Summer has officially turned to fall and we have entered Q4 2024 (hard to believe, right?). With the last few months of the year approaching, the CPA in me starts to shift more focus onto a pivotal part of any good financial plan – year end tax planning.
How pivotal is it, you ask? Well, think about it this way, how often do you make financial decisions that don’t have tax implications?
With that in mind, I’ve put together some questions to consider before 2024 comes to an end (and in some cases, slightly beyond too).
Your Year End Tax Planning Considerations
Have you completed a tax projection?
Getting a tax projection done this time of year—or really any time of year—is a great way to start your tax planning. Not only can it help you take advantage of year end tax planning opportunities, but it can also help you avoid surprises come tax time 2025, and allow you to manage your cash flow better throughout the year.
Usually, the best place to start is by using last year’s return and making applicable updates based on what has happened throughout the current year. Although it won’t be 100% accurate since the numbers aren’t final till year end, you can usually get fairly close if prepared appropriately.
Does it make sense to recognize or defer more income?
No one likes paying taxes, let’s be honest. But there is a time and place where it could make sense to pay more taxes today to save on taxes over your lifetime. This is especially notable with the Tax Cuts and Jobs Act (TCJA) due to sunset at the end of 2025. The visual below does a good job of showing how the sunset could impact you starting in 2026. If you’re due to fall in the orange sections below, it could make sense to recognize more income now. Conversely, if you’re due to be in the blue, it could make sense to defer now and pay the tax later.
If you're curious to know what tax rates and income ranges could look like, you can see estimates in the table below. It’s also important to note that the standard deduction is due to decrease, but there will likely be more deductions available (e.g., State and local tax (SALT) $10K limit will phase out, and personal exemptions will phase back in, to name a few).
Source: Kitces
Beyond the changes due to happen after the sunset of TCJA, it could make sense to recognize more income now for better peace of mind. You know what tax rates are today and can lock that in today. We don’t, however, know what they will be and if they’ll go up or down one, two, five, or 10 years from now. If you’re striving for certainty, this could make sense for you.
But what if you sold a business or company stock or had a great earning year? Then it could make sense to defer more income this year in hopes that you’ll pay less tax in the future.
What are some ways to recognize more income?
The best way, in my mind, to recognize more income is by doing a Roth conversion. This is when you take some portion of pre-tax retirement accounts, convert it to Roth (after tax), and pay the taxes on the conversion the year of. Then, going forward, you’ll no longer pay taxes on the distributions when you take them out of the account. To take full advantage of this, you’ll want to pay the taxes using cash you have on hand rather than from the retirement account. Otherwise you’re losing out on some of that tax-free/tax-deferred growth.
Some other options are:
- Gain harvesting, where you sell stocks or bonds, recognize the gain then buy right back into the holding and increase your basis (potentially lowering future tax bills).
- Taking more money out of pre-tax accounts for current or future cash needs while taking advantage of low tax rates.
What are some ways to defer income?
If you had a higher-than-normal income year, will be in the highest tax bracket for the foreseeable future, or you plan on retiring soon and know you’ll be in a lower tax bracket once you step away, it could make sense to defer income this year. Some ways to do this include:
- Pre-tax contributions to employer sponsored plans (could use your year-end bonus to help fund the account)
- Defined benefit/cash balance plans if you have good cash flow and qualify
- Installment sales if you’re selling a business
- Deferred compensation plans
Are you eligible to make Health Savings Account contributions?
If you’re part of a high deductible health plan and qualify for a Health Savings Account (HSA), this is a great opportunity. Contributions to HSAs will give you a tax deduction when you contribute,the funds will grow tax free and any distributions that are used for qualified healthcare expenses are also distributed tax free (I know, it sounds too good to be true). Although the contribution limits are relatively small ($8,300 for families and $4,150 for individuals) if done over many years, this money can add up.
If you’d like to learn more about HSAs, you can check out our Insight.
Are you charitably inclined?
If you are, there are two great year end tax planning opportunities you can take advantage of:
- Donor Advised Funds (DAF) – This is when you gift assets to an account (in most cases highly appreciated assets), get a tax deduction for the gifted amount (if you itemize), and pay no taxes on any unrealized gains from the position while the gift amount is the full value of the holding(s). The beauty of these accounts is that you can make multiple years’ worth of gifts at once to take advantage of the tax deduction, but you can distribute the funds out of the account over many years. These accounts are also great to keep track of all your gifts since all the inflows and outflows will happen from one spot.
- Qualified Charitable Distribution (QCD) – If you’re age 70 and half and have pre-tax IRAs, QCDs are for you! This allows you to take pre-tax money and gift it to the organization of your choice without paying taxes on it. If you’re in the phase of life where you’re taking required minimum distributions, this could allow you to gift those distributions without ever having to pay taxes on the money.
Do you have a desire to give gifts to friends or family?
Making gifts to the next generation during your lifetime can be rewarding for the giver and the receiver. If you have intentions to do this, you’re able to gift $18,000 to any one you’d like to this year without filing a gift tax return.
If you have young children or grandchildren, gifting to a 529 plan could be a great option to fund future educational expenses. In some states, you can get a tax deduction for contributions made to these accounts, while the account grows tax deferred, and distributions are tax free if used for qualifying educational expenses.
Read more about the importance of 529 plans in our Insight: What are 529 Plans and Why are they important?
And if you’re looking to do a bit longer term planning and have a desire to gift a lot out of your estate now (granted you have the assets that this applies to you) it could make sense to max out your lifetime exemption gifts either this year or next. Right now, the lifetime exemption amount is $13.61MM and if you’re a married couple, it's twice that.
Contact Us for Year End Tax Planning Support
As you can see, year end tax planning is important, and there are a lot of things to consider. So as the year comes to an end, take some time to consider doing some tax planning. Even a little bit now can make a big impact later.
Our team of professionals is here to help you with your 2024 tax planning and beyond. Contact us today to get started.