To Our Clients and Friends:
The end of the tax year is almost upon us, so it's a good time to think about things you can do to reduce your 2024 federal taxes. With the presidential election coming up, there's no guarantee we won't see a retroactive tax law change affecting 2024. So, for now, we can only assume that the law currently in effect for 2024 will remain in place. If there are any developments that affect 2024, we certainly will let you know. With that said, here are some things to think about doing before the end of the year.
Check Tax Withholding and Estimated Payments. If the federal income tax (FIT) withheld from your paychecks plus any estimated tax payments for 2024 aren't at least equal to (1) your 2023 tax liability [110% of that amount if your 2023 AGI was more than $150,000 ($75,000 if you file MFS)] or, if less (2) 90% of your 2024 tax liability, you will be subject to an underpayment penalty. Making an estimated tax payment reduces any underpayment from the time the payment is made. FIT withheld from wages is considered paid ratably over the year. So, if you had unexpected income or gains early this year and haven't made sufficient tax payments, you can increase your withholding to correct your underpayment.
Bunching Itemized Deductions. Each year, you can choose to deduct your itemized deductions (mortgage interest, charitable contributions, medical expenses, and taxes) or the standard deduction. The 2024 standard deduction is $14,600 for singles and married individuals filing separately (MFS), $29,200 for married couples filing jointly (MFJ), and $21,900 for heads of household (HOH). If your total itemizable deductions for 2024 will be close to your standard deduction, consider "bunching" your itemized deductions so they exceed your standard deduction every other year. Having enough itemized deductions in 2024 to exceed your standard deduction will lower this year's tax bill. Next year, you can claim the standard deduction, which will be increased for inflation. If Congress does nothing, the standard deduction will fall dramatically in 2026 and the cap on the deduction for state and local taxes will expire. This is even more reason to bunch itemized deductions into 2024, defer them in 2025 and take the standard deduction, and bunch again in 2026. Even if these provisions are extended, this strategy results in accelerating deductions into 2024 and maximizing deductions versus taking the standard deduction in both 2024 and 2025. If the provisions expire, you will have deferred itemized deductions into 2026, where they are likely to produce a much larger tax benefit than if you had taken them in 2025.
Manage Investment Gains and Losses. When selling appreciated securities, it's usually best to wait until they have been held for over 12 months; they will generate a long-term, versus short-term, capital gain. The maximum long-term capital gain tax rate is 20%, but for many, a15% rate applies. The 3.8% Net Investment Income Tax (NIITI also applies at higher income levels. Even so, the highest tax rate on long-term capital gains (23.8%) is still far less than the 37% maximum tax rate on ordinary income and short term capital gains. Any recognized losses or loss carryovers can offset capital gains if you decide to sell stocks at a gain this year.
Make Your Charitable Giving Plans. Donate appreciated assets that were held for over a year. If you give such assets to a public charity, you can deduct the full fair market value of the donated asset while avoiding the tax you would have paid had you sold the asset and donated the cash to the charity. Charitable gifts of appreciated property to a private nonoperating foundation are generally only deductible to the extent of your basis in the asset. Qualified appreciated stock (generally, publicly traded stock) donated to a private nonoperating foundation can qualify for a deduction equal to its fair market value.
Convert Traditional IRAs into Roth Accounts. Converting makes the most sense when you expect to be in the same or higher tax bracket during your retirement years. If that turns out to be true, the current tax cost from a conversion this year could be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account's post-conversion earnings. If the conversion triggers a lot of income, it could push you into a higher tax bracket. One way to avoid this is to convert smaller portions of the traditional IRA over several years.
Annual Gift Tax Exclusion. The basic estate, gift, and generation skipping transfer tax exclusion is scheduled to fall from $13.61 million ($27.22 million for married couples) in 2024 to $5 million ($10 million for married couples) in 2026. The 2026 amounts will be adjusted for inflation, but the bottom line is that, absent any tax law changes, the 2026 exclusion will be substantially less than 2024 exclusion. So, many estates that will escape taxation before 2026 will be subject to estate tax after 2025. If you think your estate may be taxable, annual exclusion gifts (perhaps to children or grandchildren) are an easy way to reduce your taxable estate. The annual gift exclusion allows for tax-free gifts that don't count toward your lifetime exclusion amount. For 2024, you can make annual exclusion gifts up to $18,000 per donee, with no limit on the number of donees.
