The 2024 year-end is fast approaching! Given that this is an election year, and the presidential candidates are each promising big tax changes, it is important to start thinking about actions that may help lower your taxes for this year and the years to come.
We have compiled a list of potential actions based on current tax rules that may help you save tax dollars if you ACT BEFORE YEAR-END. Not all of them will apply to you, but you (or a family member) may benefit from many of them. Please review the following list. If you would like us to advise you on which tax-saving moves might be beneficial given your circumstances, please reach out to us at your earliest convenience so we can tailor a particular plan for you.
We have broken out the potential actions into the following sections:
Individuals
Stock Market Investor Strategies
Business
Individuals
For 2024, many taxpayers won’t need to itemize their deductions due to the high standard deduction ($29,200 for joint filers, $14,600 for singles and married filing separately, and $21,900 for heads of household) and the reduction or abolition of several itemized deductions.
Consider a bunching strategy to maximize deductions by concentrating medical expenses and charitable contributions into one calendar year.
Consider postponing income to 2025 (such as deferring a bonus) and accelerating deductions into 2024, especially for those anticipating a lower tax bracket in 2025. However, taxpayers expecting a more favorable filing status in 2024 or higher tax rates in 2025 may benefit more from accelerating income into 2024.
Consider donating appreciated publicly traded stock to get a two-fold benefit of the donation at fair market value without having to pick up the capital gains.
Consider using a credit card to pay deductible expenses before year-end.
Higher-income individuals should be cautious of the 3.8% surtax on certain unearned income. As year-end approaches, strategies to minimize or eliminate the surtax will vary based on estimated modified adjusted gross income and net investment income.
Higher-income earners may need to take year-end action regarding the 0.9% additional Medicare tax. This tax applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds. Employers must withhold the additional Medicare tax from wages in excess of $200,000, regardless of filing status or other income. Self-employed persons must take this tax into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.
Consider converting your traditional IRA into a Roth IRA in 2024 if you believe a Roth IRA is better for you. A conversion is generally best during a year where you expect lower taxable income and/or when you have funds invested in underperforming stocks or mutual funds. Keep in mind that this conversion will increase your taxable income and could reduce tax breaks subject to phaseouts at higher AGI levels.
Required minimum distributions (RMDs) from a traditional IRA have not been waived for 2024. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts. Taxpayers may want to take RMDs by the end of 2024 to avoid having to double up on RMDs in 2025.
Consider making charitable donations via direct qualified charitable distributions from your traditional IRAs if you are age 70½ or over by the end of 2024, especially if you are unable to itemize your deductions. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on as an itemized deduction. However, you are still entitled to claim the entire standard deduction.
If facing a penalty for underpayment of estimated tax and increasing wage withholding will not sufficiently address the problem, consider taking an eligible rollover distribution from a qualified retirement plan before the end of 2024. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2024. You can then timely roll over the gross amount of the distribution (the net amount received plus the taxes withheld) to a traditional IRA. No part of the distribution will be includible in income for 2024, but the withheld tax will be applied pro rata over the full 2024 tax year to reduce previous underpayments of estimated tax.
If you become eligible in December of 2024 to make HSA contributions, you can make a full year’s worth of deductible HSA contributions for 2024.
Consider making gifts sheltered by the annual gift tax exclusion ($18,000) before the end of the year. The exclusion applies to gifts of up to $18,000 made in 2024 to each of an unlimited number of individuals. You cannot carry over unused exclusions to another year. These transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Consider utilizing energy-related credits and deductions under the Inflation Reduction Act of 2022.
If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster related losses, you may be able to claim losses on the tax return for the year the loss occurred.
Stock Market Investor Strategies
As year-end approaches, you should consider the following moves to make the best tax use of losses from your stock market investments:
Sell investments at a loss to offset earlier gains. A generally preferred tax strategy is to sell enough of the down-turn investments to generate losses to fully offset your earlier gains plus an additional $3,000 loss. The current tax legislation caps net capital losses at a maximum annual deduction of $3,000, which in turn can be used to offset ordinary income (as opposed to only capital gains).
Since individual taxpayers may carryover excess capital losses indefinitely, there is no reason to sell appreciated stocks simply to generate offsetting capital gains.
Keep in mind the wash sale rule which disallows taxpayers from deducting capital losses generated on securities that were sold at a loss and subsequently reacquired within 30 days.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate.
If selling an investment in a qualified small business stock (QSBS), consider the tax savings and rollover provisions.
Review your ISO, NQ, and RSU holdings to determine strategies to minimize tax.
Business
This year’s business planning is particularly challenging due to uncertainty over potential legislation that could raise corporate tax rates and increase taxes on business owners’ ordinary income and capital gains next year. While the standard year-end strategy of deferring income and accelerating deductions remains effective for most small businesses, proposed tax increases may lead high-income businesses to benefit from pulling income into 2024 to take advantage of currently lower rates and deferring deductible expenses to 2025. Implementing these strategies will require careful evaluation of all relevant factors.
Taxpayers (excluding C-corporations) may qualify for a deduction of up to 20% of their qualified business income, with limitations based on the type of business, the amount of W-2 wages paid, and the unadjusted basis of qualified property held by the business.
More small businesses now can use the cash method of accounting (as opposed to the accrual method), qualifying if their average annual gross receipts do not exceed $30 million over a three-year testing period for 2024. This method allows taxpayers to more easily shift income by delaying billings to the next year or accelerating expenses.
The generous Section 179 expense deduction limits allow many small and medium-sized businesses to deduct most or all their expenses for timely machinery and equipment purchases (up to $1,220,000 for 2024).
In 2024, the bonus depreciation deduction rate will drop to 60%, falling by 20% per year thereafter until it is completely phased out in 2027 (assuming Congress doesn’t take action to extend it).
Businesses may be able to take advantage of the de minimis safe harbor election to expense lower-cost assets and supplies, provided these costs don’t need to be capitalized under UNICAP rules.
Consider funding a qualified retirement plan and/or setting up a Simplified Employee Pension (SEP). As a reminder, if you have five or more employees, you must either set up a retirement plan with CalSavers or set up your own alternative plan.
Consider having your flow-through entity pay a portion of your state tax liability under the Pass-Through Entity (PTE) tax credit provisions.
In 2024, domestic Research and Experimentation costs (commonly called R&D) must be capitalized and amortized over five years (fifteen years if foreign sourced) instead of being expensed immediately.
A corporation (other than a large corporation) expecting a small net operating loss (NOL) for 2024 (and substantial taxable income in 2025) may benefit from accelerating just enough of its 2025 income or deferring 2024 deductions to create a small taxable income for 2024.
Year-end bonuses can be strategically timed for tax benefits by both cash and accrual basis employers.
To reduce 2024 taxable income, consider deferring a debt-cancellation event until 2025 or to accelerate, consider finalizing a debt-cancellation event.
Take steps to utilize prior year suspended basis, at-risk, or passive losses.
If your partnership, corporation or LLC hasn’t already filed the new Beneficial Owner Information (BOI) Report with the U.S. Treasury Department’s Financial Crimes Enforcement Network, make sure to do so by January 1, 2025. While this is a legal document and not a tax form, we want to make sure you don’t miss this important filing.
These are just some of the year-end steps that can be taken to save taxes. As you can tell from this letter, many provisions are quite complex and require some analysis based on individual facts. Even if you do not believe any of these provisions will apply to your 2024 tax situation, you should consider contacting us prior to year-end to run a tax projection and help you avoid unnecessary surprises come April 2025.
