2024 Year-End Tax Planning Strategies
by Jen Hall, CMA, CPA, CFP®, CRPC® and James Lange, CPA/Attorney
Before you blow off reading this letter, consider how hard it was to earn $1,000 at work and how easy it is to cut your taxes by $1,000 or tens of thousands or even more by applying some of the advice in this article. That said, if you are like me, you won’t read this article beginning to end but will look for the topics you are most interested in reading.
Table of Contents
Roth IRA Conversions
We generally like to think in terms of a long-term Roth IRA conversion plan by doing a series of Roth conversions over a number of years. That said, the immediate issue is: should you do a conversion between now and the end of the year?
Over the last few years, we have emphasized the importance of the looming sunset of the provisions included in the Tax Cuts and Jobs Act (TCJA) of 2017. The implications were tax rates were going up in 2026 so hurry up and do Roth conversions before tax rates revert to their 2017 levels. Now, we are modifying our recommendations in light of the recent election results. We are looking at the incoming Republican Trifecta (President, Senate, and the House) as an opportunity to perform more Roth conversions over a longer period of time, possibly until the end of 2028 or later vs. the previous 2025 year. We are also considering the impact of the estate and gift tax exemption limits remaining the same during the next administration through 2028 vs. the previous sunset in 2026.
We are not market timers and prefer our investment colleagues make investment recommendations. Nobody rings a bell when the market hits a high or low point. That said, after taking everything that President-elect Trump has said and looking at his non-traditional cabinet choices, it is a fair bet there will be volatility in the market in the years to come. You may be tempted to wait for a market dip to do a Roth conversion. However, there isn’t much time to wait if we are talking about a 2024 conversion. Also, please remember the conversion for 2024 must be accomplished in 2024, not April 2025 like a Roth IRA contribution.
By making a series of Roth conversions in the years 2024 through possibly 2028, you may position yourself to save significant tax dollars by reducing your required minimum distributions (RMDs) since there are no RMDs required on Roth IRA accounts. Also, there would not be any taxes owed on the portfolio income earned inside the Roth accounts. The money that you would be using to pay the tax on the Roth conversion would not be there, potentially reducing capital gains taxes, and net investment income, your medical expense deduction may be increased, and your IRMAA premium charges may be reduced as a result of a solid Roth conversion plan (not for the year of the conversion, as Roth conversions increase your IRMAA premiums).
Many of our clients think they need to do a significant Roth conversion to make a difference on their overall retirement and estate plan. Instead, it may be smaller Roth conversions over a longer time horizon that can still make a significant difference in your overall planning. Please do not automatically negate the positive impact Roth IRA conversions can make for you. It’s important to test the numbers first before making an informed decision. The best and most complete Roth IRA conversion discussion we have written and what Burton Malkiel calls the best discussion of Roth IRA conversions he has ever seen can be found in Retire Secure for Professors and TIAA Participants on pgs. 293-325. More information about Roth conversions can be found further down in this article.
Estate Tax Exclusion
Before we knew the election results, for many wealthy taxpayers, the sunset of the current estate and gift tax provision provided the greatest concern. We now believe the likelihood of changes in the near-term future estate tax and gift tax provisions is low. For 2025, the federal and gift tax limit increases to $13.99 million per individual ($27.98 million for married couples). We no longer believe the estate and gift tax provisions will return to their pre-TCJA levels of approximately $6.8 million per individual ($13.6 million for married couples).
The annual gift tax limit for 2024 is $18,000 per donee ($36,000 for split gifts) and has been increased to $19,000 for 2025 ($38,000 for split gifts). If you have a large estate in excess of $13.99 million per individual ($27.98 million for married couples), there are a lot of things you can do, but most are variations of a gift.
Individual Tax Brackets
Some of the likely changes to become tax law with the upcoming Republican Trifecta is the individual tax brackets staying the same through 2028 or later, keeping the higher standard deduction, and the elimination of the State and Local Tax (SALT) deduction or increasing the limit from the current $10,000 limit or doubling the limit for joint filers. Consideration should also be given to the reduction or elimination of some of the energy efficiency tax credits introduced in the Inflation Reduction Act. It is too early to comment on some of the tax reductions or eliminations mentioned during the campaign trail including no taxation on Social Security income, Tip income or Overtime income. Since we are big proponents of planning, we encourage you to consult with your advisory team (professional tax preparer and estate attorney) to develop a solid plan to combat the possibility of these upcoming changes.
What’s New for 2024?
Below are some of the new provisions effective for 2024 from the passing of SECURE Act 2.0:
- 529 Plan to Roth IRA rollovers allow beneficiaries of 529 plans to roll over up to a lifetime maximum limit of $35,000 to a Roth IRA. The 529 plan must have been established for at least 15 years, and the rollovers are subject to the annual Roth IRA contribution limits. The beneficiary must have earned income up to the rollover amount. Surprisingly, the rollover is not restricted by the income limits imposed upon individual Roth IRA contributions.
- As in 2023, Roth contributions are now permitted in SIMPLE and SEP plans.
- Required Minimum Distributions from Roth accounts from employer-sponsored plans, including 401(k)s, 403(b)s, and governmental 457(b) plans are now eliminated while the employee is still living. Previously, annual RMDs applied to these Roth accounts, but not Roth IRAs.
- While heirs of an inherited IRA from a decedent who died in 2020 or later will not incur a penalty for missed RMDs in the inherited account in 2024, the beneficiary must still empty the account by the original 10-year deadline.
- Spousal beneficiaries who leave the retirement account in the decedent’s name are now permitted to use the Uniform Lifetime Tables to calculate their RMDs if they choose to keep the account in the decedent’s name for any reason. Previously, the surviving spouse had to evaluate the tradeoffs between an inherited account and a spousal rollover account. This option reduces the consequences of making the incorrect decision. We still generally prefer a spousal rollover option.
- We do not usually recommend distributions from retirement plans, but with the passing of SECURE Act 2.0, an expansion of penalty-free withdrawals, including emergency personal expense distributions up to $1,000 are now permitted. There are restrictions around the distribution relating to necessary personal or family emergency expenses and only one distribution may be made every three years unless the distribution has been repaid. Penalty-free distributions in case of domestic abuse, terminal illness, or due to qualified disasters are also now permitted. That said, we still don’t like premature distributions from an IRA if there is any other money that can be used.
Employers’ Share of a Retirement Plan Contribution Can Be Roth
- The option of employers adding a change to their Plan document to allow the employer matching contributions to be contributed into a Roth account vs. a Pre-Tax Traditional account for employer-sponsored plans has been extended to year 2026 due to the administrative burden of implementing the change. This is a great new law, that has been botched administratively. Hopefully, this will change, and your employer will adopt it.
Other Provisions
- Increased required minimum distributions age to age 73 if you were born between 1951 and 1959, and age 75 if you were born in 1960 or later.
- There is no age limit for IRA contributions, meaning anyone working who has earned income may contribute to a traditional IRA regardless of their age.
- Catch up provisions for employees 50 and older remain at $7,500. Catch up provisions for employees ages 60-63 are $11,250 per year. If you can afford this, it is a no-brainer.
- Previously slated for 2024, but now deferred until 2026, higher income employees who are age 50 and older who make catch-up contributions to employer-sponsored plans, must contribute the catch-up contributions in the form of a Roth vs. a Traditional Pre-Tax account. This is for employer-sponsored plans only (not IRAs).
- A disabled person had to be disabled before age 26 to have an ABLE account established. Now the disability must have begun before age 46 in order to qualify for an ABLE account effective in the year 2026.
- Beginning in 2023, if you are age 70½ or older, you can make a one-time charitable distribution of $50,000 to a Charitable Remainder Trust (CRAT/CRUT) or a charitable gift annuity. These rules are complicated, and we strongly encourage you to consult your tax professional before considering this option. This is an expansion of the type of charity that can receive a QCD. Forgetting the change for a minute, subject to rare exceptions, we love QCDs as the most tax-effective method of making a charitable donation.
Home Improvement Credits
As part of the Inflation Reduction Act passed in August 2022, there are some key energy improvement credits to consider.
