2024 Year-End Tax Planning Basics
Don’t pay any more in taxes than you have to!
You don’t want to pay any more in tax than you have to. That means taking advantage of every strategy, deduction, and credit that you’re entitled to. However, the window of opportunity for many tax-saving moves closes on December 31, so it’s important to evaluate your tax situation now, while there’s still time to affect your bottom line for the 2024 tax year.
Timing is everything
Consider any opportunities you have to defer income to 2024. For example, you may be able to defer a year-end bonus, or delay the collection of business debts, rents, and payments for services. Doing so may allow you to put off paying tax on the income until next year. If there’s a chance that you’ll be in a lower income tax bracket next year, deferring income could mean paying less tax on the income as well.
Similarly, consider ways to accelerate deductions into 2024. If you itemize deductions, you might accelerate some deductible expenses like qualifying medical expenses, qualifying interest, or state and local taxes by making payments before year-end. Or, you might consider making next year’s charitable contribution this year instead.
What if you’ll be in a higher tax bracket in 2024?
If you know that you’ll be paying taxes at a higher rate in 2024 (say, for example, that an out-of-work spouse will be reentering the workforce in January), you might take the opposite tack. Consider whether it makes sense to try to accelerate income into 2024, and to postpone deductible expenses until 2024.
Factor in the AMT
Make sure that you factor in the alternative minimum tax (AMT). If you’re subject to AMT, traditional year-end maneuvers, like deferring income and accelerating deductions, can have a negative effect. That’s because the AMT–essentially a separate federal income tax system with its own rates and rules–effectively disallows a number of itemized deductions. For example, if you’re subject to the AMT in 2024, prepaying 2024 state and local taxes won’t help your 2024 tax situation, but could hurt your 2024 bottom line.
AMT triggers: You’re more likely to be subject to the AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. Other common triggers include home equity loan interest when proceeds aren’t used to buy, build, or improve your home, and the exercise of incentive stock options.
Landscape has changed for higher-income individuals
Most individuals will pay federal income taxes for 20249 based on the same federal income tax rate brackets (10%, 12%, 22%, 24%, 32%, 35% and 37%) that applied for 2023. The same goes for the maximum tax rate that generally applies to long-term capital gains and qualifying dividends (for those in the 10% or 12% marginal income tax brackets, a special 0% rate generally applies; for those in the 23%, 24%, 32%, and 35% brackets, a 15% maximum rate will generally apply, and for those in the 37% bracket a 20% maximum rate will generally apply).
You could see a difference even if your income doesn’t reach that level. That’s because, if your adjusted gross income (AGI) is more than a certain threshold, your itemized deductions may be limited.
Two Medicare taxes need to be accounted for this year as well. If your wages exceed $200,000 this year ($250,000 if married filing jointly or $125,000 if married filing separately), the hospital insurance (HI) portion of the payroll tax–commonly referred to as the Medicare portion–is 1.45% for 2024. Also, a 3.8% Medicare contribution tax now generally applies to some or all of your net investment income if your modified adjusted gross income exceeds those dollar thresholds.
IRAs and retirement plans a key part of planning
Make sure that you’re taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2024 taxable income. Contributions you make to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) aren’t deductible, so there’s no tax benefit for 2024, but qualified Roth distributions are completely free from federal income tax–making these retirement savings vehicles very appealing.
For 2024, you can contribute up to $23,000 to a 401(k) plan ($30,500 if you’re age 50 or older), and up to $7,000 to a traditional IRA or Roth IRA ($8,000 if age 50 or older). The window to make 20249 contributions to an employer plan typically closes at the end of the year, while you generally have until the due date of your 2024 federal income tax return to make 2024 IRA contributions.
Required minimum distributions: Once you reach age 70½, you’re generally required to start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules apply if you’re still working and participating in your employer’s retirement plan). You have to make the required withdrawals by the date required–the end of the year for most individuals–or a 50% penalty tax applies.
Thanks to legislation in 2019 that was not the last year for qualified charitable distributions (QCDs) from an IRA. The ability to make QCDs up to $100,000 per year to a qualified charity, while satisfying required minimum distributions, remains in effect for individuals age 70 1/2 and older. The SECURE Act did not change the ability to make QCDs. In fact, the SECURE 2.0 Act further builds on the SECURE Act, with changes to charitable contributions.
Here’s a more detailed explanation:
According to the Community Foundation Tampa Bay, “The Qualified Charitable Distribution enables IRA owners who are 70 ½ and older to transfer up to $100,000 per year of IRA assets to public charities without being subject to federal income tax on the distribution”. The rule, as stated by the Community Foundation Tampa Bay, is applicable to individuals who reach age 70 ½ after December 31, 2019.
Essentially, QCDs remain a valuable tax-saving strategy for those who are charitably inclined and meet the age requirements. The $100,000 limit can be a significant benefit, allowing individuals to both donate to charity and potentially reduce their taxable income.
Big changes to note
Home office deduction rules starting with the 2024 tax year:
Who Qualifies?
· Self-Employed Individuals: If you’re a freelancer, independent contractor, or business owner, you may be eligible to deduct expenses related to your home office.
