your traditional IRA for the year of the switch.
- Third, converting can pay off if you expect your IRA assets will soar in value. The same rationale applies if you have IRA assets that now are depressed in value.
- Fourth, income from the conversion is taxable and will increase your adjusted gross income, thus potentially triggering higher Medicare premiums two years down the line.
Note you don’t need to convert the entire amount to a Roth in one swoop. You can transfer the money in increments over time and space out the tax hit.
Investments
Your investment portfolio provides plenty of tax-saving opportunities.
Tax loss harvesting is one way investors can lower their tax bills. The strategy involves selling stocks or other securities in your taxable investment accounts that have declined in value for the purpose of generating capital losses to offset gains from the sale of winners. Investors commonly do this closer to the end of the year, when they have a better idea of the amount of capital gains they will have. Capital losses can offset capital gains plus up to $3,000 of other income. Excess losses are carried over to the next year and can help offset future gains.
Don’t run afoul of the wash-sale rule. It prohibits a capital loss write-off on the sale of securities if you purchase substantially identical securities up to 30 days before or after the sale. The recognized loss isn’t gone forever; it’s only suspended. That’s because the loss is added to the tax basis of your replacement securities.
The wash-sale rule can catch you by surprise. You have a wash sale if you sell securities at a loss, and you, your spouse, or a corporation that you control, buys substantially identical securities within the 60-day period. You also have a wash sale if you have your IRA purchase stock after you sell the same stock at a loss in your taxable investment account, or if you happen to sell mutual fund shares at a loss less than 30 days after the date a dividend is reinvested to buy more shares.
People who sell cryptocurrency at a loss needn’t worry about the wash-sale rule. The definition of securities for purposes of the wash-sale rule doesn’t include crypto. So, for example, if you own crypto that sharply falls in value, you can sell it, recognize a capital loss, and buy the same digital currency the same day or soon after.
If you have capital loss carryforwards, cull your portfolio for capital gains. That’s because your net gains — up to the carryover amount — won’t be taxed at all.
See if you qualify for the 0% rate on long-term capital gains and qualified dividends. If taxable income other than long-term capital gains and dividends doesn’t exceed $47,025 on single returns, $63,000 for head-of-household filers or $94,050 on joint returns, then your qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal rate until they push you over the threshold amounts.
If you’re not eligible for the 0% rate, there’s always the 15% or 20% rate. The 20% rate on long-term capital gains and qualified dividends starts at $518,901 for singles, $551,351 for household heads and $583,751 for couples filing jointly. The 15% rate is for filers with incomes between the 0% and 20% break points.
Here are three scenarios to illustrate the 0%-rate rules. For the following examples, you have a married couple with $18,000 of qualified dividends and long-term capital gains, which are included in taxable income.
- In the first example, the couple has $75,000 of taxable income. The full $18,000 of gains and dividends is taxed at the 0% rate.
- Let's now assume the couple has taxable income of $102,000. $10,050 of the gains and dividends ($94,050 - ($102,000 - $18,000)) gets the favorable 0% tax rate, and $7,950 is taxed at 15%.
- If the couple instead has $125,000 of taxable income, the 0% rate doesn't apply, and the full $18,000 of gains and dividends is taxed at 15%.
The 0% federal rate isn’t all gravy. Zero-percent-rate capital gains and dividends might not be taxed at the federal level, but they do hike adjusted gross income (AGI). The extra AGI can cause more of your Social Security benefits to be taxed. Also, your state income tax bill may jump, since many states tax capital gains as ordinary income.
Take steps to limit the sting of the 3.8% surtax on net investment income — dividends, taxable interest, capital gains, passive rents, annuities, royalties, and income from a passive activity if the taxpayer doesn’t materially participate.
The tax applies to single filers with modified adjusted gross incomes above $200,000 and joint filers over $250,000. Modified AGI for this purpose is AGI plus tax-free foreign-earned income. The tax is due on the smaller of NII or the excess of modified AGI over the thresholds. Buying municipal bonds is helpful since tax-free interest is exempt from the 3.8% bite and does not affect the owner's AGI. Another idea is to use an installment sale to spread out a large gain over multiple years.
Think about investing in REITs or publicly traded partnerships. You could get a nice tax break. The 20% deduction for pass-through income (qualified business income) also applies to holders of interests in real estate investment trusts and PTPs. Individuals can deduct on their federal return 20% of their qualified REIT dividends — distributions that aren’t otherwise taxed under the favorable rules for capital gains and dividends — and 20% of their allocable share of a PTP’s qualified income.
Be wary of buying a mutual fund late in the year for your taxable portfolio. If you are thinking about investing in a dividend-paying mutual fund near year-end, check its dividend distribution schedule.
