In preparation for the end of the year and the upcoming tax season, we summarized a few key year-end tax planning tips for individuals.

Capital Gains Planning

Harvest Losses from Your Taxable Accounts – Selling securities for a loss (harvesting losses) may help reduce your tax bill now and in the future. Even if you held the securities for less than a year, losses from the sale of securities could shelter short-term and long-term capital gains realized this year from income tax. Keep in mind that capital losses are netted against all capital gains, including those from the sale of a business and real estate. Any unused losses can reduce up to $3,000 of ordinary income, and you can carry forward any remaining unused losses to help reduce future tax bills. Note that you cannot deduct a loss on a security when a virtually identical one is purchased 30 days before or after the original sale, as this is considered a wash sale. Also, if you had significant losses in 2023 or any other prior year, you may have tax-loss carryforwards that can be applied to your 2024 taxes. Your Beacon Pointe advisor is working to realize any available capital losses on your behalf before year-end.

Harvesting Gains from Your Taxable Accounts – In contrast, if you find yourself in a low tax bracket for 2024, you may wish to take advantage of the lower tax rates on capital gain income. It may benefit you to realize gains from a concentrated stock position to diversify your asset allocation further and increase the cost basis in your overall portfolio. This strategy may also benefit pass-through business owners with an expected net operating loss from your business in 2024.

Track Cryptocurrency – As more investors explore the world of cryptocurrency, it is necessary to understand the taxation of sales, transfers, and purchases. The online cryptocurrency exchanges do not report on transactions like other investment brokerage firms. This puts the responsibility on the taxpayer to track and report all transactions. If you are an active trader or miner of cryptocurrencies, it is important to track the cost basis of purchases to calculate future gains and losses when the cryptocurrency is later sold. Exchanging one cryptocurrency for another and utilizing cryptocurrencies to purchase goods should be reported as sales. Currently, cryptocurrency losses are not subject to the wash sale rules, which means you could sell a position to realize a loss, then repurchase it immediately, and still be able to recognize the loss. Be sure to let your tax advisor know if you have any cryptocurrency holdings so they can help you track and report it properly.

Consider Investing in a Qualified Opportunity Zone (QOZ) – Current law allows (1) federal tax deferral of capital gain invested in a QOZ until the earlier of when the fund is sold or December 31, 2026, and (2) federal tax avoidance on investment gain on the initial QOZ investment if held for at least ten years. The capital gain deferred or avoided might still be taxable at the state level, and the federal income taxes will be due with the filing of the 2026 tax return. You must reinvest capital gains realized within 180 days after the gain was realized. The investment does not have to occur in the same calendar year to qualify for deferral. Be sure to confirm timing deadlines with your tax advisor.

Retirement Planning

Maximize IRA and Retirement Plan Contributions – Be sure to fund your retirement account(s) to the applicable limit. The IRA funding limit for 2024 is $7,000 ($8,000 if over age 50), and the elective salary deferral limit to 401(k), 403(b), and 457 plans is $23,000 ($30,500 if over age 50). Starting in January 1, 2025, participants in qualified employer retirement plans such as 401(k) plans aged 60 to 63 can increase their “catch-up contributions” by 150% of the regular catch-up contribution of $7,500, for a total catch-up allowed of $11,250.

If your employer-sponsored plan allows post-tax contributions and in-plan Roth conversions, you can defer up to $69,000 in 2024 (including all company matches and forfeitures). The post-tax contributions effectively create a “mega-backdoor Roth IRA,” which means these contributions grow tax-deferred and can later be rolled into a tax-free Roth IRA.

Note that the deadline for making IRA and Roth IRA contributions for the tax year 2024 is April 15, 2025. If your spouse actively participates in their employer’s retirement plan, be aware that spousal IRA contributions are subject to income limits. Please discuss deductibility with your tax advisor to determine your contribution amounts.

If you are a business owner, consider contributing to a SEP IRA or establishing and contributing to a Solo 401(k) by year-end. Contributions to a SIMPLE IRA are capped at $16,000 per year, with an additional catch-up option of $3,500 if you are 50 or older. The contribution limit for SEP IRAs and profit-sharing/401(k) plans for business owners is 20% or 25% of compensation (depending on the business entity) up to a maximum of $69,000 for 2024. If you are a high-income taxpayer, deferring income could allow the 20% qualified business income (QBI) deduction on business income. The QBI deduction may apply if the deferment of income brings your income below the top income and capital gains brackets.

