7 Year-End Tax Planning Tips for Individuals
As the holidays approach, it’s time to consider tax planning moves that will help lower your 2024 taxes, as well as set you up for tax savings in future years. Here are seven year-end tax planning ideas to consider.
1. Strategize on the Standard Deduction vs. Itemizing
This is a tried-and-true year-end tax planning strategy. If your total itemizable deductions for 2024 will be close to your standard deduction, consider making additional expenditures for itemized deduction items between now and year end to surpass your standard deduction. Those extra expenditures will allow you to itemize and reduce your 2024 federal income taxes. The 2024 standard deduction is $29,200 for married couples filing jointly, $29,200 for heads of household and $14,600 for singles and married couples filing separately.
Note: Slightly higher standard deductions are allowed to those who are 65 or older or blind.
The easiest itemizable expense to prepay is your mortgage payment due in January. Accelerating that payment into this year will give you 13 months’ worth of itemized home mortgage interest deductions in 2024. Contact the office to determine whether you’re affected by limits on mortgage interest deductions under current law.
Next, look at state and local income and property taxes that are due early next year. Prepaying those bills between now and year end might lower this year’s federal income tax liability, because your total itemized deductions will be that much higher. However, under current law, the amount you can deduct for all state and local taxes is limited to a maximum of $10,000 ($5,000 if you use married filing separate status).
Also keep in mind that prepaying state and local taxes can be unhelpful if you’ll owe the alternative minimum tax (AMT) for 2024. Under the AMT rules, no deductions are allowed for state and local taxes. So, prepaying these taxes before year end may do little or no tax-saving good for people who are subject to the AMT. While the Tax Cuts and Jobs Act (TCJA) eased the AMT rules so that most people are no longer at risk, take nothing for granted. Contact the office to check on possible exposure.
Other ways to increase your itemized deductions for 2024 include:
- Making bigger charitable donations to IRS-approved charities this year and smaller donations next year to compensate, and
- Accelerating elective medical procedures, dental work and expenditures for vision care if you think you can qualify for a medical expense deduction. You can claim an itemized deduction for medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI).
2. Manage Gains and Losses in Your Taxable Investment Accounts
The stock market has experienced plenty of ups and downs this year. You might have already collected some gains and suffered some losses. And you might have some unrecognized gains and losses from stock and mutual funds that you still hold.
If you hold investments in taxable brokerage firm accounts, consider the tax-saving advantage of selling appreciated securities that have been held for over 12 months. The federal income tax rate on net long-term capital gains recognized this year is 15% for most taxpayers, although it can reach the maximum 20% rate at high income levels.
An additional 3.8% net investment income tax (NIIT) can also kick in for higher-income taxpayers. So, the actual federal tax rate on long-term capital gains can be 18.8% (15% plus 3.8%), or 23.8% (20% plus 3.8%) at higher income levels. However, that’s significantly lower than the 40.8% maximum rate that can potentially apply to short-term capital gains (37% plus 3.8%).
If you’re holding some investments that are currently worth less than you paid for them, consider harvesting those capital losses between now and year end by selling those investments. Harvested losses can shelter capital gains from the sale of appreciated stocks this year. Sheltering short-term capital gains with harvested losses is an especially tax-smart move because net short-term gains are taxed at higher income tax rates that can reach 37%, plus another 3.8% if the NIIT applies.
If harvesting losing stocks would cause your 2024 capital losses to exceed your 2024 capital gains, the result would be a net capital loss for the year. The net capital loss can be used to shelter up to $3,000 of 2024 higher-taxed ordinary income ($1,500 if you’re married and file separately). Ordinary income can include salaries, bonuses, self-employment income, interest income and royalties. Any excess net capital loss is carried forward to next year — and beyond, if you don’t use it up next year.
In fact, having a capital loss carryover to next year and beyond could turn out to be beneficial. The carryover can be used to shelter future capital gains (both short-term and long-term) next year and beyond. That can give you extra investing flexibility in those years because you won’t have to hold appreciated securities for over a year to get a lower tax rate. You’ll pay 0% to the extent you can shelter gains with your loss carryover.
Important: If you sold a home earlier this year for a taxable gain, you may be able to offset some or all of that taxable gain with harvested capital losses from the sale of losing securities.
