As the year draws to a close, it’s important to explore tax planning strategies to effectively manage your tax liability and bill. We’ve highlighted several planning topics that we discuss with our clients during their year-end tax planning meetings. Keep in mind, this list is not exhaustive. These points focus solely on federal income taxes and exclude state or local tax regulations. We suggest consulting your advisor before proceeding, as there may be more significant tax strategies suitable for your specific situation.
Tax Forecasting and Income Strategy Planning
- Partner with your financial and tax advisors to create initial tax forecasts and preliminary tax analyses.
- Evaluate whether it’s beneficial to either accelerate or delay income and expenses, considering your adjusted gross income, tax bracket, and tax liabilities.
- Analyze anticipated income taxes and decide if changes to your tax withholding or estimated payments are needed.
- Assess your exposure to the AMT, especially if you have significant itemized deductions, exercise incentive stock options (ISOs), or report substantial investment income.
- Investigate tax brackets to see if you or your family members could take advantage of the 0% or 15% Long-Term Capital Gains tax rates or other lower brackets for potential tax savings.
- To minimize the impact of Net Investment Income Tax (NIIT), consider strategies such as tax-loss harvesting (described below), reallocating investments to tax-efficient vehicles, or deferring income.
Assess Investment Gains and Losses/Utilize Loss or Gain Harvesting
- Analyze both realized and unrealized gains and losses. Look for opportunities to offset capital gains with tax losses or to harvest gains.
- If necessary, sell securities by the end of the year to engage in tax loss harvesting or tax gain harvesting.
Strategies for Charitable and Family Gift Tax Planning
- Make sure to complete charitable contributions by the end of the year, but remember that your available tax deductions might be restricted by your Adjusted Gross Income (AGI). Instead of cash, consider donating appreciated long-term stocks.
- To have more control over when charitable donations are made and when charitable tax deductions are applied, think about utilizing a Donor-Advised Fund or establishing a foundation rather than making a direct donation.
- If you’re close to itemizing, assess whether grouping your donations together is beneficial.
- Finish any gifts to family members or individuals before the year ends. For 2024, the annual gift tax exclusion per person is $18,000, allowing you to gift up to that amount to any individual each year without incurring taxes. For married couples, this amount can be doubled by using gift-splitting.
- If you are aged 70 ½ or older, evaluate if qualified charitable distributions align with your financial strategy.
Optimize Contributions to Retirement Plans
- Contribute to your company’s retirement accounts.
- Complete and convert your Backdoor Roth contributions by year-end to match the tax year, and remember that for Traditional IRA and Roth IRA contributions, the deadline is April 15, 2024.
RMDs
- Individuals aged 73 or older are generally required to take Required Minimum Distributions (RMDs) from their retirement accounts by December 31 each year. Failing to take the full RMD can result in substantial penalties. Review your retirement accounts to ensure compliance with RMD rules and consider the tax implications of these distributions on your overall income.
Education Savings
- Consider the option of establishing or contributing to education savings accounts. Determine if super funding or making annual gifts is more advantageous based on your situation.
Contributing to FSA or HSA
- Think about adding funds to a Flexible Spending Account (FSA) or Health Savings Account (HSA) during your employer’s yearly benefits enrollment.
- Explore the potential of using an HSA for long-term investments.
Evaluating Stock Options
- For those holding company-issued stock options, determine whether this is the optimal time to exercise or disqualify them.
Things to Avoid
- Refrain from buying new mutual funds that anticipate significant year-end capital gains distributions.
- Pay attention to wash sale regulations when engaging in tax-loss or tax-gain harvesting.
2025 Wealth Transfer Considerations
- Explore opportunities for long-term tax minimization. The estate tax rate is 40% on assets above the lifetime exemption amounts, which currently stand at $13.61 million per person ($27.22 million for married couples. This exemption is set to increase to $13.99 million per individual ($27.98 million for married couples). For families with substantial wealth, various advanced wealth transfer strategies can be considered to minimize the 40% estate tax.
Please don’t hesitate to reach out if you have any questions. 2025 Federal Income Tax Brackets and Inflation Adjustments can be found here.