The Residential Clean Energy Credit is now 30% of the cost to install qualifying electric, water heating, or temperature control systems for your home that use solar, wind, geothermal, biomass or fuel cell power. The credit also applies to battery storage technology with a capacity of at least three kilowatt hours. The 30% credit is in place through 2032, and then drops to 26% in 2033, 22% in 2034, and fully expires in 2035. If you are thinking about installing alternative energy systems in your home utilizing renewable energy sources, the next few years is the best time to consider these changes while the 30% credit is available. It is not clear whether these credits will be available with the upcoming President-elect change in 2025.
The Energy-Efficient Home Improvement Credit changed effective in the 2023 year. If you recall, previously, there was a lifetime credit limitation of $500 and the credit was capped for many items, including windows, water heaters, etc. The credit has now increased to 30% for the cost of certain types of insulation, boilers, air-conditioning systems, windows, and doors installed in your residence. The $500 lifetime limit has been increased to a $1,200 annual limit. The $1,200 annual limit is decreased to $500 for exterior doors and $600 for exterior windows and skylights. If you are installing a biomass stove or hot water boiler or an electric or natural gas heat pump in your home, the annual limit is $2,000. Should you consider a home energy audit, you can receive a credit of up to $150 for the cost of the home audit. It is important to plan your home improvements to possibly maximize your credits by installing home improvements in December and January to capitalize and maximize the energy efficient tax credits.
Vehicle Credits
If you are in the market for a new electric vehicle, you may want to consider the Clean Vehicle Credit which provides a maximum credit of $7,500 per vehicle. The manufacturers’ sales threshold limit is gone. There are not any limitations on the number of vehicles you can purchase to be eligible for the credit, so if you and your spouse are both looking to purchase a new vehicle, your combined credit could be $15,000.
There are three tests to qualify for the credit. If you make too much, no credit; if the vehicle costs too much, no credit, and if it was manufactured outside of North America, no credit. To be eligible for the full $7,500 credit, electric must meet a critical minerals requirement and a battery component requirement. If only one of the two factors is met, the credit is reduced to $3,750. Eligibility for full credit for electric vehicles is based upon the vehicle’s battery capacity. If you are in the market for a new vehicle and want to qualify for the $7,500 Clean Vehicle Credit, we encourage you to check the website, https://fueleconomy.gov/feg/tax2023.shtml, to make sure the year/model is eligible for the credit.
The Clean Vehicle Credit is disallowed if the manufacturer’s suggested retail price is more than $80,000 for SUVs, vans, and pickup trucks and $55,000 for all other vehicles. For used vehicles, the price cap decreases to $25,000. The credit is disallowed if your Modified Adjusted Gross Income (MAGI) for the current or preceding tax year exceeds $300,000 for married filing jointly or surviving spouses, $225,000 for head of household, and $150,000 for all other taxpayers for new vehicles. For used vehicles, the credit is disallowed if your MAGI for the current or preceding tax year exceeds $150,000 for married filing jointly or surviving spouses, $112,500 for head of household, and $75,000 for all other taxpayers.
Beginning in 2024, taxpayers purchasing eligible vehicles can elect to transfer the Clean Vehicle Tax Credit to the dealer, provided the dealer meets the registration, disclosure, and other requirements. The discount does not affect your taxes, but you still must report the transaction on your tax return through Form 8936. If you receive the rebate and you are not eligible for it, meaning your income was higher than you had originally reported, you will be required to pay the rebate back as part of your income tax filing.
In the last two sections, remember these are credits, not deductions meaning a dollar-for-dollar reduction of your taxes.
Itemized Deductions
We have a higher standard deduction allowance in 2024 ($14,600 for individuals, $16,550 if 65 or over, $29,200 for married filing jointly, and $32,300 if 65 or over). There are also significant limitations on what we may include for itemized deductions. For those taxpayers who typically never itemized their deductions, the increase in the standard deduction is welcome. For itemizers, particularly if you pay high real estate taxes and state and local income taxes, the change in itemized deductions generally hurt you.
Gaming the Standard Deduction Allowance Vs. Itemizing Deductions
Bunching Strategy: Bunching your itemized deductions is a technique that involves accumulating deductions, so they are high in one year and low in the following year. You can benefit from the “bunching” strategy. It’s very typical for most taxpayers to wait until tax time to add up everything and use the higher of the standard deduction or their itemized deductions. It should be easier for most taxpayers to project their total itemized deductions before the end of 2024 due to the elimination of certain itemized deductions and limitations on others [State and Local Tax (SALT) deduction]. By being proactive, you can time the payments of tax-deductible items to maximize your itemized deductions in one year while using the standard deduction the following year.
Bunching Charitable Donations: Consider bunching charitable donations every other year while taking the standard deduction in the off years.
A popular vehicle for maximizing your charitable donations is the use of a Donor-Advised Fund (DAF). The DAF functions as a conduit. The taxpayer receives an immediate tax deduction up to certain limits when the money is directed into the fund. The donor decides what charities will receive the money and when it shall be paid out. In a high-income year, front loading the fund with a larger contribution can be quite nice. The assets within the fund also enjoy tax-free growth. Please note that the charitable contribution limit for 2024, including donor-advised funds, is 60% of AGI for contributions of cash, and 30% of AGI for contributions for non-cash assets if the assets were held more than one year.
We have found that charities are very active with their solicitations during the holiday season and would be happy to receive gifts near year-end or early in the new year. If you think you will be itemizing your deductions in 2024, but not next year, consider making last minute cash and non-cash charity donations before year-end. If you do not have the extra cash available today, you can use a credit card before year-end and still qualify for a 2024 tax deduction. If the gift is appreciated stock, the tax benefits are even greater as you qualify for the larger charitable contribution tax deduction and do not have to pay tax on the capital gains of the appreciated stock.
Also, you don’t necessarily have to donate cash. You could also consider non-cash contributions of household goods, clothing, and furniture to the appropriate charity.
We often like to recommend a Roth IRA conversion strategy for those taxpayers who have already or are still planning to make a large charitable contribution before year-end. For example, we had a client who was consistently contributing $20,000 per year to their favorite charities. We recommended instead they ‘bunch’ three years’ worth of their contributions into one year ($60,000) by utilizing a Donor Advised Fund and funding it with appreciated stock. By combining these tax strategies, the client was able to increase their overall Roth IRA conversion. In utilizing the Donor Advised Fund, they were able to distribute the monies to their favorite charities over the three-year period and were able to accelerate the $60,000 deduction in the current year. Plus, the client did not have to pay the long-term capital gains on the appreciated stock!
To qualify for the charitable contribution deduction, contributions must be made to approved Section 501(c)(3) organizations. If you are uncertain if an organization is approved, please refer to https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations.
Required Minimum Distributions (RMDs) in 2024: As a result of SECURE Act 2.0, the ages for taking RMDs changed. For those born between 1951 and 1959, RMDs now begin at age 73 vs. age 72. And for those born in 1960 or later, RMDs will now begin at age 75.
The changes to the RMD ages can significantly impact and increase your Roth IRA conversion planning opportunities by giving you more years to make conversions before you need to begin drawing down on your IRAs. Interesting planning point: while the IRS continues to increase the RMD age from 70½ to 73 or 75, you are still able to take advantage of Qualified Charitable Distributions (‘QCDs’) at age 70½. This means that you do not have to be of RMD age to take advantage of QCDs. If you are making charitable contributions and are age 70½ or more, we strongly suggest you consider the merits of utilizing QCDs as part of your tax strategy in your charitable giving. This is especially important if you are someone who does not qualify for itemizing their tax deductions. By doing so, the charitable contribution is sent directly from your IRA to the charity without any income taxes being paid. This is a simple summary, and we encourage you to consult your tax practitioner on the merits of this strategy if it makes sense for you.
Sometimes during the planning process, we discover if you make a larger QCD, you may reduce your Income-Related Monthly Adjustment Amount (IRMAA) bracket and benefit your charity at the same time. The question comes up, “Would you rather pay additional money to Uncle Sam or to your charity?” That question seems simple, but proper planning can identify those opportunities.
