Tax Planning Tips For Year End (2024)

Before the year runs out, many tax-smart moves can be very profitable for tax-savvy individuals.

Charitable-Giving Deduction

This deduction will impact adjusted gross income (AGI) for 2021 tax returns. It is essential to note the requirements (the deduction applies to monetary donation) and does not include ‘non-cash’ gifts, objects, or securities. Also, contributions had to be made to certified charities.

It is unanswered whether the $300 restriction applies to every individual or every tax return. In terms of the congressional Joint Committee on Taxation, it applies to the tax-filing unit and not the individual. This means that married taxpayers who file a joint return and elected not to itemize deductions can deduct the full amount ($300) on their joint return. This deduction is only available until the end of this year.

Charitable foundations urged lawmakers to prolong the deduction. It is critical as a first step in the right direction, but a mere drop in the ocean regarding the monetary disaster nonprofits face.

Educator Bills

Remember to deduct $250 for unreimbursed commerce or enterprise bills. Married couples who file jointly, can deduct $500 if both spouses are eligible. The deduction applies to skilled growth programs, books, computer gear, and provisions, including associated software). It applies to those who, during the tax year, you were a teacher between kindergarten and grade 12 (instructor, counselor, principle, or aide) for at least 900 hours at a facility that provides elementary or secondary training.

IRA Charitable Transfers

When you reach the age of seventy years and six months, you can become eligible to switch as much as $100,000 from your IRA to certified charities and certify it as a certified charitable distribution, which is a nontaxable event. It counts toward your required minimum distribution for the tax year although it is not deductible as a charitable contribution. Ensure that it is switched directly to the charity.

Suspension Of Charitable-Deduction Limits

The suspension will affect donors who itemize deductions and want to contribute more than was allowed beforehand. In 2019 IRS restricted the amount you could deduct to 60% of AGI. However, that percentage can be limited more (down to 20%) depending on the gift’s properties and the charitable foundation to whom the donation is made. For the 2020 tax year, the restriction was removed for monetary contributions by individual taxpayers.

Above The Line Deductions

These deductions are very valuable, especially now that taxpayers won’t be itemizing deductions anymore. Also, they reduce the taxpayer’s adjusted gross income, which affects their eligibility for many other tax benefits.

Some of the better known above-the-line deductions are:

⇒ Individual retirement account savings.

⇒ Personal health savings account contributions.

⇒ Self-employment taxes.

⇒ Some health insurance costs.

⇒ Bank penalties paid to or early withdrawals.

Reforms repealed some popular deductions including moving expenses – except for military personnel – and alimony for divorces after 2018.

Charitable Gifts: Workarounds

The tax reform placed a cap on deductions of state and local tax deductions. Some state as a result, enacted charitable giving laws designed to get around these caps. It works by offering state tax credits in exchange for contributions to charitable programs that provide state services. In fact, it changes state tax payments into charitable contributions for federal tax purposes.

No wonder the IRS put a stop to it. If you made such contributions, new rules mandate that you reduce your charitable donation by the tax credits you received, nullifying your benefit. However, you can still treat these as state tax payments and deduct them up to the cap of $10,000.

Defer Tax

Deferrals are still significant for tax planning. It is always better to pay tax later rather than sooner. It allows you to enjoy the time value of money. You need to accelerate your deductions and postpone your payments. By deferring bonuses, consulting income and self-employment income, a lot can be gained. Attempt to accelerate state and local taxes, interest payments and real estate taxes. Just remember the $10,000 cap on tax deductions.

Increased Withholding To Make Up Tax Shortfalls

If you were disappointed by your refunds last year, you can join the club. You have a better chance to make your target for refunds, but embrace the advice of your tax practitioner. Your tax advisor can ensure that your withholding aligns with estimated tax payments and what you actually expect to pay. Do not end up with a penalty for underpaying your taxes. Make up any potential shortfall with increased withholding on your salary or bonus. If you end with a larger estimated tax payment at the end of the year, you can still be penalized for underpayments in previous quarters. Withholding, in turn, is considered to be paid throughout the year. If you increase it for year-end wages, it can save you some on penalties.

Kiddies-Tax

In terms of the TCJA, a child’s unearned are taxed at the trust or estate rate. For low-and middle-income families with children who received scholarships and military survival benefits, these rates are a lot higher than their parents’ rates. For some high-income families, the use of trust or estate rates allowed more capital gains and qualified dividends to qualify for the zero or 15% brackets.

Congress just repealed the TCJA version and reverted back to the original “kiddies” tax. You can possibly benefit from the TCJA version if you transfer assets earning investment income to your children before 2020. Just remember this is a once-off. There will be no such benefit next year.

Low-Interest Rates And Generous Exemptions

You have to make use of the historically low-interest rates and lifetime gift and estate tax exemption in your current estate planning. Many strategies are based on the assumption that the assets will grow faster in value than the interest rates prescribed by the IRS. This provides a window of opportunity for estate planning techniques while interest rates remain low and the gift exemption is high. Tax reform doubled the gift and estate tax exemptions, but this will not last forever.

