A Comprehensive Guide To 2024 Year-end Tax Planning
As the year draws to a close, it's an ideal time to review your tax strategy and take proactive steps to optimize your tax liability for both the current and upcoming tax years. Year-end tax planning can help you defer income, maximize deductions, and utilize smart decisions around gifts and your estate.
Please note – as our clients are primarily those with equity compensation, company founders, entrepreneurs, and fund managers, these recommendations are mostly focused on advising those taxpayers.
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Income deferral strategies involve pushing income into future years to potentially lower your current year’s taxable income. Here are a few tactics you can consider for deferring income before the year ends:
Deferring Elective Bonuses: Many business owners and employees can defer the receipt of bonuses. If you have the flexibility to control when you receive income, consider delaying bonuses until the first quarter of the following year, especially if you expect your tax rate to decrease in 2025.
Deferring Capital Gains: If you are trying to realize capital gains on investments, consider waiting until next year to sell assets that have significantly appreciated. For other strategies to lock-in appreciation on capital assets, see DAFs (Section 2). However, be mindful of changing market conditions that could impact the long-term benefit of deferring current gain recognition.
Tax Loss Harvesting: Tax loss harvesting is the strategy of selling investments at a loss to offset gains elsewhere in your portfolio. While implementing tax loss harvesting, be sure to be aware of the wash sale rule, which suspends losses if you purchase the same or substantially identical security within 30 days before or after the sale.
Crypto assets are treated as property (not stock), and thus it is widely believed that wash sale rules do not apply. However, you should discuss with your tax advisor to ensure any crypto loss recognition transaction will show economic substance under scrutiny.Installment Sales: For those selling property or other assets, properly utilizing installment sales can spread the recognition of income over multiple years. This strategy can be particularly beneficial for high-dollar transactions, such as company acquisitions and real estate sales.
Other Income Deferral Options: You might consider other deferral strategies, such as contributing to a retirement plan like a 401(k) or IRA, which can reduce taxable income in the current year. Some planning items need to be completed within the tax year, while others (SEP IRA & HSA, for example) can be completed anytime ahead of your original tax filing deadline.
Tax Advisor Note: If you expect tax rates to increase in the coming year (e.g., due to new legislation or changes in your financial situation), the usual logic of deferring income may not apply. Untitled Tax Project LLP does not anticipate tax rates to increase for 2025, and thus traditional logic should apply unless your personal earning potential will increase in 2025.
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Accelerating deductions into the current year can help you reduce your taxable income. Here are several common strategies to consider:
Prepaying Deductible Expenses: You can reduce your taxable income by paying deductible expenses in advance. For example, prepaying business expenses such as insurance premiums, rent, or other operating costs that are due early next year can accelerate deductions into the current year. There are limits to the potential deduction of prepaid expenses, so we recommend discussing with a tax professional before moving forward.
Prepaying Real Estate, State, and Local Taxes: Real estate taxes are generally due in installments, and it may benefit you to prepay these taxes if you are able to deduct them. Similarly, remaining state tax liabilities can be paid ahead of 12/31 and realized for deduction purposes. Note that there are several reasons why you might not receive benefit from tax deductions, such as standard deduction being higher, Alternative Minimum Tax (AMT), or Tax Cuts and Jobs Act (TCJA) limitations. Please consult with a tax advisor to appropriately optimize.
Charitable Contributions and Donor-Advised Funds (DAFs): Charitable contributions are an excellent way to reduce your taxable income. If you plan to give to charity, consider making donations before December 31st. Donor-advised funds allow you to make a charitable contribution and receive a deduction in the current year, while disbursing the funds to charities over time.
Donating highly appreciated capital gain property to a charitable organization or DAF provides several benefits. You receive a tax deduction for the full fair-market value of the donation, while simultaneously never having to pay tax on the appreciation. For example, if you bought $10,000 of NVIDIA stock 5 years ago that’s worth $300,000 today, donating to a DAF allows you to receive a $300,000 charitable deduction, while never paying tax on the $290,000 appreciation.
Tax Advisor Notes:
SALT Cap: The Tax Cuts and Jobs Act imposes a $10,000 cap on the State and Local Tax (SALT) deduction, so high earners may not fully benefit from accelerating state tax payments or property taxes above that threshold.