If you own a business, consider the following strategies:
Establish a Tax-favored Retirement Plan. If your business doesn't already have a retirement plan, consider establishing one. Current retirement plan rules allow for deductible contributions and credits. Contact us for more information on small business retirement plan alternatives.
Depreciation. For qualifying property placed in service in the 2024 tax year, the maximum allowable Section 179 deduction is $1.22 million. Most types of personal property, as well as off-the-shelf software, used for business are eligible for Section 179 deductions. These deductions can be claimed for qualified expenditures for roofs, HVAC equipment, fire protection and alarm systems, and security systems for nonresidential real property. Section 179 deductions can't cause an overall business tax loss, and deductions are phased out if you place more than $3.05 million of qualifying property in service during the 2024 tax year. 60% first-year bonus depreciation is available for qualified new and used property that is placed in service in calendar year 2024. Consider making eligible asset acquisitions between now and year end. For the 2025 tax year, the bonus depreciation percent age is scheduled to decrease to 40%.
Year-end Bonuses. Year-end bonuses can be timed for tax effect. Cash basis taxpayers should pay bonuses before year end to maximize the deduction available in 2024 if they expect to be in the same or lower tax bracket next year. Cash basis taxpayers that expect to be in a higher tax bracket in 2025, should wait to pay year-end bonuses until January.
State Income Tax Deduction. The pass-through entity tax (PTET) election allows pass-through businesses to elect to pay state income tax on their business income at the entity level. The entity elects to pay the state income tax due on the business income that would otherwise pass through to owners and be subject to state income tax at the owner level. The federal itemized deduction cap for state and local taxes that applies to individuals doesn't apply to the pass-through entity. Instead, the state income taxes reduce the business income that flows through to the entity's owners. Contact us to determine whether your business should consider making the PTET election.
Maximize the Qualified Business Income (QB/) Deduction. The QBI deduction is scheduled to sunset after 2025. However, depending on the November elections, it could end sooner. Maximizing the deduction before it ends makes sense. Even if the deduction is available in 2025, maximizing the 2024 deduction defers tax. Due to limits on the QBI deduction, tax planning moves can increase or decrease your QBI deduction. For example, claiming first-year depreciation deductions can reduce QBI and lower your allow able QBI deduction. We can help you put together strategies that give you the best overall tax results.
Qualified Small Business Stock (QSBC) Exclusion. 100% of the tax gain on eligible sales of Qualified Small Business Corporation (QSBC) stock that was acquired after 9/27/10 is excluded from taxable income. QSBC shares must be held for more than five years to be eligible for the gain exclusion. Contact us if you think you own stock that could qualify for the break. Also, contact us if you are considering establishing a new corporate business if you think the stock might be eligible for the gain exclusion. Advance planning may be required to lock in the exclusion privilege.
Employing Family Members. Employing family members can reduce overall tax liability. If the family member is a bona fide employee, the employer can deduct the wages and benefits, including medical benefits, paid to the employee on Schedule C or F as a business expense, reducing the business-owner's self-employment tax liability. Wages paid to your child under 18 aren't subject to federal employment taxes, are deductible at your marginal tax rate, are taxable at the child's marginal tax rate, and can be offset by up to $14,600 (your unmarried child's maximum standard deduction for 2024). However, your family member must be a bona fide employee, and basic business practices, such as keeping time reports, filing payroll returns, and paying a reasonable amount based on the actual work performed, should be followed.
This letter only covers some of the year-end tax planning moves that could potentially benefit you, your family, and your business. Please contact us if you have questions, want more information, or would like us to help in evaluating best tax planning options for 2024.
