Year-end is a great time to finalize tax optimization strategies to ensure timely filing in the new year. Please consider some of our favorite savings opportunities below to help you with tax planning.
Capital Gain Harvesting or Loss Harvesting
Based on election results, we do not currently expect capital gain tax rates to change drastically. Nevertheless, it may be a good time to harvest losses to offset capital gains realized thus far in 2024. Total net capital losses (after offsetting all realized capital gains) are only allowed to offset other income, such as interest and dividends, up to a maximum of $3,000 in any given year. Any excess losses are carried over indefinitely and can offset future realized gains. Assuming you have excess realized losses this year, you may also consider realizing gains to offset current year losses. If you have investments you intend to write off, but the companies have not yet shuttered, we can advise on potential strategies to accelerate the losses.
Energy Credits
The Inflation Reduction Act increased the federal solar tax credit to 30% and extended it through 2032. In addition, starting in 2023, the prior $500 lifetime credit for energy efficient home improvements has been increased to a $1,200 annual limit, subject to specific improvement limitations. As noted in our prior email blast regarding candidate tax proposals, President Trump has expressed some interest in eliminating these subsidies including subsidies for electric vehicles. If you are thinking about making such improvements or purchases, it may be worthwhile to do so before year end, as these may be eliminated in the coming years.
Charitable Contributions of Appreciated Assets
Rather than using cash to support your favorite charity, consider gifting highly appreciated assets held for over one year. This will yield a double tax benefit: you receive a charitable deduction for the fair market value of the donated assets and forgo paying capital gains taxes on the gains. The deduction for donating appreciated assets is limited to 30% of your adjusted gross income. Any overage is rolled forward for five years until used. Please note that gifts of non-publicly traded assets typically require a formal appraisal.
General Charitable Contributions
Donations made to charitable organizations are deductible if taxpayers itemize deductions. In general, taxpayers are allowed a deduction of up to 50% of their adjusted gross income for cash gifts to public charities. Any amounts gifted over 50% of your adjusted gross income will be rolled forward for up to five years. Gifting a combination of cash and stock to public charities in 2024 could also provide a deduction of up to 50% of a taxpayer’s adjusted gross income, although the proportion of stock and cash should be carefully considered. If you are interested in maximizing your gifts to charities in 2024, we can advise on potential strategies to maximize your deductions and minimize your tax liability.
State and Local Tax (SALT) Deductions Capped
The combined state income tax and property tax deduction is still limited to $10,000 for tax year 2024. In his campaign, President Trump had expressed interest in eliminating or increasing the limit on the state and local tax deduction. We therefore do not recommend prepaying these types of taxes (such as property taxes) for tax year 2024.
SALT Opportunity with State Passthrough Entity Tax (PTE)
Taxpayers who are partners or shareholders in a trade or business passthrough entity (S-corporation or partnership) should consider electing into the California PTE. This allows a tax deduction to an entity’s shareholders or partners without limitation for Federal purposes, and a credit for California purposes. We encourage you to inquire about this potential deduction as the calculations are complex and, in some circumstances, may be limited. Please note that in order to elect into this provision for 2024, California requires that a specific payment must have been made by June 15th, 2024, by the passthrough entity. Without payment, the election is invalid. Participation into the California PTE is available on a yearly basis.
IRA Funds
Reminder: Take your Required Minimum Distribution (RMD), if applicable. Beginning in 2023, the SECURE 2.0 Act raised the age for RMDs to 73. If you reach the age of 73 in 2024, the required beginning date for your first RMD is April 1, 2025, for the 2024 tax year.
To reduce your RMD, you can also make a qualified charitable distribution (QCD). These are direct transfers from your IRA to one or more public charities. You can contribute up to $105,000 per person. The portion that is made as a QCD is excluded from taxable income.
Interest Deductions
Taxpayers looking to purchase new homes may now deduct mortgage interest on loans up to $750,000 of the principal ($375,000 for married filing separate taxpayers). Interest on home equity indebtedness is no longer deductible. For loans written prior to 12/15/17, which are “grandfathered,” interest can be deducted up to $1M of the principal. Refinances after 12/15/17 are still eligible for “grandfathered” treatment if the original debt was secured before 12/15/17. Mortgage loans on rental properties are still fully deductible. Certain loans where proceeds were used for investing purposes may also be deductible as investment interest expense.