3. Donate Stock to Charity
If you itemize deductions and want to donate to IRS-approved public charities, you can combine your generosity with an overall revamping of your taxable investment portfolio of stock and/or mutual funds:
Underperforming stocks. Sell taxable investments that are worth less than they cost and claim the tax-saving capital loss. Then give the sales proceeds to a charity and deduct your donation.
Appreciated stocks. Donate directly to charity publicly traded securities that are currently worth more than they cost. As long as you’ve owned them for more than one year, you can claim a charitable deduction equal to the market value of the shares at the time of the gift. Plus, you escape any capital gains taxes you’d pay on those shares if you sold them.
4. Give Wisely to Loved Ones
The principles behind donating tax-smart gifts to charities also apply to making gifts to relatives and other loved ones. That is, don’t give underperforming taxable investments directly to your loved ones. Instead sell the stock or mutual fund shares and claim the tax-saving capital losses. Then give the cash proceeds to loved ones.
On the other hand, do give appreciated investments directly to loved ones in lower tax brackets. When they sell the shares, they’ll probably pay a lower tax rate than you would.
Before making gifts, however, be sure to consider any gift tax consequences. Also, if any potential recipients are children or young adults, check whether they’d be subject to the “kiddie tax.”
5. Make Charitable Donations from Your IRA
In 2024, IRA owners and beneficiaries who’ve reached age 70½ are permitted to make cash donations totaling up to $105,000 to IRS-approved public charities directly out of their IRAs. The SECURE 2.0 Act now allows eligible taxpayers to also make a one-time QCD of up to a limit that’s annually indexed for inflation ($53,000 for 2025) through a charitable gift annuity or charitable remainder trust. Additional rules apply to such QCDs.
You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction. The upside is that the tax-free treatment of QCDs means you can enjoy a tax benefit even if you don’t itemize deductions or if your charitable deduction would be reduced because of AGI-based limits. Also, QCDs can count toward your required minimum distribution, if applicable.
If you’re interested in taking advantage of this strategy for 2024, you’ll need to arrange with your IRA trustee or custodian for money to be paid out to one or more qualifying charities before year end.
6. Prepay College Bills
If you paid higher education expenses for yourself, your spouse or a dependent, you may qualify for one of the following tax credits:
The American Opportunity credit. This credit equals 100% of the first $2,000 of qualified postsecondary education expenses, plus 25% of the next $2,000, for the first four years of postsecondary education in pursuit of a degree or recognized credential. So, the maximum annual credit is $2,500 per qualified student per year.
The Lifetime Learning credit. This credit equals 20% of up to $10,000 of qualified education expenses. The maximum credit is $2,000 per tax return.
For 2024, both higher education credits are phased out if your modified AGI (MAGI) is between:
- $80,000 and $90,000 for unmarried taxpayers, or
- $160,000 and $180,000 for married couples filing jointly.
Numerous rules and restrictions apply. If you’re eligible for either credit and your expenses don’t already exceed the applicable limit, consider prepaying college tuition bills that aren’t due until early 2025. Specifically, you can claim a 2024 credit based on prepaying tuition for academic periods that begin in January through March of next year.
If your credit will be partially or fully phased out because of your MAGI, consider whether there’s anything you could do to reduce your MAGI so you could maximize your 2024 education credit. (Reducing your MAGI could also increase the benefit of certain other tax breaks.) If that’s not possible and your child is the student, see if he or she might qualify to claim the credit.
7. Convert a Traditional IRA into a Roth IRA
If you anticipate being in a higher tax bracket during retirement than you are now and have a traditional IRA, consider a Roth conversion. The downside is that there’s a current tax cost for converting. That’s because a conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth account.
While the current tax cost from a Roth conversion is unwelcome, it could turn out to be a relatively small price to pay to hedge against higher future tax rates. If you delay converting your account until a future year and you end up being subject to a higher tax rate — whether because tax rates increase or you move into a higher tax bracket — the tax cost will be larger.
After the Roth conversion, all qualified withdrawals from the account will be federal-income-tax-free. In general, qualified withdrawals are those taken after:
- You’ve had at least one Roth account open for more than five years, and
- You’ve reached age 59½, become disabled or died (i.e., distributions made to a beneficiary).