As a reminder, your RMD needs to be taken before any Roth IRA conversion can be executed.
A Helpful Tip: If you are currently using QCDs, please make sure you receive acknowledgement letters from the charitable organizations for any single donation of $250 or more before filing your tax return. The IRS requires the letter under the Substantiation and Disclosure requirements for the donation to be tax-deductible.
Alert: If you are subject to 2024 RMD rules and your pension income is entirely from qualified plans such as 403(b)s and 401(k)s, you should consider an IRA rollover or partial rollover before December 31, 2024. This will enable you to take advantage of QCDs by using pre-tax retirement money for the 2024 donations instead of using after-tax cash, and for 2025, the QCDs will make some of your 2025 RMDs non-taxable.
Caution: For those seniors still working and doing back door Roth conversions, an IRA rollover would dilute the intended benefit of the back door strategy.
Important Early Thought for 2025: If you are considering using your RMDs from your IRA to make QCDs, try to be proactive. Advanced planning with your tax advisor and investment advisor (if you have one) will ease the process while achieving your charitable giving goal and maximizing the income tax savings.
Medical Expenses: The 2024 threshold for deducting out-of-pocket medical expenses on Schedule A must exceed 7.5% of your AGI. Most taxpayers don’t typically incur significant deductible out-of-pocket medical expenses due to medical insurance coverage.
Your net medical expense deduction is linked directly to your AGI. Eligible expenses include health insurance premiums, long-term care premiums (limits apply), prescription drugs, medical, dental, and eye care services. If you have incurred higher medical expenses and believe that you will qualify to itemize your deductions in 2024, you should consider paying any last-minute medical, dental, or eye expenses before December 31, 2024. If one spouse has larger medical expenses and lower income than the other, analyze if filing separately reduces your overall tax bill.
If you are looking to move to an assisted living facility and there is a large buy-in cost qualifying for a large medical deduction, consider bunching your medical expenses into one year and combining the larger medical expense deduction with a Roth IRA conversion.
State and Local Tax (SALT) Deductions: The overall deductible limit for 2024 remains at $10,000. This was a previous backdoor tax increase for those paying high real estate and/or state and local income taxes. This limit applies to a combined total that will include state and local income taxes, real estate taxes, sales tax, personal property tax, etc. There is not a lot of “strategy” in this category currently. A large portion of this deduction is typically filled with a combination of income tax withholdings from employee wages and larger real estate tax costs. If you don’t have employee wages but are expecting higher taxable income from other sources of taxable income (i.e., self-employment income, capital gain income/investment income), paying an increased 4th quarter estimate by December 31, 2024, can generate additional tax savings. But, if your state and local deductions are more than $10,000, there is no advantage of paying your estimates early.
Planning Tip: There is pressure on both political sides to increase or eliminate the SALT cap in 2025. Therefore, if you have already reached your $10,000 limit for 2024, you may want to make sure you pay any 4th quarter estimates in 2025 in the event the SALT cap is increased or eliminated.
Qualified Business Income Deduction for Business Owners: The TCJA introduced a new complicated 20 percent tax deduction (also known as the Section 199A deduction) for eligible business owners such as sole proprietorships, LLCs, S Corporations, Partnerships, and Trusts. The deduction is also available to certain real estate rental property owners. The details of this deduction are beyond the scope of this letter. It is a valuable tax deduction for those who qualify. The business owner will enjoy an extra reduction of taxable income without additional capital outlay. Certain deduction limits are imposed when taxable income exceeds threshold amounts. Keeping taxable income below these thresholds will preserve more of the qualifying deduction.
The third-party payment settlement networks, such as PayPal and Venmo, were required to send you a Form 1099-K if you are paid over $600 during the year for goods or services, regardless of the number of transactions. Previously the form was only sent if you received over $20,000 in gross payments and participated in more than 200 transactions. The gross amount of a payment doesn’t include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts. The 1099-K does not apply to payments from family and friends. Due to much criticism, there is a phase-in limit of $5,000 for 2024.
Planning Note: It will be important to have your reported gross receipts equal to or more than the gross receipts reported on the 1099-K. Otherwise, an IRS notice may be generated for underreporting of the gross receipts reported by your business.
Defer Income and/or Accelerate Expenses: Many taxpayers don’t have much control in choosing whether to defer or accelerate income from year to year. However, the new tax law provides businesses and business owners (including pass-through entities), with incentives and deductions to lower their overall tax costs. Smart timing of income and expenses can be fruitful while poor timing may result in paying a larger tax bill. Being able to estimate income for 2025 can help with the decision of either accelerating income before the end of 2024 or deferring the income into 2025. The same is true for deductions. Try and use this flexibility to your advantage. Our goal is to “manage the tax brackets” between the various years to smooth out your income and deductions to pay the overall lowest income tax.
Tax Loss Harvesting: We have seen the benefits of this strategy from the 2022 tax year due to the poor performance of the market in 2022. This means selling certain investments that will generate a loss—converting them from unrealized losses to realized losses. You can use an unlimited amount of capital losses to offset capital gains. Since the stock market has performed very well in 2024, there may not be many opportunities for “loss harvesting,” but we wanted to bring it to your attention.
For details about tax-loss harvesting, please see Chapter 7, page 103, of The IRA and Retirement Plan Owner’s Guide to Beating the New Death Tax book which you should have already received.
Large long-term capital gain income has often triggered Alternative Minimum Tax (AMT) in past years. On a good note, for the most part AMT has virtually disappeared. For those higher income taxpayers, lowering current year investment income by loss harvesting will generate even greater savings. These taxpayers can potentially lower the net investment income tax (the additional 3.8% tax) assessed on net investment income above certain levels.
Tax Gain Harvesting: Tax Gain Harvesting is the opposite of Tax Loss Harvesting. If you have any highly appreciated stock that you have been holding onto for many years because you did not want to accelerate additional capital gains, this may be the year you want to sell. By selling your highly appreciated stock and offset the capital losses that you harvested, you can minimize your overall “net” capital gain/loss. Remember, you are limited to a net capital loss of $3,000 annually for both joint filers and single filers. Any additional capital losses carry over to the following year indefinitely until they are used. If you should die before the carryforward capital losses are fully utilized, those capital losses are lost. By consulting with both your investment advisor and professional tax preparer, you will be able to determine the best tax strategy for handling your capital gains and losses each year.
More Roth IRA Conversion Details: In general, we like Roth IRA conversions for taxpayers who can make a conversion and stay in the same tax bracket they are currently in and have the funds to pay for the Roth conversion from outside of the IRA. Unfortunately, the qualification “in general” is likely critically important. It is best to run the numbers to determine the most appropriate conversion amount for the current year and to plan for possible future conversions in your situation. We often develop a long-term Roth IRA conversion plan that usually involves multiple years of partial conversions.
When a conversion plan is developed, we often recommend a conversion up to certain income limits to avoid additional Medicare premium cost increases or to avoid high rates of income tax on amounts of Roth conversion income over certain amounts.
But again, in “running the numbers” we have also found that in some circumstances, it may be advantageous to make a Roth conversion that will push the taxpayer into a higher tax bracket.
Likewise, it is part of the Westinghouse retiree’s religion to never make a Roth conversion that will increase their Medicare Part B premium. But that might be a little shortsighted if you consider the long-term savings which impact your life, your spouse’s life, and ten years after that for your beneficiaries. In God We Trust. All Others Bring Data.
Jim participated on a webinar panel for Financial Planning magazine and one of the quantitative speakers mentioned to Jim that he himself did Roth conversions that pushed him into paying higher Medicare Part B premiums, but the long-term benefits of the conversion were so powerful, it was worth well more than the short-term pain of the higher premiums. It is important to remember, paying higher Medicare Part B premiums may only be a one-year sacrifice for many more future gains. This is especially true if your beneficiary has a disability and can stretch the inherited IRA over their lifetime instead of the normal ten years.
It often makes sense for a parent to gift money to their children or grandchild to either make a Roth IRA contribution or to pay for a Roth IRA conversion.
