As the year is ending, it is a good time to ensure that you have maximized all available tax benefits through comprehensive 2024 Year-End Tax Planning. Below is a subset of tax planning issues that require you to act before December 31. (This is not an exhaustive list)
Employee benefits
Ensure that you have maximized contributions to all employer tax deferred accounts such as 401 (k) plans. You can contribute $23,000; $30,500 if you are aged 50 or older) in 2024 into your 401(k) and similar workplace plans. At a minimum, you must contribute as much as to get the maximum amount of employer match, if any. If you expect your tax rates to be higher at Retirement, then you will want to contribute to a Roth 401 (k) if the plan offers it.
High income employees can maximize the value of employer plans by making non-deductible after-tax contributions (In addition to the maximum pre-tax contribution) and rolling it to a Roth account. Money in a Roth account incurs no tax if certain conditions are met.
Evaluate contributions or withdrawals from other accounts such as the Health Savings Account (HSA), FSA account and Dependent Care FSA. Money in FSA accounts need to be used before the end of the year with a little flexibility or you lose it. HSA accounts come with a high deductible health plan, which may suit those who don’t mind the higher deductible because of lower expected health expenses. These accounts are triple tax deductible and sometimes, with employer contributions and tax savings, the high deductible plan could be a better option than plans with lower deductible even with high health expenses.
Non-cash compensation
If you have Non-Qualified Stock options (NQSQ) which are taxed as ordinary income when exercised, check to see if you want to exercise some options if you expect to be in a relatively lower tax bracket. Exercising NQSQ could also help you avoid the Alternate Minimum Tax (AMT) if you exercise Incentive Stock Options (ISO) during the year. See this article more details about these options.
Loss or gain harvesting
The end of the year is a good time to rebalance your portfolio in line with your risk profile. One way to minimize incurring capital gains is to harvest any losses that you may have in your portfolio and replacing the security with a similar but not identical security to avoid the dreaded wash-sale rule.
On the other hand, if you are in a lower capital gains tax bracket, you may want to harvest gains. The wash sale rule does not apply for securities sold at a gain.
Another strategy is to gift appreciated stock to a loved one in a lower tax bracket and they can sell the appreciated stock and incur lower taxes on long term gains. In 2024, you can give away up to $18,000 ($36,000 if married) per person to an unlimited number of people without using up your lifetime estate and gift tax exemption. The long term capital gains tax rate is 0% for single filers with income below $47,025 and for married joint filers with income below $94,050.
Retirees
If you are over RMD (Required Minimum Distribution) age or you have inherited retirement accounts, you are required to take distribution, or you could be hit with a 25% penalty on the amount you failed to withdraw.
If you are charitably inclined, you can use a Qualified Charitable Distribution (QCD) from your IRA (Individual Retirement Arrangements) to make charitable contributions. QCDs do not incur taxes and also satisfy your RMD. Each eligible IRA owner can exclude up to $105,000 in QCDs from taxable income in 2024.
If your income is lower than usual and you are expected to be in a relatively lower tax bracket then you should see if a Roth conversion benefits you. In a Roth conversion, you withdraw money from your tax deferred account and roll it into a Roth IRA. Withdrawals are included in your taxable income.
Here is a checklist of year-end tax planning for individuals: CLICK HERE
Here is another checklist of year-end activities including tax planning: CLICK HERE
Business Owners
If you are a business owner, you have several planning opportunities. If you use the cash method of accounting, then you have flexibility to move your income and expenses to the year which is more favorable for tax purposes.
Business owners get generous write-offs for purchase of assets through bonus depreciation (Up to 60% bonus depreciation) or you can expense your entire purchase of up to $1,220,000 of new or used business assets using section 179.
There are several breaks for business vehicles depending on the type of vehicle (Eg Cars or heavy truck) and percentage of vehicle used for business purposes. For instance, if you purchase a truck with a gross vehicle weight rating (GVWR) of 6,001 pounds or more you can take the section 179 expense, bonus depreciation and regular depreciation.
Self-employed individuals and owners of LLCs, S corporations and other pass-through entities can deduct 20% of their qualified business income, limited to individuals with incomes of less than $383,900 for joint filers and $191,950 for all others. If you just over those key numbers you can actively reduce your income below the thresholds by harvesting capital losses, making charitable contributions or by buying business assets and using section 179 expensing to reduce business income.
Business owners and self employed individuals can also open their own retirement plans such as the Solo 401K for self employed and contribute with much more options and flexibilty than employees can.
Please contact us if you would like to discuss any of the above and other planning opportunities.