Taxes in your practice: Year-end tax planning for 2024

Scott E. Vincent is the founding member of Vincent Law, LLC in Kansas City.

Individual taxpayers should think about applicable tax rates, the standard deduction, limits on itemized deductions, and multiple other issues. Businesses should examine corporate tax rates, limits on business deductions, increased expensing, and first year depreciation for some assets. The deduction for qualified business income also continues to impact individuals and their businesses. This article outlines several individual and business planning issues to consider before year-end. These items will not apply in every situation, and taxpayers should adjust their planning for their circumstances. Taxpayers should carefully monitor ongoing legislation and the potential impacts on year-end matters. 

Year-end planning for individuals 

Look at expanded standard deductions 

Consider the expanded standard deduction, eliminated personal exemptions, and limits on itemized deductions. For 2024, the basic standard deduction is $29,200 for joint filers, $21,900 for heads of household, and $14,600 for singles and married taxpayers filing separately. For taxpayers either 65 or older or blind, there are additional standard deductions. Many itemized deductions remain either reduced or eliminated. Taxpayers may find that the increased standard deduction provides more tax benefit unless allowable medical deductions (as limited), allowable state and local taxes (as limited), allowable charitable deductions, interest deductions on qualifying residence debt, and other allowable itemized deductions exceed the standard deduction. For taxpayers with timing flexibility, there may also be an incentive for “bunching” allowable itemized deductions into one year and using the standard deduction in other years. 

Increase withholdings 

Have an employer increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end for deduction of those taxes this year. This can be beneficial if a taxpayer expects to itemize deductions this year and doing so will not cause state and local tax deductions to exceed applicable limits. 

Plan for 3.8% net investment income tax 

This surtax is 3.8% of net investment income (NII) that exceeds modified adjusted gross income (MAGI) thresholds. Year-end planning for the 3.8% surtax depends on estimated MAGI and NII. Some taxpayers may want to defer additional NII until next year, some may want to reduce MAGI other than NII, and some may be able to minimize both NII and other MAGI. 

Consider additional 0.9% Medicare tax 

This tax applies to individuals receiving a combination of wages with respect to employment and self-employment income exceeding applicable thresholds. Employers must withhold the additional Medicare tax from wages in certain circumstances. Self-employed persons must include it in estimated tax payments, and some employees may need more withholding to cover the tax. 

Expedite income 

Accelerate income into this year in cases where a taxpayer’s marginal tax rate is expected to be lower this year than it will be next year due to economic conditions or expected changes in filing status or applicable rates. Postponing income can produce savings for taxpayers who expect to be in a lower tax bracket next year. 

Examine lower long-term capital gain rates 

Consider lower long-term capital gain rates on sales of assets held for more than one year. Depending on taxable income levels, taxpayers may want to utilize these lower rates for capital gain sales and avoid selling capital assets with offsetting losses that reduce the benefits of the lower rates. The reduced rates apply to adjusted net capital gain to the extent that this amount, when added to regular taxable income, does not exceed certain thresholds based on filing status. Analysis of taxable income, potential capital gains, and other applicable taxes is required to determine the best combination. 

Consider your retirement contributions and distributions 

Maximize retirement plan contributions, including catch-up contributions of additional amounts for taxpayers 50 and older. Remember that retirement plan distributions may be subject to a 10% early withdrawal tax penalty for taxpayers who are not at least 59-and-a-half years old. There are certain exceptions to this penalty, including a limited qualified birth or adoption distribution. 

Review required minimum distributions (RMDs) from retirement accounts 

RMDs are the minimum amounts that must be withdrawn from qualified retirement plan accounts beginning at age 72, or age 73 for taxpayers reaching age 72 after Dec. 31, 2022. Participants who are still working and making contributions to an employer sponsored retirement account may be able to further delay RMDs on that account. Taxpayers who fail to take RMDs can be subject to a substantial excise tax on the required amounts that are not withdrawn. 

Consider making qualified charitable donations from traditional individual retirement accounts 

Qualified charitable distributions are made directly to charities, and $105,000 per taxpayer who is at least 70-and-a-half years old is not included in gross income or itemized deduction calculations and limits. In addition, the qualified charitable distribution may reduce RMDs when applicable. Taxpayers can plan for this benefit by maximizing contributions to traditional IRAs with amounts that may later be used for qualified charitable distributions. 

Consider a Roth IRA conversion 

A taxpayer that would prefer a Roth IRA can convert traditional IRA investments into a Roth IRA if eligible. A conversion will increase adjusted gross income (AGI) for this year, so taxpayers should consider the impact on other tax calculations. 

Examine your health savings account contributions 

This applies for taxpayers eligible to make HSA contributions. HSA contributions may be deductible from AGI, so the benefits could be available even if a taxpayer does not itemize deductions. 

Increase flexible spending account amount 

Increase the amount set aside for next year in an FSA if you did not set aside enough for this year. Earnings set aside in an FSA allow payment of medical and dental bills with pre-tax earnings. 