Sometimes, it goes the other way too. In certain situations, utilizing a parent’s IRA and lower tax rates to do Roth conversions can be beneficial. The adult child (eventual beneficiary) having sufficient financial resources can make a monetary gift to the parent to pay the tax on the conversion. Since the parent wouldn’t be receiving annual RMDs from the converted portion of the IRA, the child can make annual gifts to replace the lost income distributions to cover living expenses. Without future IRA income, the parent’s Social Security income in future years can be received tax-free.
Friendly Caution: Keep in mind that you are expecting your child to make those monetary gifts to you each year. It also gets trickier if there is a living sibling. That said, I have never seen this work in practice, though in theory it can save a lot of money.
Going forward, Roth conversions under the current tax laws may present a better opportunity to do conversions at the lower tax rates. The historical benefits of Roth IRAs and Roth conversions that grow in value have not changed. It is more important than ever to develop a Roth conversion plan considering your unique situation.
Inherited IRA distributions generally must now be taken within 10 years: Under the terms of the draconian SECURE Act, for IRAs inherited from original owners who have passed away on or after January 1, 2020, the new law requires beneficiaries, subject to exception, to withdraw assets from an inherited IRA or 401(k) plan over ten years following the death of the account holder.
Exceptions to the ten-year rule include assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than ten years younger than the original IRA owner or 401(k) participant.
Further guidance issued clarified that an RMD on an inherited traditional IRA must be taken for the first nine years and then the balance in year ten. This means a taxpayer cannot wait until year ten to take a distribution, except for the Roth IRA.
If you were the beneficiary of an inherited IRA in 2020, 2021, 2022, 2023, and 2024, and did not take any distributions from these IRAs, you will not be imposed with the penalty tax on any missed RMDs. No distributions from these IRAs will be due until at least the year 2025, but you will still need to empty out the IRA by year ten.
With the passing of SECURE Act 2.0, the penalty for failing to take a required IRA distribution is now reduced from 50% to 25% of the amount that should have been taken out. Note: if the RMD is timely corrected within two years, the penalty may be reduced to 10%.
Next Step: If you have an IRA that you planned to leave to beneficiaries based on prior rules, consider working with your tax advisor or estate planning attorney, as this change may require you to reevaluate your retirement and estate planning strategies. If you are the beneficiary of an inherited IRA or 401(k) and the original owner died prior to January 1, 2020, you do not need to make any changes. Roth IRA conversions are one of many action points to defend yourself and your family from the combination of the SECURE Act as well as the likely future tax increases.
As a comprehensive financial services firm, Lange Financial Group, LLC is committed to helping our clients improve their long-term financial success. Of course, since every situation is different, not all strategies outlined will be appropriate for you. Please discuss all potential tax strategies with your tax preparer or CPA who works with the money manager. We want you to get the benefit of true tax planning, not just receiving good historical reporting of what did occur.
Our entire team at Lange Financial Group, LLC is available to provide you with updated information that can help with all your financial planning needs. If you would like us to mail a print copy of this important report to any of your friends or associates, please call Erin at our office at 412-521-2732.
It should be noted that one of the topics of recent webinars has been transferring money from the taxable environment to the tax-free environment. Roth IRA conversions is one example of this strategy.
What may be even more important for many families is transferring money from the taxable environment to the tax-free environment outside of your estate. This is where you withdraw money from your IRA and then “gift” the net proceeds to an heir who invests it in something that is tax-free. We mentioned gifts to children and grandchildren for their Roth IRAs and Roth 401(k)s above.
Here are two more:
- Section 529 plans (college plans for grandchildren and children). We recommend Joe Hurley’s book, Saving for College, or his website, savingforcollege.com.
- Life insurance.
As always, if you have any questions about your specific situation before our next scheduled meeting, please feel free to call your CPA or person who is working with the money manager for assets under management.
Sincerely,
James Lange
Certified Public Accountant
Attorney at Law
P.S. What follows is year-end tax planning advice that we licensed and are providing for you. We covered what we believe are the most important points for most taxpayers, but frankly did not go into as much detail in many areas as the following reprinted materials. I would read the section about HSAs if you have access to a HSA and are not maximizing your contribution.
Medicare Tax
Many higher income taxpayers have larger tax bills due to the 3.8% Medicare contribution tax on net investment income. The focus must be on reducing your AGI to help mitigate the additional tax costs. Try and manage your AGI by keeping it as close to the threshold as possible. Going well below the threshold provides no additional benefit as it relates to computing the 3.8% surtax. With a few strategic moves, you may be able to reduce your AGI enough to mitigate the impact of these new taxes.
The Medicare contribution tax is imposed only on “net investment income” and only to the extent that total MAGI exceed $200,000 for single individuals and $250,000 for taxpayers filing joint returns. The amount subject to the tax is the lesser of:
1. Net investment income; or
2. The excess of MAGI over the applicable threshold amount listed above.
Let’s Examine Ways to Reduce your AGI Before the End of 2024
Many taxpayers, especially wage earners, have less control over their AGI when compared to self-employed taxpayers or even those in retirement. The following year-end moves may be ideal if any of these situations apply.
If you have earned income from self-employment or an employee, one of the best ways to manage AGI is through retirement plan contributions. There are many alternatives to choose from that enable individuals to make retirement plan contributions. Now is an ideal time to make sure you maximize your retirement plan contributions for 2024 and start thinking about your strategy for 2025.
Examine your year-to-date elective deferral contributions on your most recent pay stub. While your intentions may have been to maximize current year contributions to your 401(k) or 403(b), you may find out that you have not hit the maximum amounts as anticipated. There is still time to have your employer increase your contributions from your remaining paychecks to reach the maximum level of contributions allowable for 2024.
Higher 401(k)/403(b) Contribution Limits
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $23,000 for 2024. In 2025, the annual limit amount has been increased to $23,500. The 2024 catch-up contribution limit for participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan for employees age 50 and over is $7,500 and remains the same for 2025, except for employees age 60-63. Employees age 60-63 can contribute a catch-up limit of $11,250 vs. $7,500.
Planning Note: We are big proponents of using Roth 401(k) and Roth 403(b) plans for elective deferral contributions. Considering the current increased tax rate structure on certain investment income and the Section 199A deduction for business owners, an increased focus on reducing both adjusted gross and taxable income can be beneficial. Higher income taxpayers should consider switching back to making tax-deductible retirement plan contributions instead of funding their Roth accounts. An ideal strategy may be to split your contributions during the year if you’re in overlapping tax brackets.
For example, consider making tax deductible contributions to reduce your income to the bottom level of your upper tax bracket and contribute the remaining balance into your non-deductible Roth account that is in the lower tax bracket. You have flexibility in making these types of changes during the year if your financial circumstances should change.
If you’re interested in this strategy, be sure to discuss this with your professional tax preparer so any adjustments can be made to your quarterly tax estimates if necessary. A practical approach is to simply hedge against higher future tax rates by splitting your current year 401(k)/403(b) contributions equally into deductible and non-deductible Roth contributions.
Make a Tax-Deductible IRA Contribution
For those taxpayers who qualify, you can make a tax-deductible contribution of $7,000 with a catch-up (for taxpayers 50 or older) of an additional $1,000. The contribution can be made until April 15, 2026, and still be a deduction on your 2024 tax return. There are income limits to this strategy so please check with your tax preparer to make sure you qualify.
Planning Note: Since the IRA contribution can be made after the end of the calendar year, calculating the actual tax savings provides a great advantage and should not be overlooked.
While It Lasts: For those of you who don’t qualify for a regular Roth IRA contribution (because your income is too high) and who have no traditional IRAs, you can still take advantage of a nice loophole in the code (back door Roth). Consider making a traditional IRA contribution and converting it immediately to a Roth IRA. You will run into complications with this strategy if you have other traditional IRAs. Once again, if this strategy fits your situation, make your 2024 contribution as soon as possible and repeat the process with your 2025 IRA contribution in early January 2025. If you are married with adequate earned compensation, the back door Roth IRA strategy will be applicable to your non-working spouse.