Qualified Small Business Stock (QSBS)
Gains on sales of Qualified Small Business Stock held for more than five years may be eligible for a federal gain exclusion ranging from 50% to 100%, depending on your date of purchase. Taxpayers not yet meeting the 5-year holding requirement may be able to defer recognition of their capital gains by rolling over their proceeds into new QSBS investments.
20% Passthrough Deduction (Section 199A)
Your self-employed or passthrough operating business income may be eligible for the deduction. We encourage you to ask us about this potential deduction as the calculations are complex and, in many circumstances, benefits are limited.
Stock Options
If you own options with fast approaching expiration dates, or options with exercise prices well below today’s market value, it may be time to consider exercising. Timing for option exercise is a matter of personal preference based on your expectations of the stock price. Additionally, there could be significant tax implications to consider. We strongly recommend seeking advice before any exercise.
Bonus Depreciation
The Tax Cuts and Jobs Act (TCJA) started to phase out the 100% bonus depreciation starting January 1, 2023. For 2024, the limit is 60% (down from 80% in 2023) and will decrease to 40% in 2025 absent any legislation change. Bonus depreciation is available for both new and used qualified property. In President Trump’s campaign tax plan, he noted that he would like restore bonus depreciation levels to the original TJCA level of 100%. You may want to refrain from purchasing new fixed assets as the new administration may provide more immediate tax benefits depending on legislation.
Lifetime Gifting
The amount of lifetime exemption (the maximum amount a person can give during their lifetime or at death without incurring federal gift or estate taxes) for the 2024 tax year is $13.61 million and, without any tax law change this year, will continue to be adjusted for inflation each year. This level of lifetime exemption is set to sunset at the end of 2025 and revert to roughly $7 million per person for 2026. With the recent election, we expect that the current lifetime exemption levels will not be reduced.
Despite the expectations of little to no change in current gift and estate law, those with larger estates should still consider gift and estate planning to minimize the taxability of their estate. Strategies to make current gifts to efficiently utilize your lifetime exemption can help to reduce the size of your estate and also take any future appreciation related to that asset from your future estate. In addition, certain estate gifting strategies such as forming a grantor retained annuity trust (“GRAT”) may be useful. When implementing a GRAT strategy, appreciation passes to your beneficiaries without affecting your lifetime gifting exemption. Gifting strategies are complex, and we encourage you to contact us or your estate planning advisor to discuss the best options available to you.
Annual Gifting
Taxpayers may still make annual exclusion gifts of up to $18,000 per recipient without affecting their lifetime exemption
Corporate Transparency Act
Starting January 1, 2024, all entities formed or registered to do business in the United States will need to take one of the following actions: (1) confirm they qualify for an exemption or (2) timely file a Beneficial Ownership Information (BOI) form with U.S. Treasury’s Financials Crime and Enforcement Network (FinCEN). Entities formed prior to January 1, 2024, have until January 1, 2025, to report. Assuming no exemptions apply, an entity will need to provide details and list individuals who directly or indirectly exercise “substantial control” or own at least 25% of the entity.
IRS Increased Enforcement
In 2022, President Biden signed the Inflation Reduction Act, which included a provision to increase the IRS’ budget by nearly $80 billion over the next 10 years. With its newly allocated funds the IRS will direct more resources toward examination of high-income and high-net-worth individuals, as well as large corporations and partnerships. We have already observed an increase in audits from the Global High Wealth and High-Income Audit teams. These teams consist of not just an auditor, but an IRS counsel, appraisers, economists, and other specialists. In advance of increased scrutiny, we recommend keeping good records and being “audit-ready,” especially as the IRS will direct more attention to deductions and items of significant income-recognition.
Talk to Us
We are prepared to strategize. Let us help you reap any benefits still allowed by the latest tax reforms. We can discuss any questions about minimizing taxes and maximizing benefits before the year is over. Contact us today!
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