Dear Tax Constituent:
Tax planning is best done using the law that currently exists, with a slight influence from the direction future tax law might be headed. Our president-elect has expressed desires for lower income tax rates in general, and specific tax exemptions on certain types of income. He has also expressed a desire to keep the current Tax Cuts and Jobs Act provisions in place beyond the current 2025 expiration date. With a Republican-controlled Congress starting in 2025, it is likely that President Trump will get some of what he wants. However, Reuters reports that the US budget deficit for fiscal year 2024 will be the third largest on record - in a time of general peace and prosperity. It is possible that the Republican-controlled Congress will take the US debt seriously, and craft new tax legislation that is not as generous with lower tax rates as prior tax law. If Congress makes no tax law changes, the default is that individual tax rates and rules would revert to mostly what they were in 2017 - generally higher tax rates with fewer deductions.
With this in mind, we have some year-end tax actions for you to consider. We have divided our commentary between business and individual considerations below:
BUSINESS
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2024 , if taxable income exceeds $383,900 for a married couple filing jointly, (about half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold. For 2025, the amount rises to $394,600
Taxpayers may be able to salvage some or all of this deduction, by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for the current year. Depending on their business model, taxpayers also may be able increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so consider getting our help before you make a move in this area.
More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2023 if, during a three year testing period, average annual gross receipts don't exceed $29 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments. For 2024, the amount rises to $30 million.
Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2024, the Section 179 expensing limit is $1,220,000, and the investment ceiling limit is $3,050,000. For 2025, the amounts rise to $1,250,000 and $3,130,000, respectively. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.
The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. So expensing eligible items acquired and placed in service in the last days of the current year, rather than at the beginning of next year, can result in a full expensing deduction on this year's return.
Businesses also can claim a 80% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service in 2023, and for qualified improvement property, described above as related to the expensing deduction. The 80% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. Consider taking advantage of bonus depreciation as it is being phased out. It will be 60% in 2024, 40% in 2025, and 20% in 2026. Bonus depreciation will not be available after 2026.
Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren't required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing qualifying items before the end of the year.
A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for the current year (and substantial net income next year) may find it worthwhile to accelerate just enough of next year's income (or to defer just enough of its current- year deductions) to create a small amount of net income in the current year. This allows the corporation to base next year's estimated tax installments on the relatively small amount of income shown on its current- year return, rather than having to pay estimated taxes based on 100% of its much larger taxable income for next year.
Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers. Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within two months after the end of the employer's tax year for the deduction to be allowed in the earlier accrual year. Accrual employers looking to defer deductions to a higher- taxed future year should consider changing their bonus plans before year-end to set the payment date later than the 2.5-month window or change the bonus plan’s terms to make the bonus amount not determinable at year-end.
To reduce current-year taxable income, consider deferring a debt-cancellation event until next year.
Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of current-year income is desired, consider disposing of a passive activity before year-end to take the suspended losses against current income.
INDIVIDUALS
Whether or not tax increases become effective in 2026, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for all but the highest income taxpayers, as will the bunching of deductible expenses into this year or next to avoid restrictions and maximize deductions.
Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer's estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans.
The 0.9% additional Medicare tax also may motivate higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the net investment income tax (NIIT) thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered in the 0% rate. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $96,700 for a married couple for 2025). If the 0% rate applies to long-term capital gains you took earlier this year for example, you are a joint filer who made a profit of $5,000 on the sale of stock held for more than one year and your other taxable income for 2024 is $89,050 or less then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses won't yield a benefit this year. (It will offset $5,000 of capital gain that is already tax -free.)
Postpone income until next year and accelerate deductions into this year if doing so will enable you to claim larger deductions, credits, and other tax breaks for this year that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into this year. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year.
If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA this year if eligible to do so. Keep in mind that the conversion will increase your income this year, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending tax law changes.
It may be advantageous to try to arrange with your employer to defer, until early next year, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals.
Many taxpayers won't want to itemize because of the high standard deduction amounts that apply for 2025 ($30,000 for joint filers, $15,000 for singles and for marrieds filing separately, $22,500 for heads of household), and because many itemized deductions have been reduced or abolished. Like last year, no more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses (but only to the extent they exceed 7.5% of your adjusted gross income), state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt. But payments of those items won't save taxes if they don't cumulatively exceed the standard deduction for your filing status.
Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next year will benefit by making two years ' worth of charitable contributions this year, instead of spreading out donations over 2023 and 2024. For 2022-2025, the deduction for charitable contributions of individuals is limited to 60% of the contribution base (generally, AGI).
If you expect to owe state and local income taxes when you file your return next year and you will be itemizing this year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into this year. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not good to the extent it causes your state and local taxes paid this year to exceed $10,000.
If you were 72 or older this year you must take a required minimum distribution (RMD) from any IRA or 401(k) plan (or other employer-sponsored retirement plan) of which you are a beneficiary. Those who turn 72 this year have until April 1 of next year to take their first RMD but may want to take it by the end of this year to avoid having to double up on RMDs next year.
If you are age 70½ or older by the end of this year, have traditional IRAs, and especially if you are unable to itemize your deductions, consider making up to $105,000 of charitable donations via qualified charitable distributions from your IRAs by the end of the year. If you are charitably minded, this can be a great way to satisfy your RMD for the year. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction. (Previously, those who reached reach age 70½ during a year weren't permitted to make contributions to a traditional IRA for that year or any later year. While that restriction no longer applies, the qualified charitable distribution amount must be reduced by contributions to an IRA that were deducted for any year in which the contributor was age 70½ or older, unless a previous qualified charitable distribution exclusion was reduced by that post-age 70½ contribution.) The IRA qualified charitable distribution also allows distributions to charities (up to $50,000) through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.
If you are younger than age 70½ at the end of the year, you anticipate that you will not itemize your deductions in later years when you are 70½ or older, and you don't now have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs this year. If these circumstances apply to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs this year. Then, in the year you reach age 70½, make your charitable donations by way of qualified charitable distributions from your IRA. Doing this will allow you, in effect, to convert nondeductible charitable contributions that you make in the year you turn 70½ and later years, into currently deductible IRA contributions and reductions of gross income from later year distributions from the IRAs.
Take an eligible rollover distribution from a qualified retirement plan before the end of the year if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes you owe this year. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in this year's income, but the withheld tax will be applied pro rata over the full tax year to reduce previous underpayments of estimated tax.
Consider increasing the amount you set aside for next year in your employer's FSA if you set aside too little for this year and anticipate similar medical costs next year.
If you become eligible by December to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for the current year.
Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $19,000 made in 2025 (increased from $18,000 in 2024) to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
If you were in a federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred, or on the return for the prior year, generating a quicker refund.
If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in the current year to maximize your casualty loss deduction this year
If you would like our assistance with your specific year-end tax planning, or more information on these or other tax topics of interest to you, please contact our office.
—McAvoy + Co, CPA