Caution: If you are planning to do a rollover from a qualified plan to an IRA account prior to the end of the year, the above strategy will be unsuccessful, and the conversion will result in unexpected taxable income. It will not matter if the IRA contribution and the immediate Roth conversions occurred earlier in the year before the rollover date. If both transactions occurred in the same year, you could trigger taxable income.
For those of you who can afford it, I encourage establishing and funding a Roth IRA for your children or even grandchildren and get a tax-free retirement fund started for their benefit. The longer period of tax-free growth provides a greater benefit. Like any IRA, the child or grandchild must have earned income to qualify for a contribution.
Tax Loss Harvesting
This may not be a potential strategy for 2024 given the bullish stock market results. However, if your capital gains are larger than your losses, you might want to consider “loss harvesting.” Loss harvesting occurs by selling securities that convert unrealized paper losses to actual realized losses. You can use an unlimited amount of capital losses to offset capital gains. If you recognize excess losses over your gains, you are permitted to offset other income items, such as interest, dividends, and wages up to $3,000. Any remaining unused capital losses can be carried forward into future years indefinitely. Tax loss harvesting will generate even greater savings for higher income taxpayers that are subject to the additional 3.8% net investment income tax on net capital gains. (Don’t forget to review your “Trust Investment Accounts” for loss harvesting as the higher tax rates apply at much lower levels of taxable income). Being tax savvy by reviewing your investment portfolio(s) for loss harvesting should be done annually prior to the end of the current tax year.
The Hidden Tax Trap
Larger tax balances due or smaller than expected refunds can often be traced to Capital Gain Distributions. Quite often the bulk of these taxable distributions will not be known until late November and December. These taxable capital gain distributions occur when the mutual fund portfolio managers recognize gains in the managed funds that get passed onto the fund investors. It is very important that you or your investment advisor review your investment portfolio(s) for any “Loss Harvesting” opportunities. You do have until the end of December to sell securities at a loss.
Please note that if you sell an investment with a loss and then buy it right back, the IRS disallows the deduction. The “wash sale” rule says you must wait at least 30 days before buying back the same security to be able to claim the original loss as a deduction. However, you can buy a similar security to immediately replace the one you sold—perhaps a stock in the same sector. This strategy allows you to maintain your general market position while capitalizing a tax break.
If you are planning to write off a non-business bad debt, be sure to establish that it is a bona fide debt and document unsuccessful efforts to collect. Form over substance matters in these instances.
Utilize Installment Sales: If appropriate, reporting taxable gains using an installment sale will allow you to spread the gain over several years rather than recognizing the entire gain in the year of sale. In many instances, this type of gain is also subject to the 3.8% Medicare surtax on “net investment income” thus managing your AGI can save additional taxes. Keep in mind that Medicare Part B premiums are determined by looking at your tax return from two years prior to the current year. An installment sale may enable you to spread the gain over several years while never crossing the threshold that would trigger increased Medicare premiums in any one year. Opting out of installment sale treatment allows you to recognize the entire gain in the year of sale even though payments would be received over multiple tax years. Consider this option if it’s the appropriate tax strategy.
Caution: Due to the risk of possible pending tax increases electing installment sale treatment and deferring income into the future comes with some uncertain risk. Also, while the IRS recognizes installment sales, not all states recognize installment sales and require you to report 100% of the gain in the year of sale. Pennsylvania is one of the states who do not recognize installment sales. Installment type sales apply in limited types of transactions. We encourage you to contact your tax advisor on your state’s rules regarding installment sales before making the decision.
Maximize your HSA Contribution
If you are enrolled in a Health Savings Account (HSA) plan, it is not too late to maximize your 2024 tax deductible contribution to the account. You have until April 15, 2025, to fund your HSA account and still receive a 2024 tax deduction. The 2024 contribution limits are $4,150 for self-only coverage and $8,300 for family coverage. Those who are age 55 and older can contribute an additional $1,000 as a catch-up contribution. This means a total of $10,300 may be able to be contributed to your HSA account if both spouses are age 55 or older. Note: the additional $1,000 catch-up contribution limit needs to be contributed to separate spousal HSA accounts. Like an IRA contribution, the exact amount of tax savings can be calculated. It is the only section in the Internal Revenue Code (the Triple Crown if you will) that allows a tax deduction on the way in, tax-free growth, and tax-free qualifying distributions.
For those who can afford it, fully funding the HSA account and never using the funds to pay for current medical expenses (using other monies to pay for medical expenses incurred) can allow for a big pot of tax-free money to accumulate over time to be used for future medical costs. These funds can come in handy during retirement when you normally experience more medical expenses while having less annual income. Also, once you reach age 65, you can use the money for reasons other than medical expenses. These non-qualifying distributions will be penalty free but subject to income taxes. It is analogous to owning an extra IRA account without being subject to RMD rules.
Planning Note: Currently, there is not a “timing” requirement for qualifying distributions to occur in the same year as the qualifying expenses were incurred. So if you wanted, while you are still working and under a high deductible health plan, you could pay for your qualified health expenses outside of the HSA, save the receipts, and sometime in the future, so long as the IRS still permits, you could withdraw the funds from your HSA equal to the amount of the qualified health expenses that you have receipts for, and take a distribution income-tax free. The only caveat is the HSA withdrawal cannot be for an expense incurred prior to the date the HSA was established.
What if you do not have enough money to fund your HSA in a year but have significant money in your IRA? There is a once-in-a-lifetime rollover option from an IRA to fund your HSA account. This technique is called a Qualified HSA Funding Distribution (QHFD). Since HSAs have a triple tax benefit, it could be a good tax planning strategy for someone who does not have enough cash to fund their HSA. There are specific conditions for utilizing this technique, however, so we encourage you to contact your professional tax preparer before considering this option. Where we see this tax strategy being the most beneficial is for someone under the age of 59½ who would not otherwise qualify for penalty-free distributions from their IRA.
Funding Self-Employed Retirement Plans
If you are self-employed, you have other retirement savings options. We will review these alternatives with you when you come in for your appointment. One of my favorites for many one-person self-employed businesses is the one person 401(k) plan.
Most self-employed retirement plans allow for contributions to be made as late as October 15th of the following year, assuming you filed a tax extension. Having this deferred funding benefit allows you to calculate various levels of savings based on various contribution amounts. For taxpayers ages 50 and older, the 2024 and 2025 maximum contribution amounts can be as high as $76,500 and $77,500, respectively. Beginning in 2025, for those between age 60 and 63, the maximum contribution amount can be as high as $81,250.
Another note to consider for 2024, if you implement a Solo 401(k) in 2024, you may be eligible for the Auto-Contribution Credit of $500 per year for 3 years (for the self-employed owner) or the 401(k) Startup Cost Credit of $5,000 per year for 3 years if you have non-owner employees. Please contact your tax professional to see if you are eligible for either one of these tax credits.
Increase Tax-Favored Income
Converting taxable interest to tax-exempt interest will serve to reduce AGI. For example, moving money from CDs or money market accounts will not create any taxable income. Alternatively, selling corporate bonds may produce a taxable gain and reduce or offset the benefits.
Reduce Business or Rental Real Estate Income
Make full use of depreciation including bonus depreciation and Section 179 expensing allowances for property and equipment placed in service before the end of the year. You have more control attaining the desired profit or loss level if properly analyzed. The 2017 TCJA has increased the annual limits for Section §179 expensing and bonus depreciation. The new tax law permits full expensing of certain improvements to nonresidential rental property. Improvements such as a full roof replacement on an existing building is eligible for full write-off under Code Section 179. These types of expenditures have historically been subject to much longer depreciation recovery periods. Expensing certain asset purchases under the de minimis expensing rules, while convenient, may end up reducing the Qualified Business Income deduction.
Important Note: 100% bonus depreciation deduction expired December 31, 2022. For 2024, the first-year bonus depreciation deduction decreased to 60% for property placed in service during 2024, 40% for property placed in service during 2025, and 20% for property placed in service during 2026, and then eliminated in future years unless new legislation is enacted which may be likely with the recent election results. This means any new equipment purchases contemplated for your business should be made sooner rather than later, assuming the proper capital to make the purchase or favorable financing terms exist. You still have the Section 179 depreciation rules which allow maximizing deductions up to $1,220,000 for 2024.