A Roth conversion makes it possible to avoid potentially higher future tax rates, because you’ve already paid the tax.
For More Ideas
Federal tax law may be uncertain for the next year or so because many of the TCJA provisions are scheduled to expire at the end of 2025 but could be extended. There also could be other tax law changes as a result of the election. Contact the office to discuss these and other federal (and state) tax planning moves that may apply to your current situation.
Tax-Saving Moves Businesses Should Consider Before Year End
Now is a good time to consider year-end moves that can help reduce your business’s 2024 taxes. The effectiveness of a particular action depends on the circumstances of your business. Here are several possibilities.
Time Income and Deductions
A tried-and-true tactic for minimizing your tax bill is to defer income to next year and accelerate deductible expenses into this year. For example, if your business uses the cash method of accounting, consider deferring income by postponing invoices until late in the year or accelerating deductions by paying certain expenses before year end.
If your business uses the accrual method of accounting, you have less flexibility to control the timing of income and expenses, but there are still some things you can do. For example, you may be able to deduct year-end bonuses accrued this year even if they aren’t paid until next year (if they’re paid by March 15, 2025).
Accrual-basis businesses may also be able to defer income from certain advance payments (such as licensing fees, subscriptions, membership dues, and payments under guaranty or warranty contracts) until next year. These payments may be deferred to the extent they’re recorded as deferred revenue on an “applicable financial statement” of the business, for example, an audited financial statement or a financial statement filed with the Securities and Exchange Commission.
Deferring income and accelerating deductions isn’t right for every business. In some cases, it may be advantageous to do the opposite, that is, to accelerate income and defer deductions. This may be the case if, for example, you believe your business will be in a higher tax bracket next year.
Buy Equipment and Other Fixed Assets
One of the most effective ways to generate tax deductions is to buy equipment, machinery and other fixed assets and place them in service by Dec. 31. Ordinarily these assets are capitalized and depreciated over several years, but there are a few options for deducting some or all of these expenses immediately, including:
Section 179 expensing. This break allows you to deduct up to $1.22 million in expenses for qualifying tangible property and certain computer software placed in service in 2024. It’s phased out on a dollar-for-dollar basis to the extent Sec. 179 expenditures exceed $3.05 million for 2024.
Bonus depreciation. This year, you can deduct up to 60% of the cost of eligible tangible property, which includes most equipment and machinery, as well as off-the-shelf computer software and certain improvements to nonresidential building interiors. Now’s the time to take advantage of bonus depreciation, since the deduction limit is scheduled to drop to 40% next year and 20% in 2026 and to be eliminated after that, unless Congress passes new legislation.
De minimis safe harbor. This provision allows you to expense certain low-cost items used in your business, even if they’d ordinarily be treated as fixed assets that are capitalized and depreciated. If your business has applicable financial statements, you can deduct up to $5,000 per purchase or invoice for these items to the extent that you deduct them for accounting purposes. If you don’t have applicable financial statements, then the limit is $2,500.
Despite the term “de minimis,” the safe harbor makes it possible to immediately deduct a significant amount of property. For example, if you buy 10 computers for your business for $2,500 each, you can deduct as much as $25,000 up front.
Each of these options has advantages and disadvantages and is subject to various rules and limitations. Contact the office for help choosing the most effective strategies for your business.
Fund a Retirement Plan
If you don’t have a retirement plan, establishing one can be a great way to generate tax benefits. It can also improve employee recruitment and retention efforts. Certain employers are entitled to tax credits for starting a new plan.
Whether you start a new plan now or already had one in place, depending on the type of plan, you may be able to take 2024 deductions for contributions you make after year end. Some plans, including simplified employee pensions (SEPs), can be adopted and funded after year end and still create deductions for this year.
Be Prepared to Write Off Bad Debts
Year end is a good time to review your receivables and determine whether any business debts have become worthless or uncollectible. If they have, you may be able to reduce 2024 taxes by claiming a bad debt deduction.