Major Business Purchases: There are limits on Section 179 expenses, and additional Bonus Depreciation is currently 80%, set to drop to 60% in 2025. However, with the newly elected political regime, we may see a reset on bonus depreciation in the future.
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Year-end is also a great time to consider your estate and gift planning. There are several methods to optimize gifting assets to your loved ones:
Annual Gift Tax Exclusion: In 2024, you can gift up to $18,000 per recipient without triggering gift tax. Married couples can combine their exclusions, gifting up to $36,000 to each individual. Take advantage of this exclusion by giving gifts before the year ends.
Superfund 529 College Plans: If you have children or grandchildren, consider funding a 529 plan for their future education. The annual gift exclusion applies to contributions made to 529 plans, and you can even superfund these plans by contributing five years’ worth of gifts in a single year (up to $90,000 for individuals or $180,000 for couples, without triggering gift taxes).
Gifts to Educational and Healthcare Institutions: Direct payments to educational institutions or medical facilities for a loved one’s tuition or healthcare expenses are not subject to gift tax and do not count against your annual or lifetime exclusions.
Understanding When a Gift is Complete: For tax purposes, a gift is considered complete when it has been "delivered" and the recipient has control over the gift. The mailbox rule states that if you mail a gift before year-end, it is considered complete for the year, even if the recipient does not receive it until the following year.
Tax Advisor Notes:
2025 Adjustments: Inflation adjustments will increase the annual exclusion and the lifetime exclusion in 2025. See the IRS website for updated information.
Estate Planning: Under existing tax law, the lifetime exclusion is set to be cut in half at the end of 2025. However, due to the incoming political regime, we do not anticipate the lifetime estate exclusion to be reduced in the short-term. There does not appear to be urgency to establish a trust to lock in a high estate tax exclusion, as many had previously anticipated. There yet may be other reasons to establish a trust, and your tax and financial advisors should help guide you in these discussions.
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Additional items that may help optimize your tax situation, which don’t fit squarely into the three standard categories of year-end planning:
Incentive Stock Options (ISOs): Exercising ISOs does not generate regular income, but does generate Alternative Minimum Tax (AMT) income. With careful analysis of year-to-date activity, you may be able to exercise ISOs and pay no tax on the exercise. This helps start the holding period for your ISO shares, which will qualify for long-term capital gain treatment if sold at least two years after grant and more than a year after exercise.
Previously Exercised ISOs and ISO Disqualified Dispositions (ISO DD): Alternatively, if you have already exercised ISOs during the year, it may be worth exploring selling some and reducing your AMT, while simultaneously generating liquidity.
Deferring Gains Through Specialized Investments: Explore opportunities to defer capital gains with Section 1045 Rollover (for qualified small business stock) or through investments like Qualified Opportunity Zones (QOZs) which allow you to defer taxes on realized gains while supporting economic development in underserved areas.
Private Investment Losses and Section 1244 Losses: If you have losses in small, early private investments, you may be eligible to treat these losses as ordinary losses under Section 1244. This provision allows for a greater tax benefit than if the loss were classified as a capital loss.
Low-Income Year and Retirement Funds: Converting a traditional retirement account (IRA, 401k, etc) to a Roth IRA in a low-income year may make sense because of lower tax brackets, meaning you'll pay less tax on the conversion. Since the converted amount is treated as taxable income, taking advantage of a low-income year allows you to minimize the immediate tax impact. Additionally, once the funds are in the Roth IRA, they grow tax-free, and future withdrawals are also tax-free, providing long-term tax benefits. This strategy helps reduce future tax burdens, especially if you expect your income and tax rate to increase in the future.
Tax Advisor Note: Part of the incoming government’s mandate includes repealing several renewable energy incentives. If you were previously planning to use “Green Energy” credits, now is the time to lock in credits such as the Electric Vehicle, Energy Efficient Home Improvement, and Solar Energy Credits.
Conclusion
Effective year-end tax planning can significantly reduce your tax liability and improve your financial situation going into the next year. Whether you focus on income deferral, accelerating deductions, gifting, or exploring more advanced strategies, the actions you take now can make a substantial difference in your overall tax outcome.
As tax laws continue to evolve, it’s important to stay informed. Consider consulting with a tax professional or financial advisor to tailor strategies specific to your needs and financial goals. If you’re looking for premium guidance, the partners at Untitled Tax Project LLP may be able to help. Contact us here.