Convert Your Traditional IRA to a Roth IRA – If you believe your tax rate might be higher in the future because of greater expected income or higher tax rates, consider converting a portion of your traditional IRA (or other qualified retirement accounts) to a Roth IRA. A Roth IRA is attractive to those expecting higher taxes in the future because, unlike distributions from a traditional IRA, qualified withdrawals from a Roth IRA are income tax-free. If market volatility has impacted the value of your IRA, you can convert it in-kind to a Roth IRA. You will pay income tax on today’s value and experience the recovery tax-free in your Roth IRA. Additionally, reducing the value of your traditional IRA will reduce future RMDs, which might result in a lower tax rate in the future. Other factors to consider are that your income determines Medicare premiums and Social Security taxation; higher RMDs could result in higher taxes and Medicare surcharges. Of course, there is no free lunch, as you will have to pay income tax on the amount you convert.

The conversion typically makes sense if one or more of the following apply: (1) you have monies outside of your IRA to pay the income tax on the conversion, (2) you believe you will be in a higher income tax bracket later, (3) you are not planning on using the converted funds for several years to allow for tax-free compounding, or (4) you plan on leaving your IRA or Roth IRA to your heirs. Note that if you decide to convert to a Roth, you cannot undo it later, so be sure to check with your tax professional before converting.

Take Minimum Distributions from Retirement Plans – If you haven’t already, make sure to take your required minimum distributions (RMD) from your IRA(s) or qualified plan(s) before December 31, 2024. Keep in mind that the RMD age was changed with the passing of the SECURE Act 2.0 from age 72 to 73 and is set to change in 2033 to age 75. It is important to take at least your full RMD amount before year-end; the penalty for not distributing the minimum required amount is 25% of the amount required to be distributed but not withdrawn. RMDs are not required for Roth IRAs. If you were born in 1951, you reached age 73 in 2024 and must take your first RMD. You can delay your first RMD until April 2025, but you will have to take two RMDs in 2025. This may make sense if you have higher income for 2024 and project you might have less in 2025. Work with your tax advisor to determine the best strategy for you.

RMDs may also apply to certain inherited retirement accounts. The primary factors that determine whether an RMD must be taken from an inherited retirement account, as well as the timing and requirements, are as follows: (1) the date the account holder passed away, (2) the beneficiary’s relationship to the deceased account owner, and (3) the type of retirement account inherited. Working with your tax advisor is required to determine the amount of your RMD and the appropriate amount of income tax to withhold from your RMDs.

Convert Unused Education Funds to Roth IRAs – Consider rolling over unused 529 plan funds into a Roth IRA for the beneficiary, up to $7,000 this year. Keep in mind there is a lifetime limit of $35,000, and the 529 plan must have been open for at least 15 years. The contribution is subject to the beneficiary’s annual Roth IRA contribution limits ($7,000, reduced by other contributions to a Roth IRA or traditional IRA during the same calendar year) and may also be limited by earned income. Speak with your tax advisor for more details.

Charitable Planning

Consider a Qualified Charitable Distribution (QCD) – If you are charitably inclined and over age 70½, you can donate up to $105,000 (2024) from an IRA directly to a qualified public charity (not a private foundation, donor-advised fund, or supporting organization) to satisfy your charitable goals and prevent the distribution from being included in your taxable income. Making a direct donation from your IRA might lower your income and allow you to qualify for lower Medicare premiums and other income tax breaks. Note that contributing to an IRA after age 70 ½ reduces the amount transferable to a charity as a QCD. A QCD also counts toward your annual RMD. As a reminder, a QCD would not be taken as a charitable deduction on Schedule A (itemized deductions) as the amount is not included in your gross income like an RMD would have been.

Additionally, individuals may apply a portion of their annual limit for QCDs towards establishing a charitable remainder trust (CRT) or a charitable gift annuity (CGA) of up to $53,000 (2024).  For example, an individual can transfer up to $53,000 from their IRA to one or more CRTs or CGAs and donate up to $52,000 from their IRAs to public charities for a total of $105,000 in Qualified Charitable Distributions.

Donate Appreciated Securities or Cash to Charity – If you plan to donate to charity this year, consider donating with appreciated stock or mutual funds you have held for more than one year. If you itemize your deductions, you can deduct the full fair market value of the securities (limited to 30% of adjusted gross income for public charities and 20% for private charities, with the excess carried forward for five years). You will also avoid the capital gains tax you would otherwise pay on the sale of those securities. If you do not think you will itemize every year, consider combining several years of charitable donations into one year using a donor-advised fund. A donor-advised fund allows you to take the income tax deduction this year but direct the fund to make donations to your chosen charities over many years. Please let your advisor know if you would like to gift securities from your accounts, as it takes some time to facilitate the transfer. Be sure to obtain a receipt and a written acknowledgment from the charity describing the donation and anything you received in exchange for it. For more information, read our piece on Thoughtful Charitable Giving.

