As the end of the year approaches, our client conversations turn to how we can strategically minimize taxes. This is a collaborative effort, and a client’s role in tax planning is crucial. Together, we look at the ways they give, save, and invest, and consider how tax laws might change from one year to the next.
Most of the updates for 2024 are a result of the Consolidated Appropriations Act of 2023, which phases in tax law changes through 2028. It’s also important to remember that some tax opportunities in 2024 may go away by December 31, 2025, when the 2017 Tax Cuts and Jobs Act (TCJA) expires. However, by taking advantage of these tax breaks while they’re still available, you may be able to significantly reduce your tax liabilities and maximize your benefits.
Here, we will look at deductions and opportunities to consider as you prepare to close out your tax year.
Retirement Savings
The retirement contributions deduction could be a valuable option if you are under age 50 and looking to make headway on retirement savings. This elective deferral (contribution) is for employees under 50 who participate in 401(k), 403(b), and most 457 plans, as well as the federal Thrift Savings Plan. The annual limit is $23,000 per individual.
If you are 50 or older, the catch-up contribution for employees participating in the same plans is still available. This year, that contribution is up to $7,500 per individual (or $30,500 in contributions for the entire year). For both options, all contributions must be made in 2024.
Are you wanting to max out your IRA contributions? The limit for individuals increased to $7,000 for 2024. For taxpayers age 50 and over, the catch-up contribution limit (which is not subject to an annual cost-of-living adjustment) remains $1,000, or $8,000 in total for the year. IRA contributions for 2024 can be made up to the April 15, 2025, filing deadline.
Charitable Contributions
The TCJA roughly doubled the standard deduction amounts for charitable gifts. If income tax deductions are important to you when giving, remember that your total itemized deductions must exceed the standard deduction amount to realize the benefit. For 2024 tax returns, the standard deduction for individuals is $14,600, and the standard deduction for married couples filing jointly and surviving spouses is $29,200.
If you itemize deductions, you could consider bunching two to three years’ worth of charitable gifts into 2024 to realize a deduction. (Contributions to a donor-advised fund are a great way to use this technique.)
The Consolidated Appropriations Act changed the age for required minimum distributions (RMDs) from retirement accounts from 72 to 73. The law still allows taxpayers age 70 ½ and older to use their RMDs to make a Qualified Charitable Distribution (QCD) in the form of a direct transfer. Starting this year, the annual limit will be indexed to inflation, with the limit for 2024 set at $105,000.
If you choose this option, it’s important to send the payment directly from your IRA to a charity. The contribution won’t qualify if the money passes through your checking (or other) account on the way. The payment can include all or part of your RMD, and the funds must leave your IRA by December 31, 2024.
This can be a great option for seniors to take required minimum distributions while reducing their taxable IRA distribution amount.
Bundling Deductions
Deductions are crucial to reducing tax exposure, and it’s essential to understand which ones work for you. The TCJA seriously cut back deductions in areas such as state and local taxes, mortgage interest, and charitable giving. This means if you want to itemize deductions, you may need to bundle them.
Depending on your financial situation, it might make sense to accelerate your mortgage payments now that the tax deduction for mortgage interest is capped. You could consider paying off more of your mortgage and retiring that debt sooner.
Separately, if your 2025 property taxes are billed or levied before the end of 2024, you can prepay them and claim them as a deduction. Note: This is only possible if your local government formally bills your 2025 taxes by December 31, 2024.
You can also consider claiming unreimbursed medical expenses, which are deductible if they meet the 7.5% Adjusted Gross Income (AGI) floor. This means it could be helpful to accelerate any medical procedures and payments not covered by your health insurance. This deduction may also include long-term care premiums and some home modifications if you are planning to age in place.
Capital Gains and Losses
You can pursue several different tax-saving opportunities within your investment portfolio. Start by reviewing the various sales you’ve realized on stocks, bonds, and other investments this year. Then, check your remaining investments and determine whether there’s an unrealized gain or loss. (“Unrealized” means you still own the investment, versus “realized,” which means you sold the asset.)
Further, you may qualify for a 0% capital gains tax rate for some or all of the long-term capital gains you realize in 2024 (see chart below). If this is the case, you will want to determine the highest gains you can recognize while taking advantage of the tax break.
2024 Income Tax Rates on Long-term Capital Gains
| Capital Gains Tax Rate | Taxable Income (Single) | Taxable Income (Married Filing Separately) | Taxable Income (Head of Household) | Taxable Income (Married Filing Jointly) |
|---|---|---|---|---|
| 0% | $0 to $47,025 | $0 to $47,025 | $0 to $63,000 | $0 to $94,050 |
| 15% | $47,026 to $518,900 | $47,026 to $291,850 | $63,001 to $551,350 | $94,051 to $583,750 |
| 20% | $518,901 or more | $291,851 or more | $551,351 or more | $583,751 or more |
Still in place for 2024 is the 3.8% surtax on net investment income. This kicks in for single people with modified AGI over $200,000 and joint filers with modified AGI over $250,000. If this applies to you, one strategy is to determine if you have unrealized losses that can be harvested to reduce the amount of surtax.
Loss harvesting means selling certain investments that will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you’re limited to only $3,000 of net capital losses to offset other income, such as wages, interest, and dividends. Any remaining unused capital losses can be carried into future years indefinitely.
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When you have a complex financial life, decreasing your tax liability requires more than just a plan—it requires a strategic tax plan. There are many moving parts, and making one decision could have unintended consequences that defeat the overall strategy.
Effective tax planning not only requires staying informed about changing regulations but translating that information to your situation. As financial advisers, we consider your complete financial picture and create a strategy that uncovers the opportunities tailored to you.
Insights
- Contributions to an employer-sponsored plan must be made by December 31, 2024, to qualify for the 2024 tax year.
- The 2017 Tax Cuts and Jobs Act roughly doubled the standard deduction for most taxpayers.
- An additional 3.8% surtax is levied against investment income for high-income taxpayers.
