Before we all get too deep into pumpkin spice everything and holiday celebrations, we want to take a few minutes to focus on year-end tax planning topics. Custodial partners have let us know of deadlines in early December in order to guarantee year-end completion of cash and security movement. Thus, it is important to make and communicate these decisions in a timely manner so they can be implemented.
Harvesting Capital Losses (or Gains)
Tax loss harvesting occurs by selling a security that has had a market price loss since purchase date. The loss has value to offset current or future realized gains. Attention must be paid to not violate the wash sale rule which applies to substantially identical securities bought or sold within 30 days of the loss trade date. We look for loss opportunities throughout the year, though our options to offset this year’s realized gains are more limited given the strong equity returns of 2023 and 2024. We will continue to be sensitive to loss opportunities through the end of 2024.
Single filers with taxable income of $47,025 or less and joint filers with taxable income of $94,050 or less for calendar year 2024 pay 0% on realized long-term capital gains. If you have the 0% capital gain bracket available to you, consider tax gain harvesting and re-setting your cost basis by repurchasing the same security after the sale. There are no wash sale rules when it comes to taking gains.
Charitable Giving Opportunities
If you are planning charitable contributions, consider donating appreciated stock instead of cash. When you use long-term holdings (i.e. securities owned longer than 365 days), you get the full market value deduction for the stock donation and avoid realizing capital gains and the related taxes on the appreciation of the stock. Consider using your cash to repurchase the security, which will reset your cost basis for the stock. If you don’t know specifically what charities you want to support, consider setting up a donor-advised fund (DAF) with those appreciated securities to secure the tax deduction for 2024.
Many taxpayers now use the standard deduction instead of itemizing their tax deductions. To maximize your deductions, consider bunching your charitable gifts. For example, defer your regular 2024 charitable gifting into early 2025. Doubling up contributions next year may allow you to use the standard deduction in 2024 and then itemize your deductions in 2025. This bunching can also apply to other tax-deductible expenses, such as non-reimbursed health care costs.
If you are over age 70.5, you can make qualified charitable distributions (QCDs) directly from your IRA, up to $105,000 for 2024. QCDs must go to public charities. A DAF does not qualify as a public charity. The distribution will be excluded from your taxable income and will count towards satisfying your annual required minimum distribution (RMD) if you have an RMD requirement.
Retirement Funding
You must have earned income in order to fund 2024 IRA or Roth IRA contributions. 2024 contribution limits are $7,000, or $8,000 if you are age 50 by December 31, 2024. There are gross income limitations for Roth IRA contributions as well as for making tax-deductible IRA contributions. Back door Roth contributions are still an option for taxpayers that exceed the gross income limitations. For joint filers, only one partner needs to have earned income. 2024 contributions can be made until the tax filing date of April 15, 2025, so you have time to consider the earnings limitations. Extending your tax return does not extend the date for making those contributions.
If you are employed with a 401(k) or 403(b) plan available to you, 2024 contribution limits are $23,000 or $30,500 with the “catch-up” provisions for those age 50 and over.
Required Minimum Distributions (RMDs)
If you are age 73 or older by the end of 2024, you have a required minimum distribution from your IRA assets for 2024. If you turned 73 during 2024, you have an option to defer your first RMD until April 1, 2025, but then you will also have a 2025 RMD to take in the same calendar year of 2025, essentially doubling up your RMD ordinary income in 2025. QCDs (referenced above) can be used to meet all or part of your RMD requirement, up to $105,000 for 2024.
If you have an inherited IRA from an owner who passed away after 2019, final regulations issued by the IRS in July of 2024 now require most inherited beneficiaries to begin annual distributions in 2025. Requirements for 2020 through 2024 have been waived, but non-spousal beneficiaries still have 10 years following the year of death to withdraw all of the funds from those inherited IRAs. Pre-2020 deaths for inherited IRAs for non-spousal beneficiaries still have annual RMD requirements, but do not have the 10- year rule. The rules here are complicated for non-spousal inheritors, so it’s important to have these discussions with your investment and tax advisors.
Roth IRA Conversions
If you think your future tax rates may be higher than they are today and you can afford to pay the taxes on the conversion income with cash from other investment accounts, consider a Roth IRA conversion. The longer the Roth IRA stays invested, the more a Roth conversion makes sense. You can do small amounts to take advantage of incremental tax brackets. Roth IRA conversions would not be appropriate if you are going to leave the IRA to charity as the charity would not pay taxes on a regular IRA gift. There is no option to undo a Roth conversion once it has been done.
Family Gifting
The annual gift tax exclusion for 2024 is $18,000 to as many individuals as you choose; $36,000 for a married couple. Parents and grandparents frequently use their annual exclusion to fund 529 education savings accounts where the assets grow tax-free, as long as eventually used for qualified education expenses. New provisions allow excess 529 plan assets to be converted to a Roth IRA for the beneficiary. There is a limit of $7,000 per year with a lifetime limit of $35,000 on this type of conversion, and the 529 account has been open at least 15 years.
Gifts in excess of the annual exclusion will reduce your personal lifetime estate tax exemption, but it may still make sense to make these gifts now to remove future appreciation of the assets from your estate.
Estimated Tax Payments
Federal estimated tax payments are generally calculated by your tax preparer to cover the lesser of 110% of your actual liability for the preceding year (2023 tax year), or 90% of the tax liability for the current year. Final 4th quarter estimated federal tax payments are due January 15, 2025. If you find you have underpaid or missed an estimated tax payment, consider using your IRA to make those tax payments. The IRS treats tax payments made from an IRA distribution as withholding and are deemed to have been made ratably throughout the year. This may help you avoid any underpayment penalties.
There are a lot of year-end considerations here. We are grateful to have the opportunity to discuss them with you, your family members, and friends.
Deb Eveans, CPA
Comments or questions: Please contact us at 913-345-7000; or, visit our website at www.meritageportfolio.com