Capital Gains and Losses
Looking at your investment portfolio can reveal several different tax-saving opportunities. Review your year-to-date sales of stocks, bonds, and other investments. This allows you to determine the net amount of capital gains or losses you have realized to date. Also, review the unsold investments in your portfolio to determine whether these investments have any unrealized gains or losses. (Unrealized means you still own the investment while realized means you’ve sold the investment.)
Most taxpayers can obtain the tax basis of their investments. In most instances, basis refers to the price that you paid to acquire the investment. Some investments allow you to reinvest your dividends and/or capital gains to purchase additional shares. These additional shares add to the cost basis of the original purchase.
Generally, it is best to offset short-term gains with long-term losses rather than the opposite of offsetting long-term gains with short-term losses. If your capital gains are larger than your losses, you can begin looking for tax-loss selling candidates. See Tax Loss Harvesting. Tax loss harvesting and portfolio rebalancing are a natural fit.
Please note that if you sell an investment with a loss and then buy it right back, the IRS disallows the deduction. The “wash sale” rule says you must wait at least 30 days before buying back the same security to preserve the original loss as a deduction. However, you can buy a similar security to immediately replace the one you sold—perhaps a stock in the same sector. This strategy allows you to maintain your general market position while utilizing a tax break.
Dealing with Stock Loss Carryovers in the Year of Death for a Surviving Spouse
From a tax point of view, it is important for the surviving spouse to consult with his/her tax advisor on strategies that would use the deceased spouse’s loss carryovers on the final joint tax return. The surviving spouse could sell their own securities or other capital assets at a gain to use the deceased spouse’s expiring capital loss carryover. If there is time, evaluating the ill spouse’s portfolio before the date of death may also be helpful.
Zero Percent Tax on Long-Term Capital Gains
If you are in the 10% or 12% tax bracket, the tax rate for long-term capital gains is zero percent! To qualify for the zero-tax rate, your 2024 taxable income cannot exceed $47,025 for singles and $94,050 for married joint filers.
Please note that the 0% tax rate only applies until your taxable income reaches the end of the 12% tax bracket. For example, let’s assume that a married couple with wages of $90,000, long-term capital gains of $45,000, and a standard deduction of $29,200 leaves them with $105,800 of taxable income. The first $33,250 of long-term capital gain is tax-free, but once the taxable income passes the $94,050 limit, the remaining long-term capital gain of $11,750 is taxed at 15%.
If you are eligible for the 0% capital gains tax rate, here is a cool maneuver to take advantage of the federal tax-free rate. Sell some appreciated stocks recognizing just enough gain to push your income to the top of the 12% tax bracket.
If you want to continue owning these investments, use the sales proceeds to purchase new shares in the same company or companies. The newly purchased shares will now have a higher cost basis than the shares you sold. If you eventually decide to sell the new shares, the capital gains will be smaller due to the higher cost basis. Please also note that you do not have to wait 30 days before you can buy the stock back when there is a taxable gain. This technique is referred to as “gains-harvesting.” The 30-day period only applies to securities sold at a loss.
Consider this Strategy
If you’re ineligible for the 0% capital gains tax rate, but you have adult children (not subject to the Kiddie tax rules) in the 0% bracket, consider gifting appreciated stock to them. Your adult children will pay a lot less in capital gains tax than if you sold the stock yourself and gifted the cash to them. This is especially true if you are subject to both the Medicare surtax on net investment income, and you’re in the 37% tax bracket. In this scenario, you are paying 23.8% tax on your long-term capital gains. Modest amounts of low basis stocks can still be gifted and sold by younger children while avoiding the new Kiddie tax rules in effect.
But be careful—you cannot “go back in time” if you subsequently discover you would have fared better had you identified different shares before you made a particular sale. If you don’t specify which shares you are selling at the time of the sale, the tax law treats the shares you acquired first as the first ones sold. In other words, it uses a First-In, First-Out (FIFO) method. This may not produce the optimal result that you had wished for.
Hidden Gem
When a parent’s income is too large to claim education tax credits (the American Opportunity and Lifetime Learning), shifting income to the kid’s return can generate tax savings. In this tax-planning strategy, the parent is eligible to claim the child as a dependent but chooses not to do so. The child indicates that he or she can be claimed as a tax dependent on someone else’s tax return thus by default not claiming a personal exemption. Due to income limitations, the parent(s) do not qualify for the education tax credit on their tax return. Also, since the personal exemption deduction is currently suspended, no tax benefits associated with the child are lost. The child utilizes the education credit up to $2,500 on their own tax return depending on which education credit they qualify for. This holds true even if the parent pays for the college tuition and qualified expenses. Ideally you would shift enough income from the parent to the child to be offset by the education tax credit.
Caution: Consider the changes to the Kiddie Tax rules when calculating the optimal amount of income to shift.
Step-Up-In-Basis Rules
Another very important but often overlooked item is a step-up-in-basis which occurs when a taxpayer inherits certain assets. The new cost basis is the fair market value as of the date of death, which is often much greater than the original basis that the decedent had in this investment. However, the step-up-in-basis rule does not apply to certain investments, such as IRAs and other tax-deferred accounts.
Remember that if someone gifts you an appreciated asset while they are alive, the tax basis of the giver becomes your tax basis.
Taxes on Social Security Income
Social Security income may be taxable, depending on the amount of other income a taxpayer receives. If a taxpayer only receives Social Security income, the benefits are generally not taxable, and it is possible that the taxpayer may not even need to file a federal income tax return.
If a taxpayer receives other income in addition to Social Security income, and one-half of the Social Security income plus the other income exceeds a base amount up to 85% of the Social Security income may be taxable. The base amount is $25,000 for a single filer and $32,000 for married taxpayers filing a joint return.
A complicated formula is necessary to determine the amount of Social Security income that is subject to income tax. IRS publication 915 contains a worksheet that is helpful in making this determination.
Social Security income is included in the calculation of MAGI for purposes of calculating the Medicare contribution tax, as discussed earlier. Therefore, taxpayers having significant net-investment income will have a reason to delay receiving Social Security benefits.
Assuming a reasonable or long-life expectancy, it is generally beneficial for an individual who is eligible to receive Social Security on or after age 62 to delay payments until full retirement age. Assuming a full retirement age of 66, an individual who elects to receive Social Security benefits at age 62 will see benefits reduced by 25%. However, if the same individual delays receiving Social Security benefits until after full retirement age, a delayed retirement credit may be available. The chart below shows the percentage increases when an individual delays receipt of retirement benefits.
Increase in Social Security Benefits for Delayed Retirement
Source: The Essential Planning Guide to The Income & Estate Tax Increases, Page 38
An interesting wrinkle in long-term planning related to the taxation of Social Security is the synergy of developing a good long-term Social Security maximization plan and a good long-term Roth IRA conversion plan. We often enjoy tremendous benefits using the following combination strategy under the right circumstances.
One effective strategy is holding off on Social Security and making Roth IRA conversions in the years after you retire and you don’t have wages, but before age 70 when you will have full Social Security and before age 73 or 75 when you begin receiving taxable RMDs. Make those Roth IRA conversions while your marginal income tax bracket is at an all-time low. Please note a Roth IRA conversion increases income which could increase the tax on Social Security, the addition of net investment income tax, and increased Medicare premiums.
Estate and Gift Tax Opportunities
The game of estate planning for most clients has changed from trying to reduce gift or estate tax to trying to reduce income taxes. For 2024, each taxpayer can pass $13,610,000 (minus past taxable gifts that he/she has made) to children or other beneficiaries without having to pay gift or estate taxes.
If you are married, you will be able to pass $27,220,000 without any federal gift or estate taxes. For 2025, the limit has been increased to $13,990,000 or $27,980,000 for a married couple. The top tax rate for estates is 40% on gifts or estates of deceased persons exceeding the limits. This is the exemption amount for federal estate tax, not for PA inheritance tax, which is a flat 4.5% to lineal heirs (children and grandchildren).
