2024 Year-End Tax Planning Reminders

As we approach the end of the year, there is still time to take advantage of tax-saving opportunities. This article outlines a few things to investigate before December 31. We recommend you consult your professional advisors before implementing any strategy to ensure alignment with your personal circumstances and overall financial plan.

Employer Retirement Plan Contributions

Check to see if you are on pace to maximize your retirement contributions for the year. If not, consider adjusting your contributions (if your plan allows) — whether it’s a 401(k), 403(b), or TSP. The maximum deferral in 2024 is $23,000 for those under age 50 and $30,500 for those age 50+. Deferrals must be deposited by December 31, 2024.

IRA Contributions

Individual Retirement Accounts (IRAs) have more flexible contribution deadlines than employer-sponsored plans. IRA account holders can deduct contributions until April 15, 2025, tax filing deadline. The 2024 contribution limit for those under age 50 is $7,000, and for those age 50+, it is $8,000.

Roth Conversions

Once you have a sense of your taxable income for the year, explore whether a Roth conversion makes sense. When you convert your traditional pre-tax IRA funds to after-tax Roth IRA accounts, you will pay taxes on the amount you convert, but all future gains and qualified withdrawals will be tax-free. The deadline to complete a Roth conversion for 2024 is December 31; however, many custodians have internal processing deadlines that take effect in early December. It is highly recommended not to wait until the last minute to request a Roth conversion to ensure it is completed before year-end.

Health Savings Accounts (HSAs)

If applicable, maximize deductible contributions to a health savings account or HSA. These accounts are available to participants enrolled in a high-deductible health insurance plan. The maximum contribution in 2024 is $4,150 for a single person and $8,300 for a family. Note that this limit includes any employer contributions made to the plan on your behalf.

Bunching Deductions

The Tax Cuts and Jobs Act (TCJA) increased the standard deduction ($29,200 for married couples filing jointly and $14,600 for single filers), making it harder to itemize taxes. TCJA also cut back deductions for state and local taxes, mortgage interest, and charitable donations. If you want to itemize your taxes (which requires exceeding the standard deduction), you can “bunch” deductible expenses, such as your mortgage and property tax bills, by accelerating payments. For example, you can pre-pay your mortgage and tax bills in December instead of January, increasing the amount available to deduct for 2024 on your tax return.

Charitable Contributions

Since TCJA increased the standard deduction, itemizing taxes and deducting charitable gifts is harder. If you are charitably inclined and want to recognize the tax benefits from your donations, you should consider strategies such as bunching deductions (see above) or using a donor-advised fund to realize the deduction on your tax return. Talk with your advisor and CPA about your charitable intent to determine the most beneficial way to donate your assets. It is also important to leave time for your custodian and charitable organization to process your donation, so starting now is recommended to avoid the year-end rush.

Required Minimum Distributions (RMDs)

RMDs are required by the IRS once accountholders reach age 72 or 73 (depending on your birthdate). The deadline to take your 2024 RMD is December 31. There is a steep penalty equal to 50% of the undistributed amount if you don’t meet the deadline. Ensure you have taken your entire RMD before the end of the year to avoid issues. Try not to wait until the end of December to process your request since many custodians have processing cut-offs earlier in the month.

Qualified Charitable Distribution (QCD)

A QCD allows individuals aged 70 ½ or older to donate up to $105,000 (2024 limit) to one or more charities directly from a taxable IRA instead of taking their RMD. Since RMDs are considered ordinary income subject to tax, donating the funds to a qualified charity may prevent donors from being pushed into higher income tax brackets and phasing out other tax deductions. The funds must leave your IRA by December 31, so make sure you leave time for processing to avoid missing the deadline. There are specific rules for QCDs and reporting requirements to the IRS, so it is recommended that you consult with your tax professional to ensure compliance.

Gifting

The IRS considers any gift to someone other than your spouse or dependent to be taxable; however, there are exceptions to this rule. Specifically, gifts not exceeding the annual exclusion limit for the calendar year are not taxable. Per IRS rules, every taxpayer can gift up to $18,000 per person per year (2024 limit) to any number of beneficiaries (family or nonfamily) without paying gift tax or using up any available exclusion during one’s lifetime. The IRS also allows taxpayers to give away up to $13.61 million (2024 limit) in assets or property during their lifetime or as part of their estate. The lifetime exemption limit applies to gifts a person gives while alive and property left to heirs after death. Gifts over the annual limits will offset a person’s lifetime exemption until depleted. States may also impose a gift and/or estate tax with different limits. It may be beneficial to consider making gifts to family members and loved ones to help reduce the size of your estate.

Estate Planning

The IRS imposes tax on transfers, by gift, or at death above the applicable exclusion amount, which is indexed for inflation ($13.61 million in 2024). With proper planning, it is possible for a married couple to use two exclusion amounts and minimize taxes. For example, an executor can make a “portability” election to transfer any unused exclusion from a deceased spouse to a surviving spouse. The estate tax rate is 40% for any amount exceeding $13.61 million (or $27.22 for married couples filing jointly). States may also have an estate tax with different limits. Consult your financial, tax, and legal advisors to determine the appropriate strategy for your circumstances.

Education Planning

If applicable, maximize deductible contributions to 529 plans. Each state sponsors its own 529 plan and has different tax incentives and rules, so it is important to review plan-specific details to determine deductibility. The IRS views 529 contributions as gifts. In 2024, individuals can gift up to $18,000 per beneficiary without counting against their federal lifetime exclusion.  

You can fund a 529 plan with up to 5 years’ worth of contributions all at once. That means an individual can contribute up to $90,000 in a single year to a particular 529 plan in 2024. But you couldn’t give more money to that same recipient within that 5-year period without counting against your lifetime gift tax exemption. If elected, you must file a gift tax return (IRS Form 709) to indicate that your contribution is being spread over five years. Consult your tax advisor for additional information.

529-to-Roth Rollovers

Beginning in 2024, you can roll assets from a 529 account into a beneficiary’s Roth IRA (same registration) up to a lifetime limit ($38,000 in 2024). To be eligible, you must have owned that 529 account for at least 15 years before the rollover is performed, and any contributions in the 5 years (including any earnings) are ineligible for rollover. In addition, the rollover limit is subject to the annual Roth IRA limits ($7,000 in 2024). This is new legislation, so it is highly recommended that you consult with your tax advisor before completing any rollovers.

Consult a Qualified Professional

These are meant to be general suggestions and are not intended to be specific recommendations. It is important to consult with your qualified professional advisors before implementing tax planning strategies.