Opportunity zones

If you sold or plan to sell assets this year and face substantial capital gain taxes, the gains can be deferred if you invest an equal amount in opportunity zone fund within 180-days after the sale. And, if you keep the investment for ten years, you will face no gain on the new investment either. You must still recognize the deferred gain, but if you invest before the end of this year, you will pay an additional 5% less.

Hold the investment for five years and the IRS will forgive 10% of the deferred gain and hold it for seven years and it will be 15%.

Retirement Account Tax Savings

You can still maximize your contributions to your retirement account. Your 401(k) or IRA always provide some of the very best savings available. Contributions reduce taxable income when you earn it and defer taxes until you take money out of your retirement.

Standard Deductions

Do you expect to take the standard deduction? You need to make this decision before you decide on your-end spending that would typically have generated itemized deductions. Your standard deduction has been doubled by the TCJA. But, your itemized deductions were repealed and limited. If your itemized total deductions are not more than $12,200 ($24,400 if married and filing jointly), you will not get any deduction for charitable gifts and elective health care products.

The law eliminated many of the standard deductions for:

⇒ Tax preparation fees (miscellaneous).

⇒ Investment Expenses.

⇒ Home office expenses for those who are not self-employed.

⇒ Unreimbursed Employee Business Expenses.

The law capped deductions for:

⇒ State and Local Income Tax (SALT) at $10,000.

⇒ Home Mortgage Interest Deduction to acquisition indebtedness up to $750,000 in mortgage loan interest for new mortgages taken out after 2018.

The consequence of the above is that fewer taxpayers can itemize on their returns, although the significant increase in the standard deduction made up for this for most taxpayers. Irrespective of the above, taxpayers still have to determine whether their allowable deductions in 2019 exceed the standard deduction – and if it does, it always makes sense to itemize.

The Gift Tax Exclusion

You can gift up to E$15,000 to as many people you want for 2019. You get a new gift tax exclusion every year. Do not waste the opportunity. With your spouse, the limit is $30,000 per beneficiary per year. This means if you have three married children, you could remove $180,000 per year from your estate in a single year. This amount grows if you have grandchildren.

Harvest Tax Losses

Timing is essential concerning the tax consequences for your investments. Long-term capital gains can be 20% less than your ordinary tax rate. This rate applies to investments held for longer than 12 months. The specific rate depends on your income and the type of asset sold.

Considering that growth on your investments is not taxed unless it is sold, it provides flexibility in deferring taxes; hence, you can time the sale of your investments to reduce taxes.

⇒ You can recognize gains when you have capital losses to absorb the increases

⇒ If you have realized significant gains during 2019 search for unrealized losses in your portfolio that you cans ell before the end of the year to offset the gains

⇒ Long-and short term gains and losses can offset each other

⇒ BEWARE OF THE WASH SALE RULE

⇒ You cannot take a loss on a security if you buy a substantially identical security or an option on the same within 30 days before or after you sell the security that created the loss.

Make A Qualified Charitable Contribution (QCD)

If you are:

⇒ Older than 70 years and six months.

⇒ If you have an IRA.

⇒ If you don’t have enough deductions to itemize, then it can be more beneficial for you to make a qualified charitable contribution to achieve your philanthropic goals.

For a QCD, the custodian of your IRA distributes directly to the charity on your behalf, up to $100,000), resulting in the amount not being taxable while it will count towards your RMD (required minimum distribution) for the year. You will only be taxed on the remaining portion of the distribution you receive. The direct transfer by the IRA trustee to the eligible charity has to be completed by December 31^st.

Maximize Pre-Tax Deductions

You can direct up to $2,700 in pre-tax income to your FSA (flexible spending account) to cover qualified, unreimbursed medical expenses, with the snag that what you do not use during the year, you lose at the end of the year. Some plans make it possible to roll over up to $500 per annum, and some allow up to 2½ months grace for you to incur medical expenses to use it up. No plan is allowed to offer both options – it is strictly an either-or scenario.

For those who are covered by a qualified high deductible health plan, you can set up a health savings account (HSA)into which you can contribute pretax income. You can do the same if you have an employer-sponsored health savings account.

For self-only coverage, you can contribute up to $3,500 for family coverage up to $7,000, adding $1,000 if you are 55-years old or older.

The advantages are:

⇒ Withdrawals for qualified medical expenses are tax-free.

⇒ HAS balances can be carried over from year to year.

⇒ Contributions can be invested and will grow tax-deferred like an IRA.

Maximize Retirement Plan Contributions

One of the best methods to reduce taxable income is by contributing the allowed maximum to your employer-sponsored defined contribution plan like a 401(k) or 403(b). Typically contributions are made pre-tax and will reduce your modified adjusted gross income (MAGI), which will reduce your exposure to the 3.8% net investment income tax (NIT). These assets grow tax-deferred, while some employers match some or all of your contributions.

For the tax year 2019, you can contribute up to $19,000 in salary deferrals, and for those above 50, you can add $6,000 in catch-up contributions for a total of $25,000. In 2020 the above will increase to $19,500 $6,500 for catch-up.