Gift Planning

Make Annual Exclusion Gifts to Family – For those who want to help family members, the 2024 annual exclusion allows you to make tax-free transfers of $18,000 (or $36,000 for married couples) per recipient in cash or property without reducing your lifetime estate and gift tax exclusion amount. These tax-free transfers do not require filing a gift tax return (unless you split gifts with your spouse). If gifting cash, be sure checks are deposited before year-end to count for your 2024 annual exclusion. Consider creative ways to give to your children, grandchildren, and loved ones:

• Gifting shares of stock or other investments can get them interested in learning about investing.
• Fund a tax-advantaged Section 529 college savings plan. You can supercharge your gift by giving up to five years’ worth of annual exclusion gifts immediately (gift tax return required). This strategy allows gifts up to $90,000 ($180,000 if married) into a 529 plan (2024). Qualified higher education expenses include apprenticeship programs, elementary and secondary schools ($10,000 annually), and student loan payments (up to $10,000 for the account holder’s lifetime).
• If your children or grandchildren are working, your gift of cash might fund a Roth IRA to kick-start their retirement savings, compounding growth over a long period and creating tax-free income in retirement. In 2024, your loved ones can use up to $7,000 of your gift to fund a Roth IRA ($8,000 if 50 or older), reduced by any other contributions to an IRA. To be eligible, your loved ones must have earned income of not more than $146,000 (single taxpayer) in 2024.

Planning for Itemized Deductions

2024 Key Federal Itemized and Standard Deductions – The standard deduction is $14,600 for single filers and $29,200 for joint filers. If your itemized deductions exceed the standard deduction, you should itemize. Key itemized deductions:

• Up to $10,000 combined for state and local taxes paid (property tax, plus your choice of state income tax or sales tax);
• Mortgage interest on primary and secondary home loans up to $750,000; loans taken before 12/14/2017 up to $1,000,000;
• Unreimbursed qualified medical expenses over 7.5% of adjusted gross income; and
• Charitable
• While investment advisory fees are no longer tax deductible as part of your itemized deductions, such fees are deductible when calculating the 3.8% net investment income tax on investment income.[1]

Pass-Through Entity Tax (PTET) – Currently, 36 states have enacted a PTET since the Tax Cuts and Jobs Act (TCJA) limited the deductibility of state and local income taxes after 2017. The PTET allows taxpayers of pass-through entities to opt into paying state income tax on net income at the entity level, which reduces income for federal income tax purposes. For most taxpayers, this will reduce federal income taxes, similar to when state income taxes were fully deductible before the TCJA. However, there are a few caveats, so opting in does not always make sense. A call with your tax advisor is required to determine if this is right for you. The election must be made, and state income taxes must be paid before December 31, 2024, to benefit from the deduction this year.

Maximize contributions to HSA plans – You can contribute $4,150 for individuals and $8,300 for families ($1,000 catch-up for those age 55 and over). You have until April 15, 2025, to deduct contributions to an HSA plan for the 2024 tax year. Also, be sure to submit all HSA and FSA receipts for reimbursement. If you have already met your health insurance deductible for the year, consider completing any additional medical procedures before the end of the year.

Important Year-End Planning Consideration – The Corporate Transparency Act

Due to the Corporate Transparency Act (CTA) passed in 2021, beginning January 1, 2024, most small business entities, including LLCs and corporations, must report the beneficial owners (i.e., those who own 25% or more). This includes entities that may have been structured for estate planning purposes. The Beneficial Ownership Information (BOI) report must be submitted to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) before January 1, 2025. There are a few exemptions and many nuances, so work with your tax and legal advisors (depending on complexity) as soon as possible to ensure this information is filed timely, as there are hefty fines for failure to file (up to $500 per day until the violation is corrected). Although there are challenges to the fate of the CTA, filing is still required.

Final Thoughts into 2025

Much of the current tax policy set under the 2017 Tax Cuts and Jobs Act expires at the end of 2025. However, given the recent election results, we anticipate tax legislation in 2025. Many expect that most of the provisions under the TCJA will be modified or extended. This could be favorable for taxpayers, most notably as such changes may relate to extending the current lower individual income tax rates and the higher estate and gift tax exclusion amounts.

 

If you could benefit from a conversation with our advisory team, we would be happy to provide a complimentary consultation.

 

[1] Check with your tax advisor whether your state has conformed to the 2017 CJA. For example, California and New York have not conformed to Federal law for itemized deductions and still allow a deduction on state tax returns for property taxes, miscellaneous itemized deductions, including investment advisory fees, and mortgage interest on new loans up to $1,000,000.

Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal, or tax advice. All investments involve risks, including the loss of principal. Investors should consult with their financial professionals before making any investment decisions. Past performance is not a guarantee of future results.

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