5 Year-End Tax Planning Focus Areas for Individuals in 2024 (and Beyond)

An underlying theme in year-end tax planning for high-net-worth individuals last year was planning around the impending sunset of the 2017 Tax Cuts and Jobs Act (TCJA). That theme continues this year, albeit with even more uncertainty. The election of former President Donald Trump along with a Republican majority in the House and Senate increase the likelihood that many of the TCJA’s provisions may be extended before they expire at the end of 2025. But for now, we don’t know what will stay, what will go, how long certain provisions might be extended and what other legislative changes might be in the works.

So, how should individuals plan amid such uncertainty? We’ve assembled a list of a dozen year-end planning ideas that fall into five potentially impactful categories. Consider them with your advisers — this year and next — to remain adaptable and respond quickly to changing legislative conditions.

1. Income Tax Planning in an Uncertain Environment

Absent new legislation, the TCJA is set to expire at the end of 2025, resulting in the following major changes:

• Income tax rates revert to higher pre-TCJA levels
• $10,000 state and local tax limit and the higher standard deduction amount go away
• Many itemized deductions and personal exemptions return

Following the election, expiration of the TCJA appears less likely. Similar to the process used to pass the TCJA in 2017, Republicans can use budget reconciliation to extend many of the TCJA’s key tax provisions. However, legislation passed via the reconciliation process necessarily comes with an expiration date. Under this scenario, taxpayers get short-term certainty, but the long-term tax picture remains uncertain — basically the environment taxpayers have operated under for the last six years. In another scenario, Republicans eliminate the Senate filibuster, and they pass permanent tax legislation.

In either case, the current tax environment will most likely continue in some form. Last year, we discussed the strategy of accelerating income into 2024 and 2025 to take advantage of lower tax rates while they still existed. However, in the current environment, you may find it makes sense to continue tried and true income tax planning strategies, such as deferring income and accelerating deductions. However, since we may not have clarity on the tax environment until later next year, remain vigilant and talk frequently with your tax advisers throughout 2025.

2. Estate & Gift Tax Planning

Annual Exclusion Gifting

The annual gift tax exclusion, which is the amount a donor can gift free of transfer tax to an individual, is $18,000 in 2024 (an increase of $1,000 from the prior year). Married couples can double this amount by either gifting separately to an individual or electing to split gifts on a properly filed gift tax return.

TAKE NOTE: The annual gift exclusion limit will increase by another $1,000 to $19,000 in 2025.

Enhanced Estate Tax Exemption

Absent new legislation, we warned last year that that the expiration of the TCJA at the end of 2025 would halve the estate and gift tax exemption from approximately $14 million per individual to approximately $7 million. Following the election, the probability that the lifetime exemption remains at current levels is much higher, but there is no guarantee Congress will act. Furthermore, any extension of the current estate tax exemption level could be temporary.

If your estate is above the exemption amount, consider reducing your estate tax liability. Since the current estate tax environment is about as good as it will get absent full repeal, it makes sense to take advantage of the large exemption available now. Additionally, transferring assets out of your estate today freezes the value of your assets and shifts future appreciation out of your estate.

If your estate is under the exemption amount, it may make sense to continue focusing on income tax basis planning. Assets includible in your estate at death receive a step up in tax basis to the current fair market value. Holding on to low-basis assets until death can provide significant income tax benefits to your heirs.

End of the year is a great time to review your estate plan and ensure it still meets both tax and non-tax goals.

Advanced Planning Tips

• Review old irrevocable trusts that are not generation-skipping transfer (GST) exempt to potentially use some of the additional GST exemption available under the TCJA.
• As interest rates remain relatively high, consider taking advantage of estate planning techniques such as a Qualified Personal Residence Trust or Charitable Remainder Trust. Both provide greater estate tax benefits when rates are higher.

3. Retirement Plan Tax Strategies

Maximizing Retirement Plan Contributions

Contribution limits for select retirement accounts in 2024:

* Earned income limits apply to all figures above ** AGI limits apply to ROTH contributions

NOTE: Beginning in 2025, individuals ages 60 to 63 are eligible to make an enhanced catch-up contribution of $11,250. The total amount these eligible individuals can defer to their 401(k), 403(b) and 457 plans will be $34,750 in 2025.

To ROTH or Not to ROTH?
Historically low-income tax rates have led many investors to believe they should make after-tax contributions to ROTH accounts while tax rates are low, and take tax-free ROTH withdrawals in retirement when tax rates will presumably be higher. For individuals with a choice between pre-tax and ROTH retirement contributions, the answer may not be straightforward.