Wrap up gifts that apply for annual gift tax exclusion 

Complete annual gift tax exclusion gifts before the end of the year to save gift and estate taxes. For 2024, taxpayers can give $18,000 each to an unlimited number of individuals but cannot carry over unused exclusions from one year to the next. These transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to tax at their parents’ rates (kiddie tax). 

Consider education deductions and other credits 

Tax-free distributions from § 529 qualified tuition programs are allowed for higher education expenses. This has been expanded in recent years to include up to $10,000 per beneficiary per year for elementary or secondary public, private, and religious schools, as well as expenses for participation in certain apprenticeship programs and qualified education loan repayments. For taxpayers under certain income thresholds, there are also several credits and deductions available and limited student loan interest may be deductible. Student loan forgiveness in 2024 should generally be excludible from income for federal tax purposes but may result in state or local income taxes. 

Consider home related tax provisions 

Mortgage interest is limited to the level of acquisition indebtedness depending on when the home was acquired ($750,000 for homes acquired on or after Dec. 16, 2017; $1 million for homes acquired before that date); mortgage interest allocable to the portion of a home used to operate a business is not subject to this limitation. Interest on home equity indebtedness may be deductible to the extent the debt was used to buy, build, or substantially improve the home. Gain of up to $500,000 for married taxpayers ($250,000 for other taxpayers) on the sale of a home is excluded from income, but the portion of the home used for business or rented reduces this exclusion from gain. Discharges of qualified principal residence indebtedness may be excluded from gross income. 

Consider clean energy credits 

Clean energy credits include residential clean energy credits and vehicle related credits. Eligibility for residential credits depends on the improvements made, annual limits, and or applicable percentages. Vehicle credits vary by date of acquisition, battery size, and manufacturer eligibility, which can be impacted by total qualifying vehicles sold and place of final assembly. 

Year-end planning for business owners 

Consider the qualified business income deduction 

This applies for non-corporate taxpayers where up to 20% of qualified business income from a domestic business operated as a sole proprietorship, partnership, LLC taxed as a partnership, or S corporation. For 2024, the deduction may be limited (with a phase-in for the limitation) if taxable income is over $383,900 for married couples filing jointly or $191,950 for other filers. These deduction limitations may apply depending on whether the taxpayer has a service-type trade or business such as law, accounting, health, or consulting, or whether the trade or business meets W-2 wage and qualified property (like machinery and equipment) requirements. Because there are taxable income thresholds and phaseouts for certain taxpayers, there may also be significant tax savings from deferring income or accelerating deductions into a particular year, depending on the taxpayer’s circumstances. Similarly, a taxpayer may be able to increase the deduction available by increasing W-2 wages or qualified property before year-end. 

Make expenditures before year-end that qualify for § 179 business property expensing 

For tax years beginning in 2024, the expensing limit is $1.22 million for property placed in service this year, reduced dollar for dollar for property placed in service over $3.05 million. This expensing is available for most depreciable property and qualified improvement property, which generally includes interior building improvements, and roofs, HVAC, fire protection, alarm, and security systems. Importantly, property acquired and placed in service before year-end is eligible for full expensing for the year. 

Look at first-year bonus depreciation 

Consider first-year bonus depreciation for new and some used machinery and equipment purchased and placed in service. Like expensing, bonus depreciation is available for the full year even if the asset was placed in service late in the year, so year-end purchases may receive a full first-year bonus write off. Notably, bonus depreciation is being phased out, with 60% available in 2024; 40% in 2025; 20% in 2026; and elimination in 2027. 

Consider changing to the cash method of accounting, rather than the accrual method 

“Small businesses” with less than $30 million (for 2024) of average annual gross receipts over a three-year period may be eligible for the cash method if they meet other requirements. Depending on the business, the cash method of accounting may allow more flexibility in timing income and deductions. 

Consider timing for debt-cancellation and disposition 

Consider timing for a debt-cancellation event, including whether lower effective tax rates are expected this year or next year. Also take into account disposition of a passive activity to allow a deduction for suspended losses to reduce current year taxable income. 

Review partnership and S corporation information 

Review partnership and S corporation basis to make sure it is sufficient to deduct losses in current and future years. Also examine S corporation salaries to ensure that shareholders receive reasonable wages and that distributions are based on ownership percentages of shareholders. The IRS often audits S corporations that pay all profits as distributions without accounting for reasonable wages to shareholders for their work in the business. 

Consider setting up and utilizing retirement plans and health insurance plans 

These plans can provide key benefits for retention of employees and for owners of a business. 

Consider business credits 

A variety of credits may apply for a particular business, including credits related to retirement plans and employees, as well as research and development, clean energy, and vehicles credits. 

Conclusion 

Election outcomes could lead to new legislation and could provide additional considerations for year-end and ongoing planning.