To qualify for the deduction, you’ll need documentation or other evidence that the debt is bona fide. You’ll also need evidence that there’s no reasonable expectation of payment (such as the debtor’s insolvency or bankruptcy) or documentation that you’ve taken reasonable steps to collect the debt. You should also have documentation that the debt was charged off this year, which is required for partially worthless debts and a best practice for totally worthless debts.
Finally, to deduct a bad debt you must have previously included the receivable in your taxable income. Thus, an accrual-basis business can deduct an otherwise eligible bad debt if it’s already accrued the receivable, but a cash-basis business can’t.
Find the Optimal Combination
Whichever year-end tax strategies you explore, it’s critical to understand how they interact with other provisions of the tax code. For example, if you have a pass-through business, claiming significant amounts of bonus depreciation can reduce your Section 199A deduction for qualified business income (QBI). That’s because first-year depreciation deductions reduce your taxable income and your QBI. Contact the office for help selecting the optimal combination of year-end planning strategies for your business.
Want to Find Out What IRS Auditors Know About Your Industry?
To prepare for a business audit, an IRS examiner generally researches the specific industry and issues on the taxpayer’s return. Examiners may use IRS Audit Techniques Guides (ATGs). A little-known secret is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.
Many ATGs target specific industries or businesses, such as construction, aerospace, art galleries, architecture and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.
Unique Issues
IRS auditors examine different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand the industry and its typical issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.
By using a specific ATG, an auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s typical for the industry. The auditor also might identify anomalies within the geographic area in which the business is located.
Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags.
Updates and Revisions
Some guides were written several years ago and others are relatively new. There isn’t a guide for every industry. Here are some of the guides that have been revised or added recently:
- Child Care Provider (January 2022),
- Construction Industry (April 2021),
- Entertainment (March 2023) and,
- Equity (Stock)-Based Compensation (June 2024).
For a complete list of ATGs, visit the IRS website here: https://www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-guides-atgs
Seniors: A Tax-Wise Alternative to Selling Your Appreciated Home
In recent years, the residential real estate market has surged in many areas. That means many homes have greatly appreciated, and the $250,000 home sale gain exclusion ($500,000 for joint filers) isn’t always sufficient to protect a home sale from federal income taxes. If you’re a senior thinking about selling your highly appreciated home, the transaction may bring a painful tax bill. One alternative to consider is aging in place.
If you remain in your home until your death, the tax basis generally will be adjusted to your home’s fair market value as of your date of death. When your heirs sell the home, they’ll owe federal capital gains tax only on appreciation that occurs after this date. The rules are a little more complicated for married couples, but ample tax savings can still be reaped from aging in place.
Tax planning usually calls for action. But this is one situation where it might make sense to hang tight. Contact the office to determine if this strategy is right for you and your family.
Use It or Lose It: Your 2024 Gift Tax Annual Exclusion
As the year winds down, you may want to combine estate planning with tax savings by taking advantage of the gift tax annual exclusion. It allows you to give cash or property up to a specified amount to an unlimited number of family members and friends each year without gift tax implications.
That specified amount is subject to annual inflation adjustments. For 2024, the amount per recipient is $18,000. Notably, in 2025, this amount will increase to $19,000 per recipient. Why is this significant? The amount was stagnant at $15,000 for several years (2018 to 2021). Beginning in 2022, the amount has increased by $1,000 annually due to inflation.
Each year you need to use your annual exclusion by December 31. The exclusion doesn’t carry over from year to year. For example, if you don’t make an annual exclusion gift to your granddaughter this year, you can’t add the $18,000 unused 2024 exclusion to next year’s $19,000 exclusion to make a $37,000 tax-free gift to her next year. Contact the office with any questions.
Recovering Lost Documents and Receiving Tax Relief After a Natural Disaster
It’s common for individual and business taxpayers to lose financial records during a natural disaster. Unfortunately, you usually need such records to document losses for your insurance company and to qualify for federal assistance. But if you visit the IRS website (https://www.irs.gov/individuals/get-transcript), you can view or obtain copies of your historical tax returns, wage and income statements, and other tax account information.
Requesting online access to your records is the fastest method, but even physical transcripts can be expected to arrive in the mail within 10 calendar days. Call your bank, credit card issuers and other financial service providers for copies of other needed documents.