Tax rates certainly impact the decision as to whether to ROTH or not but so do other factors, such as life circumstances and tax phaseouts. Having a mix of tax-free, tax-deferred and taxable accounts, i.e., tax diversification, provides flexibility during working years and in retirement to adjust to both personal and legislative changing tax conditions. Drawing from different tax buckets in retirement can allow you to smooth your income and manage your tax rates. Discuss with your tax adviser where best to save your retirement dollars.

Reminder: Flex Spending/Transportation/Dependent Care Accounts
Many employers’ annual enrollment period is near year-end. Do not forget about optimizing contributions to flexible spending and dependent care accounts ($3,300 limit each in 2025) and transportation spending accounts ($325 limit per month in 2025). Contributions to these plans avoid FICA self-employment tax as well as federal and state income taxes. Be aware that subject to some exceptions, unused dollars may be forfeited.

Advanced Planning Tip

• Self-employed taxpayers and business owners may want to consider a defined benefit plan, such as a cash balance plan, to contribute larger sums of income to qualified retirement plans. For example, a 60-year-old taxpayer can save approximately $245,000 annually via a cash balance plan, in addition to any defined contributions amounts.

ROTH Conversions

ROTH IRAs and ROTH 401(k)s remain some of the most potent tax planning vehicles available. They allow for tax-free growth and tax-free withdrawals. Furthermore, they are not subject to required minimum distributions. With marginal income tax rates at historic lows, now may be the time to consider converting assets into ROTH retirement accounts.

A ROTH conversion might make sense in the following situations:

• You expect higher tax rates in the future and/or in retirement
• You have special tax attributes, such as net operating losses (NOLs) or charitable carryovers available to offset the conversion income
• You have funds outside of retirement accounts to pay the tax on the conversion
• Market valuations are low

Advanced Planning Tips

• If you are a high-net-worth taxpayer wishing to pass wealth to your heirs, consider converting tax-deferred accounts to ROTH accounts. The prepayment of the income tax reduces your taxable estate, and it allows you to transfer an income tax-free asset to your beneficiaries.
• Take caution, however. Stock market valuations are near historic highs. If the market falls following a ROTH conversion, you are no longer able to recharacterize, or, undo, the conversion. Consider converting smaller sums over time to reduce the risk of market swings.

4. Charitable Tax Planning Strategies

Charitable Planning: Qualified charitable distributions (QCDs)

Beginning in 2024, the $100,000 maximum annual amount for QCDs is now indexed for inflation. Taxpayers 70 ½ and older can distribute up to $105,000 from an IRA direct to charity in 2024 and count that amount toward any required minimum distribution (RMD).

The following example illustrates the benefit of using the QCD strategy, versus taking an IRA distribution and then making a charitable deduction. Assume a married couple filing a joint return has:

• $250,000 of non-qualified portfolio income,
• $50,000 required minimum IRA distribution,
• $10,000 of state tax deduction,
• A desire to contribute $50,000 to charity, and
• Both taxpayers are older than 70 ½.

This couple could save nearly $5,000 by using a QCD versus taking their RMD and gifting to charity.

A QCD effectively reduces your adjusted gross income (AGI). This can keep you in a lower tax bracket and avoid certain thresholds, such as for the net investment income tax (NIIT). Additionally, a lower AGI can help keep you under the thresholds at which higher Medicare Part B and prescription drug coverage premiums begin.

Advanced Planning Tip

• The Secure 2.0 Act now allows for a one-time QCD of up to $50,000 ($100,000 if married) to fund charitable gift annuities or charitable remainder trusts (CRTs). While a CRT is not practical with only $100,000, a charitable gift annuity could be beneficial if you are charitably inclined and desire to provide an income stream to a spouse or other family member.

Charitable Gifts of Appreciated Assets

With the S&P 500 up over 25% year-to-date in 2024, many taxpayers are sitting on large, unrealized capital gains. If you are charitably inclined, consider funding your charitable gifts with appreciated securities held for more than a year.

Assume a married couple filing jointly:

• Has $400,000 of nonportfolio income,
• $10,000 state tax deduction, and
• A desire to contribute $50,000 to charity.

If the couple donates appreciated stock worth $50,000 (originally purchased for $15,000) that has been held for at least one year, they will receive a charitable deduction for the fair market value of the stock and avoid recognizing gain. In this example, selling the stock for $50,000 and donating the proceeds would cost the taxpayers over $6,500 more in taxes.

