With the end of 2024 approaching, it’s time to start thinking about end-of-year moves to help lower your 2024 tax bill. Sciarabba Walker’s tax experts have analyzed current tax rules to identify some opportunities and challenges facing our clients in the current year. We want to share some updates and strategies to help you prepare for tax filing and save you some tax dollars.
Adjusted Gross Income
Because many tax benefits are tied to or limited by your Adjusted Gross Income (AGI), an essential aspect of tax planning is to estimate both 2024 and 2025 AGI. Your 2023 tax return, 2024 pay data, and other income and deduction-related documents are a good starting point for estimating your AGI. After you’ve estimated AGI, consider whether to accelerate or defer income or deductions. Deferring income is advantageous so long as the deferral does not bump you into a higher tax bracket in the succeeding year(s). You may also benefit by accelerating your income into 2024 if you anticipate being in a higher tax bracket in 2025 than in 2024.
Standard Deduction vs. Itemized Deduction
Many taxpayers won’t want to itemize because of the high basic standard deduction amounts that apply for 2024 ($29,200 for joint filers, $14,600 for singles and for married filing separately, $21,900 for heads of household), and because many itemized deductions have been reduced or suspended. You can still itemize medical expenses that exceed 7.5% of your AGI, state and local taxes up to $10,000, your charitable contributions, plus mortgage interest deductions on a limited amount of mortgage debt, but these deductions won’t save taxes unless they total more than your standard deduction. You may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2024 deductions even if you don’t pay your credit card bill until 2025.
Investments
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on your total taxable income. If you hold long-term appreciated-in-value assets, consider selling enough to generate long-term capital gains that the 0% rate can shelter. The 0% rate applies to net long-term capital gain if your total taxable income is not more than $94,050 for a married couple, $63,000 for an individual who files as head of household, or $47,025 for any other individual. Some mutual funds can generate a significant amount of short-term capital gains, which are taxed at your ordinary income tax rate, so you want to avoid purchasing such mutual fund shares later in 2024, as such funds often declare capital gains distributions at year-end. You will be taxed on the full distribution even though you may have only held the shares for a brief period.
Maximizing Retirement Savings
If you are not contributing the maximum amount permitted to your 401(k) account for 2024, you still have time to increase contributions for the remainder of 2024 to lower your AGI. Maximizing pre-tax retirement contributions is a good tax-saving move. The limit on employee elective deferrals for participants in a traditional 401(k) plan is $23,000. Participants age 50 or over at the end of the calendar year can also make catch-up contributions of $7,500 in 2024. Taxpayers with income of $145,000 or more must make any catch-up contributions to a Roth or Roth 401(k) account. Also, beginning in 2024, individuals with Roth 401(k)s don’t need to take RMDs. If you have an education savings account (529 Plan) with leftover money after the beneficiary graduates, it can be rolled over tax-free into a Roth IRA (restrictions apply). Self-employed individuals generally can make contributions to a SEP IRA that cannot exceed the lesser of 25% of compensation or $69,000. The SEP contribution is an above-the-line deduction that reduces the AGI subject to tax. The Required Minimum Distribution age remains at 73 in 2024. If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA in 2024 if eligible to do so. Remember that the conversion will increase your income for 2024, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates in future years.
Energy and Vehicle Credits
Tax credits are available to homeowners and tenants who make energy efficient improvements to their primary residence. Examples of qualifying improvements include: exterior doors, windows, insulation materials, central air conditioners water heaters, furnaces, boilers, and heat pumps. The maximum credit is $1,200 and is nonrefundable, so it is limited to the amount you owe in taxes. However, you can apply any unused credit amount to reduce the tax you owe in future years. Credits can be claimed if the property is paid for and installed by the end of the year. If you make clean energy improvements such as: solar, wind, or geothermal power generation, solar water heaters, fuels cells, or battery storage, you may qualify for a tax credit of 30% of eligible expenses the year the improvements are installed. The home must be in the United States, and it must be an existing home that you improve or add on to, not a new home. You cannot claim the credit if you are a landlord (or other property owner who doesn’t live in the house).
Certain taxpayers and vehicles may qualify for a clean vehicle tax credit purchased and delivered to you in 2024. The maximum credit allowed per vehicle is $7,500. To qualify, taxpayers and vehicles must meet all requirements, and there are many, so we suggest you go to Clean Vehicle Tax Credits | Internal Revenue Service to begin your research.
Gifting and Charitable Giving
For 2024, the annual gift exclusion limit is $18,000 per person you make a gift to. For married filing joint returns, the two can combine their exclusion amount in a single gift and give up to $36,000 in one gift per person. These gift exclusions allow you to give gifts, whether in aggregate or at once, to an individual during 2024 up to these amounts without impacting your estate or lifetime gift tax exclusion. There is no limit to how many individuals you can give gifts to. Gifts may also be given to 529 Qualified Tuition Plans, allowing you to save for future education expenses in a tax-advantaged savings plan. Many states allow a deduction or tax credit per beneficiary for contributions to that state’s 529 plan (New York State is $10,000 total). Under a special rule for 529 plans, you can “front-load” five years’ worth of annual gift tax exclusions and make up to a $90,000 contribution per beneficiary in 2024 ($180,000 if gift-splitting with a spouse). If you are 70 ½ or older, you can make direct contributions from your IRA to charity of up to $105,000 during 2024, and those distributions can be used to satisfy your required minimum distribution. You can’t claim a charitable contribution deduction for the direct contribution, but the amounts are not included in your taxable income. You also may elect a one-time contribution from your IRA of up to $50,000 to charity through a charitable gift annuity, charitable remainder unitrust, or charitable remainder annuity trust funded only by qualified charitable distributions.
We are Ready to Assist
These are just some of the year-end steps that can be taken to save taxes. Your team at Sciarabba Walker is continuously evaluating changes to tax policy and will inform our clients if changes occur. Please stay tuned to our website and follow us on social media for the most up-to-date tips and guidance as they become available. We would happily assist you with your year-end tax planning or answer any questions. Please contact your personal Sciarabba Walker contact or email us at info@swcllp.com at your earliest convenience.