Year-end tax planning presents a particular challenge in 2024 because there’s so much uncertainty about what taxes will look like down the road. Most of the key tax components of the Tax Cuts and Jobs Act of 2017 are slated to expire after 2025…a Presidential election looms, and as of early September, it was hard to know which side will win and what tax policies will be implemented…and federal debt has risen to staggering heights, suggesting that the government will need to increase taxes at some point simply to pay its massive interest costs.
But while our tax future is cloudy, it’s clear that certain year-end steps can reduce tax bills and tax risks. April 15 is the deadline for many annual tax-planning strategies, but some things are best done by December 31, including…
You can give up to $18,000 to anyone you choose without any tax consequences in 2024, an increase from 2023’s limit of $17,000. If you have a substantial estate, making such gifts can be a smart and simple way to decrease the size of that estate to reduce or avoid future estate taxes. The federal estate-tax exemption is $13.61 million in 2024—so high that only the wealthiest of families face federal estate taxes—but that exemption is slated to be cut roughly in half after 2025. If there’s a reasonable chance that your estate could be worth more than $6 million to $7 million or more by the time it passes to your heirs, making untaxed gifts to those heirs while you’re still alive could make solid tax-planning sense.
An $18,000 gift might seem like a drop in the bucket compared with a multimillion-dollar estate, but such gifts can add up. Example: A retired couple who has three grown children, each of whom also is married, could remove up to $216,000 from their estate this year without tax consequences. The retired husband and wife each can give $18,000 to each of their kids and to each of those kids’ spouses. They can repeat these gifts in the years that follow—in fact, the gift-tax exclusion is expected to climb to $19,000 in 2025. The sooner the couple gets started with these gifts, the more years of gifts they can make and the more they will be able to remove from their taxable estate.
If you have grandchildren, consider making contributions on their behalf to a 529 plan. They can be gift-tax free up to five times the usual limit. For example, a contribution to a grandchild’s 529 plan before the end of 2024 can be $90,000 ($18,000 x 5) without any gift tax. Six grandchildren? Contributions to their accounts by year-end can remove $540,000 ($90,000 x 6) from your estate gift-tax free.
Also: If future estate taxes are a potential concern for your family, speak with an estate-planning attorney about setting up trusts if you haven’t done so already. Properly constructed trusts can essentially lock in today’s high estate-tax exemption for you…and can shield against triggering the estate tax exemption. The trusts must be funded by the end of 2025, but the time to call an estate-planning attorney is now—these attorneys are likely to be overwhelmed with clients as year-end nears.
…but this might not be the season for giving to charity. If you make annual gifts to charity around the holidays, consider postponing this year’s donations—the delay might make the gift more valuable to you without making it less valuable to your charity of choice. Under the current tax code, the vast majority of taxpayers claim the standard deduction rather than itemize their deductions—but those who don’t itemize their deductions can’t deduct their charitable donations. The standard deduction for a married couple in 2024 is $29,200. Itemizing could very well make a comeback starting in 2026 when certain aspects of the current tax code expire, so rather than make your usual donations near the end of 2024 and 2025, set that money aside and make a double-size donation at the very start of 2026, followed by your usual annual donation near the end of 2026. If you itemize your taxes that year, bundling three annual donations into 2026 will add up to a particularly nice deduction…and if you don’t end up itemizing, nothing has been lost.
Roll unneeded 529 assets into a Roth IRA. Wondering what to do with 529 assets when college plans get 86ed? Removing money from a 529 for non-educational purposes typically triggers income taxes and a 10% penalty. That creates a conundrum for parents and grandparents whose descendants don’t go to college. One option is to shift those 529 funds to a different beneficiary who also is planning to go to college. But a second option became available just this year—money in a 529 now can be rolled into a Roth IRA. This Roth will benefit the 529 account’s beneficiary—funding a Roth for a young adult can be a great way to give him/her a head start on retirement savings.
If this is something you wish to pursue, get started as soon as possible—there’s a $35,000 lifetime cap for these 529-to-Roth rollovers, so the longer you wait, the more the investments in the 529 are likely to appreciate and the smaller the percentage of the savings will make it into the Roth. The $7,000 Roth annual contribution limit applies to these trustee-to-trustee rollovers as well, so it will take some years to shift a significant sum. Exception: You might have to wait to do this rollover if the 529 is relatively new. To be eligible, a 529 must have been created at least 15 years prior to the rollover, and the 529 contributions shifted must have been made at least five years prior.
If you have a Roth 401(k), there’s a year-end step that isn’t required in 2024—taking a required minimum distribution (RMD). If you’re age 73 or older, you’re probably already aware of the importance of taking annual RMDs. Fail to remove sufficient amounts from your traditional IRAs and traditional 401(k)s each year starting at this age and you’ll likely face hefty penalties. But there’s a key change this year that’s easy to overlook—RMDs are no longer required from Roth 401(k)s. RMDs were already unnecessary with Roth IRAs, with the exception of inherited Roth IRAs.
Take full advantage of the 0% long-term capital-gains tax bracket. Under current tax rules, married taxpayers who file jointly can qualify for a 0% long-term capital-gains tax rate even if their taxable income is as high as $94,050. (The cap is $47,025 for single filers.) And those figures refer to taxable income—a married couple might have total annual income in excess of $120,000 and still land in this impossible-to-beat 0% capital gains tax bracket due to the standard deduction and other non-itemized deductions (e.g., IRA and Health Savings Account contributions). That tax rate is just too good to miss.
Unfortunately, it also might be too good to last—there’s been significant buzz that long-term capital-gains tax rates are among the tax rates most likely to rise in the years ahead. Politicians know that raising income tax rates also tends to raise voters’ ire, while increasing capital-gains taxes is the sort of thing they might hope to slip through with minimal backlash.
As 2024 near its end, get a sense of where your taxable income stands, then consider selling appreciated assets from your taxable accounts to take as much advantage of that 0% rate as possible. Your financial planner and/or tax pro might be able to help with these calculations.
Don’t let Flexible Spending Account (FSA) savings go to waste. FSA limits rose in 2024—which means there is a greater opportunity for FSA assets to be lost. Employer-offered FSAs allow employees to use pretax dollars to pay healthcare or child-care expenses. The funding limits for health-care FSAs has been climbing in recent years, from $2,850 in 2022…to $3,050 in 2023…and $3,200 this year.
But beware—FSAs are use-it-or-lose-it accounts. Money that goes into a health-care FSA is forfeited if it isn’t spent on qualifying health expenses by December 31. Some but not all FSAs offer a grace period that extends this deadline to March 15 or a rollover option that allows up to $640 of FSA money from 2024 to be shifted forward into 2025. If you’re not certain about your FSA’s rules, ask your employer’s benefits department for details before the year ends. If you have money remaining in a health-care FSA as a deadline approaches, there are ways to spend it before it goes to waste even if you don’t have medical bills—certain over-the-counter health products, such as cough medicine and painkillers, are qualified FSA expenses, and/or you could buy extra contact lenses or a spare pair of prescription eyeglasses.
