Time-appropriate tax strategies to implement before year-end
1. Evaluate your profit and losses in investments
Time-appropriate tax strategies to implement before year-end
Examine any assets you hold in a non-tax-exempt investment portfolio to identify potential profits and losses. Consider whether it might be beneficial to capture some of your profits by selling at least a portion of one or more investments, and subsequently using the money to offset any capital gains tax you'd otherwise be responsible for, by also selling investments that are currently worth less than their original purchase price.
As Dan Snyder, a certified public accountant and director of AICPA Personal Financial Planning, pointed out: "If you have assets that have increased in value, consider tax-gain harvesting, which involves selling assets that have appreciated in value when you have losses to offset the gain."
The stipulation is that your realized losses can offset up to 100% of your taxable gains in the same fiscal year, plus up to $3,000 in ordinary income.
So, for instance, if you have $10,000 in profits and $12,000 in losses, you won't need to pay capital gains tax on the $10,000, and you can deduct $2,000 from your regular income. Moreover, you can carry over your remaining $1,000 and utilize it in a subsequent tax year.
Take note if you wish to repurchase a stock or fund that you just sold at a loss, as you must adhere to the wash-sale rule, which prevents you from purchasing that security or an "essentially identical" one within 30 days before or after the loss sale. If you do so, you will not be able to use your capital loss for your 2024 tax returns.
2. Extend your retirement savings
In a practical sense, it's likely too late to enhance your 2024 contributions to a 401(k), 403(b), or 457 plan at work due to the plan administrator's limited ability to promptly adjust the deduction from your last paycheck this month.
However, if you don't have access to those plans or otherwise meet the criteria to contribute to an IRA, you still have time to make a contribution there. The 2024 federal contribution limit for IRAs is $7,000 (plus an additional $1,000 if you're at least 50). Your 2024 contribution can be made up until the tax deadline next year, although the exact date has not yet been announced, typically falling on April 15.
A traditional IRA can be funded with pre-tax dollars (reducing the income tax you owe for 2024). Yet, a Roth IRA is funded with post-tax dollars – you won't receive a tax break for 2024, but your contribution will grow tax-free and may be withdrawn tax-free in retirement or for certain reasons before then.
3. Offer your children or grandchildren a financial gift
If you're financially secure, consider gifting some money to your children or their offspring this year.
You're allowed to gift anyone up to $18,000 this year without having to report it for gift tax purposes. Therefore, if you're married, you and your spouse can each gift the same child $18,000, totaling $36,000. Additionally, you can gift up to $18,000 to as many other individuals as you wish.
A benefit: You can witness your descendants use the money for something significant. "Kids need your help now, not when they are 80. Observe how your children manage money. Let them practice under your supervision," suggested certified financial planner Mari Adam.
Or, if you'd rather not engage in that endeavor, but still want them to benefit, you could put the money into a 529 plan or, with their consent, into a Roth or other IRA account if they lack sufficient funds to save themselves.
Another alternative: Give them an appreciated security you own. "The kids get your basis, but (if their income is low enough) they may not owe any capital gains tax if they sell it or they may owe very little in taxes. It's much better than you selling, paying tax at a high bracket, then giving the money away," Adam suggested.
Consider shares you purchased for $10,000 and are now worth $18,000. If you gift them to a grandchild, their capital gains basis will be the value of the shares on the day they receive them. In contrast, if you first sell the shares directly, you'd owe capital gains tax on the $8,000 gain, leaving you with significantly less cash to give them based on your tax bracket and whether the gain was short- or long-term.
Another advantage of executing gifts during your lifetime: You can decrease your estate for estate tax purposes. For most people, the federal estate tax exemption is only $13.8 million, but if you live in a state with an estate tax, the exemption level may be significantly lower, such as $2 million or less in Massachusetts, Oregon, and Rhode Island, according to the Tax Foundation.
Generally speaking, an FSA is a use-it-or-lose-it situation: If you don't utilize all the money in your 2024 account for qualifying expenses incurred in 2024, you lose it. However, certain employers may offer two options or neither: They might allow you to carry over up to $640 for 2025 health-related expenses, or extend a grace period of up to 2.5 months into the new year, where you can still claim eligible expenses for your 2024 balance.
Ensure you review your employer's guidelines and any company lists outlining eligible expenses. Also, check when the deadline is to submit your claims. It could be from December 31 of this year to March 31, 2025.
5. Comply with your minimum distribution requirements
Individuals aged 73 or older are obliged to extract an annual minimum distribution from their traditional IRAs (including Simple and SEP IRAs).
For those already retired and aged 73 or older, you are also required to withdraw minimum amounts from tax-deferred 401(k), 403(b), or 457(b) accounts if you still possess any. If you are not yet retired, you can defer your RMDs, unless the workplace plan regulations necessitate you to start withdrawals.
(Note: No RMDs are necessary for Roth IRAs or designated Roth accounts in a 401(k) or 403(b) account.)
Beneficiaries of a deceased person's retirement accounts are also subject to annual RMDs. This includes traditional, as well as Roth IRAs.
The deadline for RMDs is usually December 31, though it may be April 1 of the following year for the initial requirement.
If you miss the deadline for your 2024 RMD, you'll not only pay income tax on the withdrawn funds (with the exception of beneficiary Roth accounts) but may also incur penalties.
The IRS stated that: "If the account owner fails to withdraw the full amount of the RMD by the due date, the owner is subject to a 25% excise tax on the amount not withdrawn. However, the 25% excise tax rate can be reduced to 10% if the error is corrected within two years."
If you neglect to withdraw an RMD as required, the excise tax may be even higher.
(The rules governing RMDs are notoriously complex, so consulting a knowledgeable tax advisor might be beneficial. In the meantime, additional guidance and answers to frequently asked questions about RMDs are available from the IRS.)
In the context of tax-gain harvesting, Dan Snyder suggests considering business strategies that involve selling appreciated investments to offset capital gains tax, especially if you have losses to offset.
For individuals looking to extend their retirement savings, contributing to a traditional IRA can be an option, as it allows funds to be deposited with pre-tax dollars, reducing income tax for the current year.