Buying a fund shortly before the record date this year means you will get the dividend payout for 2024, which you will owe tax on when you file your federal income tax return next year. However, you aren't better off financially because the fund's share price falls by the amount of the distributed dividend. To avoid this, think about buying the mutual fund after the dividend record date.
Review whether your stock mutual funds frequently buy or sell holdings. These funds can potentially generate big short-term capital gain distributions, which are taxed at ordinary income rates instead of as long-term capital gains. Before you invest in a mutual fund, check its turnover ratio. The higher the ratio, the higher the potential for tax-inefficient short-term capital gains distributions.
Witholding
Boost your federal income tax withholding and estimated taxes if you expect to owe tax for 2024. It can help avoid an underpayment penalty when you file your 2024 federal return next year. You’re off the hook for the fine if you prepay, via tax payments or withholding, at least 90% of your 2024 total tax bill or 100% of what you owed for 2023 (110% if your 2023 AGI exceeded $150,000). Note that tax withheld at any point in the year is treated as if evenly paid throughout the year. Here are a few ways to increase your tax withholding for 2024.
- You can give your employer a new W-4 to have more tax taken from wages.
- Fill out W-4V to have federal tax withheld from your Social Security benefits. You can elect to have 7%, 10%, 12% or 22% of your monthly benefits taken out.
- IRA owners taking RMDs can use this income tax withholding strategy: Have more tax withheld from a year-end distribution from your traditional IRA. By default, IRA custodians withhold 10%, but you can ask for more to be withheld.
Don’t forget about the 0.9% Medicare surtax on earned income. It kicks in at earnings over $250,000 for joint filers and $200,000 for single and head-of-household filers. Employers must begin to withhold the tax from worker paychecks in the period when wages first exceed $200,000, regardless of the employee’s marital status. This can lead to under-withholding for a couple if each spouse earns under $200,000, but their combined wages total more than $250,000. The same goes for an employee with a self-employed spouse if the couple’s combined earnings will exceed $250,000.
Business Taxes
There are generous write-offs for business asset purchases this year. Businesses can save on taxes with first-year 60% bonus depreciation. Firms can deduct 60% of the cost of new and used qualifying business assets, with lives of 20 years or less, that they buy and place in service by Dec. 31, 2024. Purchase and place assets in service this year if you want the 60% break. It falls to 40% next year.
Expensing is available. In 2024, businesses can expense up to $1,220,000 of new or used business assets. Note that the amount expensed can’t exceed the business’s taxable income. Bonus depreciation doesn’t have this rule.
There are lots of breaks for buyers of business vehicles under the tax laws. For new and used cars first put in use in business in 2024, if bonus depreciation is taken, the first-year cap is $20,400. The second-and third-year caps are $19,800 and $11,900. After that, $7,160. If no bonus depreciation is claimed, the first-year cap is $12,400.
Buyers of heavy SUVs also get write-offs. Up to $30,500 of the cost of SUVs with vehicle weights over 6,000 pounds can be expensed in 2024. 60% of the balance gets bonus depreciation, and the rest may qualify for regular five-year depreciation.
The tax break is larger for big pickup trucks, those over 6,000 pounds, with a cargo bed at least six feet long and not accessible from the cab. Up to 100% of the cost of a big truck used in business can be expensed, subject to the rule that total expensing can’t exceed taxable income from the business.
See if you can take advantage of the 20% deduction for pass-through income. Self-employed individuals and owners of LLCs, S corporations and other pass-through entities can deduct 20% of their qualified business income, subject to limitations for individuals with incomes of more than $383,900 for joint filers and $191,950 for all others. If you’re close to or just above the income limits, consider accelerating deductions or deferring income so that you can come in under the dollar thresholds for the year.
Gig workers, freelancers and other independent contractors (but not employees) can claim this write-off from their earnings.
Also, Schedule E rental income may be eligible for the 20% deduction in some cases. But applying the QBI rules to income from rentals of real property is thorny. IRS regulations say the rental activity must generally rise to the level of a trade or business, a standard that is based on each taxpayer's particular facts and circumstances. Alternatively, there is a safe harbor if at least 250 hours a year of qualifying time are devoted to the activity by the taxpayer, employees or independent contractors. Taxpayers who use the safe harbor must meet strict recordkeeping requirements.
Businesses using the cash method of accounting have some leeway in shifting income and expenses between 2024 and 2025. Professionals can delay year-end billings to collect less revenues in 2024 or speed up billings to collect more. Firms can also juggle taxable income by shifting the payment of expenses from one year to another.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
