October 2024
Fall Greetings!
It has been awhile since we have delivered a firm newsletter, so there is a lot of content included in this email. Please feel free to contact us for further discussion or more information.
Now Offering Bookkeeping and Business Insights
We are excited to announce the addition of client advisory services to our professional services including:
bookkeeping
managing financial functions
developing and evaluating KPIs
budgeting and planning
year-end reporting
reviewing internal controls
The addition of three new staff members later this month will provide over 20 years of combined experience in these areas. Please reach out to us if you would like to discuss how these services could benefit your business.
BOI Reporting Reminder
Initial Beneficial Ownership Interest (BOI) reports are due by January 1, 2025 for entities registered with the secretary of state prior to 2024. Please let us know if you need assistance with this requirement. If we do not hear from you, we will assume that you have already submitted the applicable report.
2024 Year End Tax Planning
With cooler temperatures approaching, it is time to start thinking about year-end tax planning. Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will likely continue to produce the best results for all. For the highest income taxpayers, bunching deductible expenses into this year can help avoid restrictions and maximize deductions. We have compiled a summarized list of actions for both individuals and businesses based on current tax rules that may help you save tax dollars if you act before year-end. We can narrow down specific actions when we meet to tailor a particular plan for you. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves might be beneficial:
Individual Tax Planning
IRA and ROTH IRA contributions must be made by April 15, 2025 for the 2024 tax year.
Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer's estimated MAGI and NII for the year.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. Alternatively, an individual who has recognized capital gains might consider harvesting capital losses to offset those gains to potentially reduce your capital gains rate.
Postpone income until next year and accelerate deductions into this year if doing so will enable you to claim larger deductions, credits, and other tax breaks for this year that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into this year. For example, that may be the case for a person who will have a more favorable filing status this year than next.
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 this year if eligible to do so. Keep in mind that the conversion will increase your income this year, 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 the future.
Many taxpayers won't want to itemize because of the high standard deduction amounts that apply for 2024 ($29,200 for joint filers, $14,600 for singles and for marrieds filing separately, $21,900 for heads of household), and because many itemized deductions have been reduced or abolished. As in the past few years, no more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions are not deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses but only to the extent they exceed 7.5% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, and mortgage interest on a restricted amount of qualifying residence debt. However, payments of those items won't save taxes if they don't cumulatively exceed the standard deduction for your filing status.
Some taxpayers 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 are beneficial. For example, a taxpayer who will be able to itemize deductions this year but not next will benefit by making two years' worth of charitable contributions this year, instead of spreading out donations over two years. In the alternate year, the standard deduction can be utilized.
If you were 72 or older this year you must take a required minimum distribution (RMD) from any IRA or 401(k) plan (or other employer-sponsored retirement plan) of which you are a beneficiary. Those who turn 72 this year have until April 1, 2025 to take their first RMD but may want to take it by the end of this year to avoid having to double up on RMDs next year.
If you are age 70½ or older by the end of this year, have traditional IRAs, and especially if you are unable to itemize your deductions, consider making charitable donations via qualified charitable distributions from your IRAs by the end of the year. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction.
If you are younger than age 70½ at the end of the year, you anticipate that you will not itemize your deductions in later years when you are 70½ or older, make maximum contributions to traditional IRAs this year. Then, in the year you reach age 70½, make your charitable donations by way of qualified charitable distributions from your IRA. Doing this will allow you, in effect, to convert nondeductible charitable contributions that you make in the year you turn 70½ and later years, into currently deductible IRA contributions and reductions of gross income from later year distributions from the IRAs.
If you become eligible by December to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for the current year.
Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $18,000 made in 2024 to each of an unlimited number of individuals.
An individual who wishes to reduce their estate for estate tax purposes might consider making gifts that exceed the annual gift exclusion to utilize their lifetime exemption. In 2024, an individual’s lifetime exemption is $13.61 million. By making gifts that use their lifetime exemption, the individual potentially removes any future appreciation from the individual’s estate with respect to the money or property that the individual gives away. In addition, by making those gifts before the lifetime exemption is currently set to decrease after 2025, the individual potentially can take advantage of the higher exemption.
Business Tax Planning
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. The deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. Therefore, tax planning may be beneficial to maximize this deduction. The rules are quite complex, so don't make a move in this area without consulting us.
Businesses should consider making expenditures that qualify for the liberalized business property expensing option under Section 179. For 2024, the expensing limit is $1,220,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most, if not all, their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. So expensing eligible items acquired and placed in service in the last days of the current year, rather than at the beginning of next year, can result in a full expensing deduction on this year's return.
Businesses also can claim a 60% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service in 2024, and for qualified improvement property, described above as related to the expensing deduction. The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. Now is the time to take advantage of bonus depreciation as it is being phased out. It will be 60% in 2024, 40% in 2025, and 20% in 2026. Bonus depreciation will not be available after 2026.
Businesses may be able to take advantage of the de minimis safe harbor election to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren't required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can’t exceed $2,500 (if the taxpayer does not have an audited financial statement). Consider purchasing qualifying items before the end of the year.
Year-end bonuses can be timed for maximum tax effect by both cash and accrual-basis employers. Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within two months after the end of the employer's tax year for the deduction to be allowed in the earlier accrual year. Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year end to set the payment date later than the 2.5-month window or change the bonus plan’s terms to make the bonus amount not determinable at year end.
Retirement plan and profit sharing contributions can be an effective way to reduce income tax liability. Please reach out to us for discussions regarding options specific to your business and plan type.
Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of current-year income is desired, consider disposing of a passive activity before year-end to take the suspended losses against current income.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.