If you were the victim of a natural disaster this year, you also may be eligible for filing extensions and other tax relief. Visit the IRS website for more information: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
Give Your Finances a Quick Once-Over with QuickBooks Online
How does QuickBooks Online fit into your normal workday? Do you log in only when you have to send an invoice or record a payment, for example? Do you save up work and visit the site only when you have a pile of paperwork to enter? Or are you busy enough that you need to check in daily to see what’s come in and what you need to do?
How often you should access your financial information depends on a variety of factors, such as the volume your business does. But there are certain things you should consider doing when you’re in there, whether because you have work to process or just for a daily check-in. You can learn a lot by targeting the areas of QuickBooks Online that will tell you quickly if there’s trouble brewing.
Here’s what you might want to do in these sessions. Following these steps can be especially helpful if you’re new to QuickBooks Online and don’t have a good grasp of its features yet.
Check Your Bank Connections
Click Transactions in the toolbar, then Bank transactions. Look in the boxes at the top of the page. If there’s a small red circled “i” in any of them, click it, then click Reconnect account in the window that opens. Click the pencil icon if you need to edit your account information. If the transactions look old, click Update in the upper right to refresh the account.
Categorize Your Transactions
This will be less of an onerous task if you do it regularly. Open an account by clicking in the box and make sure For review is highlighted. Open each transaction by clicking it and change the Category if it’s missing or not correct. Once you’ve verified everything in the box, click Confirm.
Check Your Dashboard
- Click Dashboard in the toolbar, then Home to see what might be on your list of outstanding tasks, like Pay 1 overdue bill.
- Go to the Bank Accounts pane on the left and look at your balances to see if anything looks amiss. Click on any to see their underlying registers.
- Look at the Expenses chart. QuickBooks Online will tell you how your current expenses compare to those incurred in previous periods. Click the down arrow in the upper right corner to change the date range.
- Click the Planner tab at the top of the page and make sure Money in/out is highlighted. Change the date range to 3 months by clicking the down arrow below Today’s cash balance so you can see where you fall for the current period.
Look at the Status of Sales
Click Sales in the toolbar, then All sales. Pay special attention to the Estimates, Unbilled income and Overdue invoices numbers. If you see an area that needs work, click on the corresponding colored bar to see a list of related transactions below. Look at the end of each row to see what your options are in the Action column.
Process Bills
Do you have bills that have come in the mail sitting there, waiting to be entered and paid? Click Expenses in the toolbar, then Bills. Click Add bill in the upper right and complete the form that opens. If the bill occurs on a regular basis, you can create a recurring bill. You can also upload scanned images of bills and attach them to the QuickBooks Online forms you create.
Click the Unpaid tab on the Bills page and look at the Status column to see if any are due soon (or overdue). You can mark them as paid here if you’re settling your debts manually, or you can pay them electronically through QuickBooks Bill Pay. Contact the office for help.
See How Your Budget Is Doing
If you have a budget set up in QuickBooks Online, click Budgets in the toolbar. Find your current one and click Run Budgets vs. Actuals report in the Action column.
Check Inventory Levels
If you carry inventory, you need to keep an eye on your stock status. Hover your mouse over Sales in the toolbar and click Products & services.
If you’re low on stock or completely out, you’ll see that information at the top of the page. You’ll also see a list of your inventory items and their Qty (Quantity) on Hand and Reorder Point, so you can look ahead and catch impending shortages.
Stay Aware of Your Financials
Of course, if you find work that needs to be done as you go through these steps, that will add time to your QuickBooks Online session. If you follow this path through the site a few times a week (or daily if your company is very active) it will give you more confidence in the financial health of your company and help you head off problems early. There are, of course, many other things you could do. This is the bare minimum. As always, contact the office if you need help, especially if you’re new to QuickBooks Online.
Upcoming Tax Due Dates
November 15
Employers: Deposit Social Security, Medicare and withheld income taxes for October if the monthly deposit rule applies.
Employers: Deposit nonpayroll withheld income tax for October if the monthly deposit rule applies.
Calendar-year exempt organizations: File a 2023 information return (Form 990, Form 990-EZ or Form 990-PF) if a six-month extension was filed. Pay any tax, interest and penalties due.
December 10
Individuals: Report November tip income of $20 or more to employers (Form 4070).
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
