This article is reprinted with permission from Esq. Wealth Management, Inc.
As 2024 draws to a close, it’s the perfect time to revisit tax-saving opportunities that can benefit you now and set up savings for future years. At EsqWealth, we work closely with high-net-worth clients to ensure they maximize their tax planning. Below are some essential strategies—for individuals and businesses—to consider in connection with reducing your tax burden while optimizing long-term financial health.
Individual Tax Strategies
1. Convert Your IRA to a Roth IRA for Future Tax-Free Income
Converting a traditional IRA to a Roth IRA before year-end may be advantageous if you anticipate being in a higher tax bracket in retirement. Though you’ll pay tax on the converted amount, future qualified withdrawals from a Roth are tax-free. Additionally, Roth IRAs are not subject to required minimum distributions, which preserves more of your wealth for your later years or your beneficiaries. For those with uneven annual income, timing a Roth conversion in a lower-income year can further reduce the tax impact of the conversion.
2. Get the Most from Your Deductions: Standard vs. Itemizing
Review your deductible expenses to decide if itemizing will offer more savings than taking the standard deduction, which for 2024 is $29,200 for married couples and $14,600 for single filers (with higher limits for those 65+ or blind). If close to the itemized threshold, you can maximize your deductions by prepaying January’s mortgage, charitable contributions, or unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). Remember that state and local tax (SALT) deductions are capped at $10,000, limiting the benefits of prepaying taxes in some cases. Additionally, if you’re subject to the Alternative Minimum Tax (AMT), some itemized deductions may not be beneficial, so consult with a tax advisor.
3. Plan for Charitable Donations from Your IRA
If you’re over 70½, consider a Qualified Charitable Distribution (QCD) from your IRA to reduce your taxable income. For those who don’t itemize, this strategy allows you to make up to $105,000 in charitable donations without increasing AGI, potentially avoiding higher tax brackets or surcharges on Social Security benefits. SECURE 2.0 added a one-time QCD up to $53,000, which can be used to fund charitable annuities or remainder trusts, providing tax-favored giving options for those looking to make significant contributions to charity.
4. Reduce Gains or Capture Losses in Your Investment Portfolio
Taxable accounts often hold a mix of gains and losses. Selling appreciated securities held for over a year captures gains at long-term capital gains rates (15% for most, but up to 23.8% for high earners due to the Net Investment Income Tax). Conversely, selling underperforming assets creates capital losses that can offset gains, and if losses exceed gains, they can offset up to $3,000 of ordinary income. This loss carryover can be especially useful if you plan to realize capital gains in the future, as it allows you to offset those gains without having to hold appreciated securities for over a year.
5. Give Appreciated Investments to Family Members in Lower Tax Brackets
Instead of realizing gains on appreciated assets, gifting them to family members in lower tax brackets can lower the tax liability upon sale. For instance, an adult child may pay no tax on capital gains if their income falls below the threshold for long-term capital gains (up to $44,625 for single filers). This strategy can be particularly advantageous for high-net-worth families looking to pass wealth to the next generation efficiently. If gifting to children under 18, keep in mind the “kiddie tax,” which may tax investment income at the parents’ rate.
6. Support Charities with Appreciated Stock
Donating appreciated stock directly to a charity rather than selling it can avoid capital gains taxes while giving you a charitable deduction equal to the stock’s market value. This is particularly advantageous if the stock has seen significant growth, as it allows you to contribute more than if you had sold the stock and donated the cash. Donating appreciated stock can also be a valuable strategy for portfolio rebalancing at year-end.
7. Prepay College Expenses to Maximize Education Tax Credits
If you or your dependents qualify, consider prepaying tuition for the first quarter of 2025 to claim education credits on your 2024 tax return. The American Opportunity Credit offers up to $2,500 per student, while the Lifetime Learning Credit provides up to $2,000 per tax return. Both credits phase out at higher income levels, so consult a tax advisor if your modified adjusted gross income is close to these thresholds.
Business Tax Strategies
1. Use a Retirement Plan for Immediate Deductions and Future Savings
Contributing to a retirement plan provides an immediate tax deduction and is a great way to attract and retain employees. If you establish a new plan, you may qualify for a tax credit covering a portion of setup costs. Contributions to certain plans, like Simplified Employee Pensions, can be made up until the tax filing deadline and still count for 2024, providing flexibility as you close out the year.
2. Invest in New Equipment and Use Accelerated Depreciation
Year-end is an ideal time to make equipment purchases, as Section 179 expensing and bonus depreciation allow immediate deductions on qualifying assets. For 2024, Section 179 allows you to deduct up to $1.22 million in expenses with a phase-out at $3.05 million, while bonus depreciation allows you to deduct 60% of eligible property. With bonus depreciation scheduled to decrease in future years, now may be the best time to take advantage. For businesses with smaller expenses, the de minimis safe harbor rule allows you to deduct items costing up to $5,000 each if you have applicable financial statements ($2,500 without statements).
3. Take a Closer Look at Accounts Receivable and Write Off Bad Debts
Accrual-basis businesses can claim a bad debt deduction for accounts deemed uncollectible, which can help reduce taxable income. Review receivables at year-end to identify debts that are unlikely to be recovered, ensuring you document your collection efforts and the debt’s worthlessness. This practice not only saves on taxes but also improves your balance sheet, providing a clearer picture of cash flow going into the new year.
4. Optimize the Qualified Business Income Deduction (QBI)
The QBI deduction allows pass-through entities to deduct up to 20% of qualified business income. However, certain deductions, like depreciation, reduce taxable income and may impact the QBI deduction. Balancing deductions to maximize QBI benefits can be complex, particularly for high-income earners subject to phase-out thresholds. Consulting a tax professional to optimize the interplay of deductions and QBI can help maximize your tax benefits.
5. Defer Income or Bring Forward Expenses to Manage Taxable Income
Last but not least, consider deferring your income and accelerating your expenses. For cash-basis businesses, deferring income by delaying invoices until January or paying for deductible expenses in December can reduce taxable income for 2024. Accrual-basis businesses can also use this approach by deferring certain types of advance payments (like licensing fees or subscriptions) or by accruing year-end bonuses to be paid in 2025. If you expect your business to be in a higher tax bracket next year, it may be beneficial to do the reverse and accelerate income while deferring expenses.
Conclusion
With the complexities of year-end tax planning, taking the right actions now can make a significant impact on your financial position. These strategies offer ways to lower taxes, enhance your financial standing, and position you well for 2025. At EsqWealth, we’re here to help you navigate these decisions and tailor a plan that meets your unique needs.
The information above is not intended to and should not be construed as specific advice or recommendations for any individual. The opinions voiced are for general information only and are not intended to provide, and should not be relied on for tax, legal, or accounting advice. To discuss specific recommendations for any unique situation, please feel free to contact us.