Understanding current and future tax rules is a key component of tax planning, particularly with the level of volatility we’ve seen over the past few years.
The Tax Cuts and Jobs Act of 2017 (TCJA) made several temporary changes for individuals for tax years 2018 – 2025 including increased standard deductions, itemized deduction restrictions, repeal of personal exemptions, creation of a passthrough income deduction, and significantly increased estate tax exemption. You can find a deeper dive into those changes here.
A top priority of the incoming Congress and President-elect Trump is the extension of all or many TCJA expiring provisions. However, because those extensions come at a high cost, it remains uncertain which will be addressed, when, and what might be used as revenue raisers.
Tax planning generally begins by estimating your current and future year tax brackets and maximizing the benefit of low tax bracket years.
If you expect to be in a lower tax bracket in the current year, you might consider accelerating income or deferring deductions. Income acceleration options include converting funds from your traditional IRA to a Roth IRA, taking taxable retirement plan distributions not required, or expediting self-employment income. Deduction deferral could mean waiting to make charitable contributions or moving other itemized deductions into next year.
On the other hand, if you will be in the same or a lower tax bracket in the future, consider deferring income where possible or accelerating deductions. To do this you might make tax-deferred retirement and health savings account contributions, make a charitable donation, or harvest capital losses (all discussed further below).
It is also important to stay aware of your projected adjusted gross income (“AGI”). Many tax benefits (such as certain IRA contributions, child tax credits, and student loan interest deductions) phase out once AGI passes specified thresholds.
Due to stock market volatility, you may hold securities that have declined in value. This may provide an opportunity to realize those losses, which can be used to offset current or future capital gains and up to $3,000 of ordinary income annually.
Note: tax loss harvesting does not mean removing funds from the stock market entirely; proceeds from loss‐generating sales can be reinvested into a similar asset class or the exact investment can be repurchased 30 days after the loss is realized.
Each year, you may deduct the larger of your itemized deductions (state taxes, mortgage interest, charitable contributions, medical over 7.5% of AGI, etc.) or the appropriate standard deduction based on your age and filing status.
If the total of your itemized deductions is close to the standard deduction amount, you may consider bunching itemized deductions into one year and taking the standard deduction the next.
The alternative minimum tax (AMT) is a parallel tax system that disallows or accelerates certain deductions and income. For example, some itemized deductions are not allowed for AMT, such as state and local income and property taxes.
Exercising incentive stock options without selling the stock in the same year can also create an addition to AMT income. The TCJA increased AMT exemptions, but if not extended after 2025, many more taxpayers could be thrown back into AMT.
The state and local tax (SALT) deduction limitation of $10,000 for itemizers has also lowered AMT’s applicability, but there is talk of repealing or increasing the cap.
For those who itemize deductions, there may be an advantage to donating appreciated stock to charity, as opposed to selling the stock and donating the proceeds. Donating stock itself for a tax deduction is based on the fair market value of the donated shares. For stocks with a low tax basis, this technique offers the advantage of a larger charitable deduction and avoids capital gains tax upon selling the stock.
If you have an IRA and are taking Required Minimum Distributions (RMDs), you might consider making a charitable donation directly from your IRA. This technique, called a Qualified Charitable Distribution (QCD), allows all, or a portion, of your RMD (up to $105,000 per taxpayer in 2024) to be transferred directly to a qualified charity.
Rather than reporting income from the IRA withdrawal and a subsequent deduction for a contribution to charity, the QCD is excluded from income altogether. In addition to the income tax benefit, you also reduce your modified AGI, which is used to determine Medicare premiums and other deduction phaseouts.
Also, beginning in 2023, your QCD can include a one-time gift of up to $50,000 to a split-interest equity like a charitable remainder trust or charitable gift annuity.
Every year, think about what retirement contributions you may be eligible to make individually or through work.
If you are self‐employed, consider whether an IRA, SEP IRA, or individual 401(k) is the best option for your retirement funding. You may also be eligible to make contributions to a Roth IRA that, while taxed now, grows tax-deferred and has tax-free withdrawals when conditions are met.
Health Savings Accounts (HSAs) are also a great tax planning tool for those covered by a high-deductible health plan. Contributions are tax deductible above the line (which reduces AGI), funds grow tax-deferred, and withdrawals for qualified medical expenses are tax-free.
Unlike other health accounts, HSA funds do not have a “use-it-or-lose-it” restriction. Unused funds stay in your account and move with you if you change jobs. Additionally, an HSA can be used as an additional tax-deferred retirement account. Once you reach age 65, funds can be withdrawn for any reason, though tax will apply if not used for medical purposes.
Consider transferring wealth via gifts. You and your spouse are each allowed to gift up to $18,000 per recipient annually (indexed for inflation), without using any of your lifetime gift and estate exemption.
In addition, you may also make health care and education payments directly to a provider. Contributions to a college savings 529 plan may also be beneficial at the state level, and beginning in 2024, accounts open for more than 15 years can roll tax and penalty-free into Roth IRAs (limitations apply). For those subject to the estate tax, keep an eye on the upcoming TCJA expiring provision – if not extended, the current exclusion could be cut in half after 2025.
Many locations across the nation endured natural disasters during the year. While the TCJA limited personal casualty losses for tax years 2018 – 2025, individuals are still allowed to take those attributable to federally declared disasters. Instead of waiting to claim the loss on your 2024 tax return, you can elect to take it in the prior year on an amended return.
The Inflation Reduction Act (IRA) extended and enhanced several energy-related tax credits. If you are considering purchasing a new vehicle or making home repairs, make sure to review IRA incentives here. Increased clean vehicle restrictions apply for 2024 and 2025+ which could decrease selection, but for those who qualify, transfer of credits to the dealer is now available.
Business owners should watch TCJA developments as well. For example, the qualified business income deduction (section 199A), created temporarily through 2025, faces potential elimination.
The SALT cap may also potentially increase or be repealed, though, the passthrough entity tax (PTET) regime could provide relief in the meantime for those with significant passthrough business state income tax. TCJA’s excess business loss limitation is not set to expire until after 2028, so careful planning is beneficial to avoid creating a loss that would be disallowed in the current year.
Finally, if you are planning to reduce business taxable income through fixed asset purchases, remember that the TCJA phased down bonus depreciation in 2023 at 20% increments until hitting zero in 2027. The current reduction in 2024 is 60%.
Please contact your RubinBrown representative to develop a tax plan that is best for your unique set of facts.
Published: 12/03/2024
Readers should not act upon information presented without individual professional consultation.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.