If you contribute to an employer-sponsored plan, you can designate some or all of your contributions as Roth contributions.

⇒ Are made on an after-tax basis.

⇒ Do not reduce your current MAGI.

⇒ Qualified distributions are tax-free.

⇒ Beneficial especially for high-income earners who are ineligible to contribute to Roth IRAs.

⇒ Note: For IRA’s, the deadline is April 15^th

Time Your Income And Expenses

Those who expect to fall into a higher tax bracket next year should probably consider doing the exact opposite because accelerated income will allow more income to be taxed at this year’s lower rate while deferring expenses will make the deductions more valuable when you are subject to a higher tax rate.

You can typically control the timing of the following types of income:

⇒ Bonuses

⇒ Self-employment income

⇒ Consulting revenue

⇒ US Treasury bill income

⇒ Retirement plan distributions

⇒ While you cannot defer RMDs, there are exceptions, one of which is:

⇒ If you are older than 70 years and six months.

⇒ Are still working.

You are allowed to defer RMDs by rolling the assets from an IRA or a former employer’s retirement plan if the plan allows this. Hence you will be able to delay taking RMDs until you are no longer working and fall into a lower income tax bracket.

Extra Tips

Complex changes to the tax code, including the new Section 199A deduction (see below), made it even harder to file your taxes. Adding insult to injury, many taxpayers were surprised by smaller tax refunds and larger tax bills than anticipated.

To avoid a repetition of the same, you need to have a tax strategy, and you need to plan your taxes before Tax Day 2020 arrives.

Deductions

SALT has limited the deductions on state and local income and real estate taxes, and most of the two percent miscellaneous itemized deductions, and this made itemizing deductions harder, which prevents many taxpayers from getting a more significant benefit for their charitable deductions. We advise that you use a donor-advised fund if you plan to make annual contributions to philanthropic organizations. If you do, your contributions to this fund can occur during the years you wish to itemize. When you give highly appreciated assets to the charitable donor, it can make a massive impact by eliminating the tax on the gain while preserving the charitable deduction for the full market value of the highly appreciated asset – a win-win for the client and the charity.

199A Deductions

If your income is too high – and is impeding your allowable 199A deductions, you can reduce your capital gains to remain To do this, consider using Section 1031 exchanges and installment sales to designate benefits into a single tax year which will eliminate the deduction for this year but preserve it in later years. Planning for these events eliminates surprises and keep more money in your pockets.

Roth IRA

Your previous Roth Conversion analysis is redundant due to the lowered tax rates. A new Roth Conversion analysis might be required to determine if a conversion is still the way to go. This, of course, can only happen if you have enough liquidity to pay the taxes that will become immediately payable. When you weigh up the choices, keep in mind that Required Minimum Distributions (RMD) may cause you to pay net investment income tax on your investment income if your income is above the threshold for the tax. If you make a Roth Conversion to lower future RMDs and keep your income below the threshold, it will eliminate this 3.8% tax.

In this event, your income might fall below the threshold where you become subject to the additional 5% capital gains tax.

So, it is not only that the income in the Roth IRA will never be taxed – it is also about the other tax benefits that will accrue to you if you lower your RMDs. If you do not need all your RMDs to live on, the remainder can remain in your Roth and grow tax-free.

If you contact your tax professional, they will be able to provide many more planning tips to help you prepare for the tax season. If you plan, filing your returns becomes more manageable and you will no doubt save some real money on your taxes.

State Tax Preparation

State Tax Exemption

The new tax law almost doubled the estate tax exemption. The lifetime exclusion for 2019 is $11.4 million for an individual, and twice that for a married couple. The annual gift tax limit is now $15,000.

The IRS also indicated that it will not make these gifts taxable if a future Congress votes to lower the estate tax limit. Nevertheless, make your gifts now. You do not have to do it by the end of 2019, but the political mood might shift in favor of estate taxes after the 2020 election.

Maximize Small Business Tax Break

Small business owners and the self-employed are eligible for a 20-percent deduction of business income, subject to lots and lots of limitations, depending on:

⇒ Field of business.

⇒ Amount invested in equipment.

⇒ How much you pay your employees.

BUT, if you are below the threshold for a couple, $321,400, or $160,700 for an individual, you will AUTOMATICALLY GET THE TAX BREAK.

For those above the threshold, there are several ways to legally reduce your income to fall under the caps. This is even more important for those who cannot claim any deductions once they exceed the caps.

This is the case for :

⇒ Accountants

⇒ Doctors

⇒ Lawyers

How To Reduce To Below The Cap

⇒ Max out any tax-deferred retirement accounts and health saving accounts.

⇒ Reduce your taxable income with as much as $225,000 by contributing to a defined benefit retirement plan.

⇒ Increase employee wages by paying once-off bonuses to increase payroll enough to qualify for the 20-percent deduction.

⇒ In the case of an S corporation, those bonuses can also be paid to officers or owners of the company.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.