Alyssa Dalbey
The wealth management team at Schultz Financial Group conducts annual year-end tax planning throughout the fourth quarter.
This year has been a year of uncertainty in the markets, and yet we have experienced a market rally. While some uncertainty remains around what the future holds once the Tax Cuts and Jobs Act of 2017 sunsets in 2025, the time-tested year-end approach of deferring income and accelerating deductions to minimize the annual tax liability will continue to produce the best results for most taxpayers this year.
Bunching itemized deductions, such as charitable donations, is another strategy that will help most taxpayers. Below are a few year-end tax planning strategies to consider. Before implementing any year-end tax planning strategy, we recommend you discuss your specific situation with your tax adviser.
Long-term capital gains
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term capital assets that have appreciated in value, consider selling enough of them to recognize long-term capital gains that will utilize the 0% rate.
The 0% rate generally applies to net long-term capital gain to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount ($94,050 for a married couple in 2024).
For example, if $5,000 of long-term capital gains you took earlier this year qualifies for the 0% long-term capital gains rate, then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses will offset $5,000 of capital gain that is already tax-free.
Tax loss harvesting
On the other hand, if you already have unusually high capital gains this year, you may consider offsetting these by harvesting tax losses. Tax-loss harvesting is done by selling a security that has a fair market value below its cost basis in a taxable account.
This generates a capital loss. Capital losses are first used to offset capital gains. If the total capital losses for the year exceed capital gains, investors can use up to $3,000 of capital losses to offset ordinary income when they file their tax return. Any unused capital loss is carried forward indefinitely and can be used in future tax years.
Postpone income
Postpone income until 2025 and accelerate deductions into 2024 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2024 that are phased out over varying levels of adjusted gross income (AGI).
This includes deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income is also desirable for taxpayers who anticipate being in a lower tax bracket next year.
Roth conversions
Consider converting a portion of your traditional IRA to a Roth IRA. The amount of the Roth conversion will be treated as taxable income for the current year but may be a desirable strategy for those that anticipate being in a higher tax bracket next year or in the future.
Bunching deductions
Consider bunching your deductions. Many taxpayers no longer itemize their deductions due to the high standard deduction ($29,200 for joint filers and $14,600 for single filers).
By bunching deductions into the current year, a taxpayer may be able to itemize their deductions and lower their overall tax liability.
Charitable contributions and discretionary medical expenses are examples of deductions that may be easily bunched into a single tax year.
You may also want to consider donating appreciated securities to satisfy your charitable donations this year, rather than selling the position and donating the cash proceeds. This strategy may be particularly advantageous for individuals with concentrated positions with large unrealized capital gains.
Donating the securities directly to charity eliminates the capital gains tax you would have to pay as a result of selling the security. This article compares donating cash and property.
Make a Qualified Charitable Distribution
If you are over age 70½, consider making a Qualified Charitable Distribution. A QCD is a cash donation from your IRA to a charity that will satisfy your Required Minimum Distribution, up to $105,000 in 2024, and will not be taxable income to you.
Use the annual gift tax exclusion
Use the annual gift tax exclusion amount of $18,000. Unused annual gift tax exclusion amounts do not carry over into future years. Gifting up to the annual gift tax exclusion amount annually can be an effective way to transfer assets to other family members.
Current laws, potential changes, and – most importantly – the client’s best interest should all be considered before implementing any tax-planning strategy.
Alyssa Dalbey is a wealth manager with Schultz Financial Group Inc.