Many people believe that with the estate tax exemption set at over $13,000,000 per person, they don’t need to worry about shrewd, tax-wise ways to give wealth. However, these people might want to rethink their strategy. Congress can change the law (and has changed the law in the past), and your wealth could grow faster than expected, thereby subjecting you to estate tax. Nevertheless, before you make gifts, you need to consider the income tax effects of making certain gifts. Giving away the wrong asset can cost your family some unnecessary taxes. However, if you have an estate that is worth less than $3,000,000, I recommend focusing on long-term planning to reduce income taxes, not estate taxes. Planning appropriately for your IRA, Roth IRA, Roth IRA conversions, and your retirement plan should be your biggest concern.
Gifting
In 2024, you and your spouse can each give $18,000 per calendar year ($36,000 for couples) to as many individuals as you would like without reducing your lifetime gift tax exemptions. Depending on your circumstances, it may be smart to make a gift before the end of this year. Gifts to medical or educational providers are not included in the $18,000 limit. In fact, there is no limit on qualified gifts if the checks are made directly to a school or medical facility. For 2025, the annual gift tax exclusion increases to $19,000 per calendar year ($38,000 for couples).
If you are going to make a gift, it is important to determine which asset is the best one to gift. It is usually best to give high-basis assets or cash, especially if the taxpayer is in poor health. In most cases, it is best not to give low-basis assets because the basis of gifted assets is the same for the recipient as it is for the donor, and the gifted assets will not usually receive a step-up-in-basis when a taxpayer passes.
Before making sizable gifts to children or other family members, keep in mind that in some cases, these gifts may unfortunately backfire. For example, a gift might make a student ineligible for college financial aid, or the earnings from the gift might trigger tax on a senior’s Social Security benefits.
Congress has created several tax breaks over the last few years to help pay for education. One of the most popular types of savings plans is the Section 529 plan. Withdrawals (including earnings) used for qualified education expenses (tuition, books, and computers) are income-tax free.
The amount you can contribute to a Section 529 plan on behalf of a beneficiary qualifies for the annual gift-tax exclusion. However, the tax law allows you to give the equivalent of five years’ worth of contributions up front with no gift-tax consequences. The gift is treated as if it were spread out over the 5-year period. For instance, you and your spouse might together contribute the maximum of $180,000 (5 x $36,000) on behalf of a grandchild this year without paying any gift tax.
Miscellaneous Year-End and Other Tax Reduction Strategies
Most taxpayers cannot control the timing of received income, but many of us can determine when to pay or not pay deductible expenses. Prepare tax projections for 2024 and possibly 2025 to determine which tax bracket you are in and where you can get the most bang for your buck.
Let’s say for example, your deductions are greater than your income, and you will have a negative taxable income, with a tax liability of zero. This is often the case with seniors who receive tax-free Social Security income. In this case, it would be a good strategy to increase your income from negative taxable income to zero taxable income, because the tax on zero taxable income is still zero! One of the best ways to do this is to do a partial Roth IRA conversion up to the amount that brings your negative taxable income up to zero. Depending on your tax bracket, you may wish to convert even more, especially if you expect to be in a higher income tax bracket in the future. If a Roth conversion is not appropriate or desirable, taking additional retirement account distributions in one year while lowering the amount in the following year may save tax dollars. This strategy is comparable to bunching itemized deductions while using income instead of expenses.
Try to avoid paying unnecessary penalties. If you face an estimated tax shortfall for 2024, consider having the extra tax withheld from sources such as wages, non-suspended regular IRA, and pension distributions. Withheld taxes are treated as if you paid them evenly to the IRS throughout the year. This can make up for any previous underpayments, which could save you penalties.
IRA Contributions
Many Americans are living to older ages and an increasing number are continually working past the normal retirement age. Under the SECURE Act, you can contribute to your traditional IRA past age 73 if you are still working. Essentially, the new rules for Traditional IRAs are lining up more closely to Roth IRAs and 401(k) and 403(b) plans.
Harvesting Ordinary Income
Harvesting ordinary income is another part of an overall successful year-end plan. Many older taxpayers incur extra-ordinary high medical expenses. Without proper planning, thousands of dollars of medical expenses can be incurred with no tax benefit. Harvesting ordinary income should at least equal itemized deductions or the standard deduction; and the targeted tax liability at least equals tax credits available. Furthermore, harvesting ordinary income can be considered when “filling up” your marginal tax bracket.
Making Trust Distributions
Net investment income tax also applies to trusts and estates. With compressed tax brackets for trusts compared to individual tax brackets, making permitted discretionary distributions to beneficiaries can reduce overall taxes. By making the proper election, trusts can distribute the current year income up to 65 days into the following year and still have the income taxed to the beneficiary in the current tax year. This is known as the 65-day rule. With the highest trust income tax rate being 37% for taxable income over $15,200, proper planning can go a long way to reduce the overall income taxes paid in a year.
Pennsylvania 529 Plan Contribution Deduction
Don’t miss out on the state tax deduction for contributions to a Section 529 College Saving Program. A taxpayer can reduce their PA taxable income up to $18,000 per plan beneficiary (kids, grandkids, nieces, nephews, etc.). Married couples can deduct up to $36,000 per beneficiary per year, provided each spouse has taxable income of at least $18,000. If your child is currently in college and you are writing checks to the college for tuition or qualified expenses, you should open the 529 plan immediately. You can deposit the college expense money into the account and immediately write the check to the college. You have just generated an immediate 3.07% rate of return on the deposit, assuming you file a Pennsylvania state income tax return. Now that’s a winner.
Grandparents
Consider the State tax savings available before proceeding to establish and fund a 529 education plan for your grandchildren. If the parents live in a high-income tax state that allows a tax deduction for 529 plan contributions, consider gifting the money directly to the parents and let them establish and fund the 529 plan.
529 Plan Changes
The 2017 TCJA provides distributions up to $10,000 used for tuition at an elementary or secondary public, private or religious school, K-12 are permitted. Prior law limited 529 money to be used to pay college and/or graduate school costs. Make sure the specific State plan has been amended to allow distributions to elementary and high school tuition. The Further Consolidated Appropriations Act made permanent the $10,000 tax-free withdrawal to repay the beneficiary’s (and any of the beneficiary’s siblings’) qualifying student loan debt. This $10,000 limit is an aggregate lifetime limit per borrower. Of course, the interest paid with tax-free withdrawals are not eligible for the student loan interest deduction.
With the recent passing of the SECURE Act 2.0, beginning in 2024, any unused funds in a 529 Plan may now be eligible to be rolled over into a Roth IRA for the 529 Plan beneficiary. To be eligible, the 529 account must have been opened for more than 15 years. The rollover amount cannot exceed the annual IRA contribution limits ($7,000 in 2024 and 2025) and the rollover amount must have been in the 529 account for at least 5 years. The beneficiary must have had taxable earned income in the year of rollover, but there are not any higher income threshold limitations on the rollover. This is great news for the higher income earners who may otherwise be precluded from making Roth IRA contributions. There is also a $35,000 lifetime maximum rollover limit.
Kiddie Tax Planning
Considering hiring your child as an employee. It is prudent to review the child labor laws in your state and the Fair Labor Standards Act. Maintain good records that substantiate wage payments. A child can use their standard deduction to shelter up to $14,600 of wages from federal income tax. There are also Social Security tax savings in certain situations. The child becomes eligible to contribute up to $7,000 to a Roth IRA in 2024 and in 2025. The wage income may enable the child to escape the kiddie tax rules that would otherwise be imposed on unearned income.
In prior years, shifting income to children was a popular strategy to reduce overall family tax costs. The new kiddie tax rules can often create more tax than what the parent would have paid on their own tax return.
Utilize Your Home Office
It may be the right year to switch back to deducting the actual cost of home office expenses as opposed to using the simplified method. If you are one of the many who will be using the standard deduction in 2024, enjoying some tax benefits of deducting a portion of your real estate and mortgage interest as a home office deduction can help ease the pain.