Advanced Planning Tip

• If you have appreciated business assets, consider gifting these assets to charity in advance of a liquidation event. Just be sure to do so well ahead of a potential sale to avoid an assignment of income or prearranged sale issue. The key is to communicate your intentions to your advisory team in advance.

Charitable Contribution Bunching

Given that many taxpayers no longer itemize following the implementation of the TCJA, one common strategy is to bunch a large number of deductions in a single year, itemize in that year and then rely on the standard deduction in other years.

Assume a married couple filing jointly:

• Has $400,000 of nonportfolio income,
• A $10,000 state tax deduction, and
• A desire to contribute $15,000 annually to charity.

Rather than contributing $15,000 every year to charity and receiving no tax benefit, since the standard deduction will be higher, these taxpayers should consider bunching their charitable contributions in one year. By establishing a donor advised fund (DAF), the taxpayers can make deductible charitable contributions upfront and then make distributions to charities of their choice in subsequent years. In the bunching example, the taxpayers save $7,200 of federal tax, and the charities still receive their annual $15,000 contribution as intended. Note that the expiration of the TCJA may affect the viability of this strategy.

5. Investment Tax Planning

Gain Harvesting/Loss Harvesting

Many taxpayers are sitting on large capital gains at the end of 2024. If you are one of them, consider the following planning items:

• If you expect to have an overall capital loss, consider harvesting capital gains to offset it. You can then carryforward any capital loss over the $3,000 allowable current year loss to a future year, subject to additional limitations. While the “wash sale” rules limit a taxpayer’s ability to sell an asset at a loss and immediately repurchase the same asset, similar rules do not apply when recognizing capital gains.
• Consider harvesting gains and resetting your tax basis at a higher amount. This strategy works best in a couple of scenarios, particularly if you:
  • Have a low-income year (less than $94,050 if married filing joint or $47,025 if single) and are subject to the 0% long-term capital gains rate.
  • Expect to be subject to higher rates or the NIIT in the future and was already planning on selling the stock in the next one to two years.

Net Investment Income Tax Planning

The NIIT applies an additional 3.8% tax on net investment income for taxpayers with AGI in excess of $250,000 for married filing joint or $200,000 for single. While not a new tax in 2024, planning to mitigate the NIIT remains important. To reduce this tax, consider:

• Maximizing retirement plan contributions to reduce your modified adjusted gross income.
• Postponing net capital gains or harvest losses to offset your gain.
• Contributing to your health savings account.
• Selling property with losses.
• Spreading a large gain over a number of years by using an installment sale.
• Using a Section 1031 exchange to defer gain.
• Donating appreciated securities to a qualified charity.
• Altering the tax characteristics of your investment.
• Grouping passive activities with activities in which you materially participate.

Advanced Planning Tip

• If you have a large taxable estate and are charitably inclined, consider establishing a non-grantor charitable lead annuity trust (CLAT). CLATs pay an annuity stream to a charity for a term of years and then distribute the remaining assets to a beneficiary. If trust assets grow faster than the interest rate at the time of establishment, then a CLAT can produce a favorable estate tax benefit. Additionally, the annuity payment qualifies for a charitable deduction, which can reduce taxable income and the NIIT.

Other Impactful Tax Planning Provisions

Disaster Relief Provisions

If your address of record is in a disaster area in 2024 (and there are many), you may be eligible for taxpayer relief. Millions of individual taxpayers are eligible to defer making tax payments. Especially given the current interest rate environment, deferring tax payments can make good financial sense.

For example, taxpayers in the entire state of Florida have until May 1, 2025, to file and pay any tax due on their 2024 returns. Additionally, Florida taxpayers will not need to pay their fourth quarter 2024 estimate normally due January 15, 2025, until May 1. Consult your tax adviser to confirm eligibility.

State Residency Planning

Especially for residents of states such as California and New York, state income taxes represent a significant portion of an individual’s tax liability. Relocating your tax residency is a viable tax planning strategy. However, it is not to be taken lightly. Building the right fact pattern that is supportable and capable of withstanding a state tax audit takes time and thought. Especially if you anticipate a significant future tax event, talk to your tax adviser sooner rather than later.

The planning areas above are potentially meaningful strategies to consider with your tax advisers over the next year. Talk with them before year-end to see what makes the most sense for your tax situation and to create a plan.

Contact Joe Falbo or a member of your service team to discuss this topic further.

Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.