Caution: If you sell your home in the future that had a “home office” deduction using the actual cost method, you could be required to recapture depreciation on your home office if you are required to report and pay capital gains taxes on the sale of your home. Please consult your tax professional on this provision before electing the actual cost method.
Modifications to Depreciation Limits on Automobiles
The annual depreciation limits have been expanded very generously for these business assets. Generous depreciation deductions will lower overall taxable business income and while reducing AGI. As stated earlier, many tax benefits are tied directly to reducing your AGI.
Employee Business Expenses
With the elimination of deductions formerly reported on Form 2106 Employee Business Expense, encourage your employer for reimbursement of the substantiated expenses that are no longer tax-deductible.
Charitable Giving
Under the current tax system, a focus on controlling AGI can provide tax savings. The Path Act of 2015 made permanent the popular Qualified Charitable Distribution (QCD) rules for making charitable contributions from an IRA. Taxpayers ages 70½ and older can transfer up to $105,000 directly from their IRA over to a charity in 2024 ($108,000 in 2025), satisfying all or part of the RMD with the IRA-to-charity maneuver.
For married couples, the limit is $210,000 for 2024 ($216,000 for 2025). It can be viewed as making a charitable donation with pre-tax dollars. This is especially fruitful when the alternative of using the after-tax dollars to fund the donations does not reduce your taxable income due to the higher standard deduction.
Caution: If you are over age 70½ and make a current year tax-deductible IRA contribution while also planning a current year QCD from your RMD, your plan becomes more complicated due to the “anti-abuse” provisions. The provision was enacted to prevent individuals from deducting the IRA contribution and subsequently using a QCD vehicle as a pre-tax charitable donation with the same dollars. Married couples with separate IRA accounts have additional flexibility in bypassing the rules.
This is a great time of the year to clean out your basement and garage. However, please remember that you can only write off these non-cash charitable donations to a charitable organization if you itemize your deductions. Please do yourself a favor and follow the substantiation rules to tilt the scale in your direction if the deduction is questioned by the IRS. Determining the value of non-cash donations can sometimes be challenging. It can never hurt to have pictures of the donated items (cell phone cameras make this much easier). The more detailed the receipt, the better. Please send cash donations to your favorite charity no later than December 31, 2024. Be sure to hold on to your cancelled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need an acknowledgement from the charity. Many taxpayers kindly help various charities by making non-cash donations.
Tax Tip for Coaches Who Still Itemize their Charitable Deductions
Many taxpayers have children who participate in youth, intermediate or even high school level sports. If dad or mom volunteer their time as coaches, assistant coaches, timekeepers, etc., they can be eligible for an income tax deduction for various out-of-pocket expenses incurred. For example, miles driven on their cars while performing their role as coach are deductible charity miles. Many teams travel out of town to compete. You are entitled to deduct certain travel expenses as a charitable deduction. See the IRS website Newsroom for “Tips for Taxpayers Who Travel for Charity Work” for a list of qualifying deductions. Of course, you must be eligible to itemize your deductions vs. taking the standard deduction to benefit from this strategy.
My favorite substantial charitable gift is leaving a portion of your IRA or retirement plan to a charity of your choice after you and your spouse die.
If you want to give money to a charity and get the deduction this year, but don’t know which charity you want to benefit, you should consider donor directed funds that could be set up by a group like The Pittsburgh Foundation or a donor advised fund as discussed earlier.
As mentioned earlier, if you plan to make a significant gift to charity this year, consider gifting appreciated stocks that you have owned for more than one year rather than cash. Review your tax brackets to help determine how you can maximize the deduction. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset, and therefore, you never have to pay taxes on the profit! If you really like the appreciated stock that you donated, use the non-donated cash to repurchase the donated securities. Essentially, you still own the same stock except with a higher tax basis in the newly acquired shares.
Do not donate stocks that have lost value. If you do, you can’t claim a loss. In this case, it is best to sell the stock with the loss first and then donate the proceeds, allowing you to take both the charitable contribution deduction and the capital loss.
Inherited IRAs
Be careful if you inherit a retirement account. In many cases, a decedent’s largest asset is his or her retirement account. When a beneficiary receives this distribution, it is often a very large sum of money, and there is no step-up-in-basis on retirement accounts. If you inherit a retirement account, such as an IRA or other qualified plan, the money is usually taxable upon receipt. In addition to this immediate taxation, the extra money could push you up into a higher tax bracket, causing you to pay more taxes than you might have if this taxable income were spread over several years.
The solution to this problem is to establish an inherited IRA. With an inherited IRA, distributions can be spread over several years allowing you to defer the income taxes and be more selective in controlling your taxable income. Sounds easy, right? Unfortunately, the tax laws regarding the inheritance of retirement accounts are very complicated. Be sure to take the necessary steps to avoid any unnecessary income taxes.
Helpful Tip: Inherited IRAs for non-spouse beneficiaries can never be converted to a Roth IRA. Inherited employer plan assets [401(k), 403(b), etc.] can be directly transferred to a properly titled, Inherited Roth IRA. Income tax will be due on the conversion of an inherited 401(k) and paid by the beneficiary. Required distributions will also occur. If the child beneficiary is in a lower tax bracket at the time of inheritance, what a wonderful way to get a Roth IRA started at a lower tax cost while enjoying future tax-free growth. You may want to help direct mom and/or dad after they retire to keep some of their retirement plan dollars in a qualified plan rather than rolling everything into a traditional IRA.
Identity Theft Affidavit
Consider filing IRS Form 14039 (available on the IRS website) before the 2024 tax filing season arrives. Identity theft has been steadily on the rise. The IRS will provide you with a 6-digit PIN number to use when filing your income tax return. The PIN will help the IRS verify a taxpayer’s identity and accept their electronic or paper tax return. The PIN will prevent someone else from filing a tax return with your SSN as the primary or secondary taxpayer (spouse).
You could also apply for an identity protection PIN through your online account through your ID.me account or by filing Form 15227 – Application for an Identity Protection Personal Identification Number. By using this alternative, it could take up to 6 weeks to receive your IP PIN through the mail.
New Corporate Transparency Act (CTA) Filing Requirement
The new CTA requires business entities to file a Beneficial Ownership Information (BOI) report with the Financial Crimes Enforcement Network (FinCEN) by December 31, 2024, unless the business is new. If it is a new business, the deadline is 90 days from the date the business was established. Failure to comply with the CTA can result in severe penalties. The purpose of the new filing requirement is to have companies doing business in the United States report information about the individuals who own or control them. It is not an annual requirement, but rather, a one-time filing requirement. Anytime information changes with the individuals owning or controlling the business requires an updated filing. The information required to be reported for each beneficial owner include name, date of birth, address and either a non-expired U.S. driver’s license, non-expired U.S. passport, or a non-expired identification document issued by a state or local government or Indian tribe. The filing requirement applies to limited liability companies (including single-member limited liability companies), corporations, partnerships, etc.
It should also be noted that the AICPA, FICPA and other state societies have requested a postponement on the implementation of the new CTA filing requirement, as there have been several court cases filed on the enforcement of the Act. Up until the writing of this newsletter, there has not been any postponement, so please make sure you file your timely BOI report by December 31, 2024.
We want to make sure you are aware of the reporting requirement. We are not attorneys and will not be able to perform the reporting services on your behalf. To learn more, go to https://fincen.gov/boi.
Final Thoughts
When it comes to tax planning and paying income taxes, it’s usually not what you know, but rather what you don’t know that can leave you with unhappy tax results. We are here to help close that knowledge gap. We look forward to seeing you soon.
Some Content Provided by MDP, Inc. Copyright MDP, Inc.
About Jen Hall, CMA, CPA, CFP®, CRPC®: Jen is a member of our tax and retirement planning team. Jen brings 30+ years of experience as a tax and accounting professional.
About James Lange, CPA/Attorney: Jim is President of Lange Financial Group, LLC and has 35+ years of experience working with retirees and those about to retire. Jim can be reached at (412) 521-2732.
The views expressed are not necessarily the opinion of Lange Financial Group, LLC and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a financial professional.