· Employees Generally Don’t Qualify: Due to changes from the Tax Cuts and Jobs Act of 2017 (TCJA), most employees who work from home (even for their employer’s convenience) cannot claim this deduction. This restriction is in effect through 2025.
· Exceptions for Employees: There are a few specific exceptions for certain employees, such as:
o Performing artists who meet specific income and expense requirements.
o Certain military reservists.
o Specific state and local government officials.
o Employees with disabilities who incur necessary expenses for working from home.
Requirements for Qualification:
To qualify for the home office deduction, your home office must generally meet the following tests:
- Exclusive and Regular Use: You must use a portion of your home exclusively and regularly for your trade or business. This means using that space only for your business activities, not for personal use, and on a consistent, ongoing basis.
- Principal Place of Business: Your home office must be your principal place of business. This means it’s where you conduct your administrative and management activities and have no other fixed location for these tasks.
- Meeting Patients, Clients, or Customers: You can also qualify if you regularly meet with patients, clients, or customers in your home in the normal course of your business.
- Separate Structure: If you have a separate structure on your property used exclusively and regularly for your business, it can qualify for the deduction.
- Storage of Inventory or Product Samples: You might qualify even without exclusive use if you use part of your home for storing business inventory or samples, provided your home is the only fixed business location and you use the space regularly for storage.
- Daycare Facility: Special rules apply to licensed daycare providers using their home for business.
Calculating the Deduction:
You have two options for calculating the deduction:
- Simplified Option: This allows you to deduct a flat rate of $5 per square foot of the business portion of your home, up to a maximum of 300 square feet. The maximum deduction under this method is $1,500.
- Regular Method: This method requires calculating and deducting a percentage of your actual home expenses, based on the portion of your home used for business. These expenses can include:
- Mortgage interest
- Real estate taxes
- Rent
- Insurance
- Utilities (like electricity, heat, and water)
- Repairs and maintenance
- Depreciation
Important Considerations:
- Exclusive Use: You must use the home office space exclusively for your business activities to claim the deduction (with exceptions for daycare and inventory storage).
- Documentation: Regardless of the method you choose, it’s crucial to maintain thorough records to support your deduction.
- Limitations: The deductible amount of home office expenses may be limited.
- Depreciation Recapture: Using the regular method and claiming depreciation can have implications when you sell your home, potentially triggering depreciation recapture taxes.
In summary, for 2024, the home office tax deduction is primarily available to self-employed individuals and requires meeting specific IRS criteria regarding the use of your home office space. Employees working from home generally cannot claim this deduction.
Same-sex married couples: Same-sex couples legally married in jurisdictions that recognize same-sex marriage are treated as married for federal tax purposes, including for filing requirements and tax deduction rules in 2024. This is a result of the Supreme Court decision in United States v. Windsor in 2013.
Federal Tax Filing Requirements and Options for 2024:
- Recognition of Marriage: The IRS recognizes any same-sex marriage legally entered into in any of the 50 states, the District of Columbia, a U.S. territory, or a foreign country, regardless of where the couple currently resides.
- Filing Status: Legally married same-sex couples must file their federal income tax return using either:
o Married Filing Jointly: This option is often encouraged by the IRS and may offer tax benefits like a larger standard deduction, depending on the couple’s income and circumstances.
o Married Filing Separately: This option may be beneficial for some couples, especially those with similar incomes who might face a “marriage penalty” when filing jointly.
- Consequences of Filing Separately: Filing separately will result in:
o Half the standard deduction amount available to those filing jointly.
o Smaller IRA contribution limits.
o Ineligibility for certain tax credits like the Earned Income Credit or Lifetime Learning Credit.
o A smaller maximum capital loss deduction.
Federal Tax Deduction and Credit Rules for 2024:
- Married Filing Jointly Advantages:
o Standard Deduction: Married couples filing jointly receive a doubled standard deduction compared to single filers.
o Exclusion of Gain from Sale of Principal Residence: Joint filers can exclude double the amount of gain from the sale of their principal residence compared to individual filers.
o Medical and Dental Expenses: Joint filers can potentially deduct a larger amount of qualifying medical and dental expenses.
o Adoption Tax Credit: The adoption tax credit may be available to offset adoption expenses.
- Marital Deduction: Same-sex couples can take advantage of the gift- and estate-tax marital deduction, allowing them to give unlimited assets to each other tax-free.
- Gift Splitting: Married couples can split gifts of separate property, essentially doubling the annual gift exclusion amount per person.
- Retirement Plan Benefits: Same-sex married couples have the same benefits related to retirement plan distributions, including the ability for a surviving spouse to roll over qualified retirement plan balances tax-deferred.
- Employee Benefits: Legally married same-sex couples qualify for the same employee benefits as heterosexual couples, such as tax-free health insurance coverage and reimbursements from health care flexible spending accounts.
State Tax Filing Requirements and Rules:
- State Recognition: While same-sex marriage is recognized nationwide for federal tax purposes, individual state tax filing requirements may vary.
- Married Filing for State Taxes: In states that recognize same-sex marriage, couples can file their state income tax returns as married.
- Single Filing for State Taxes: In states that do not recognize same-sex marriage, couples may be required to file their state income tax returns as single.
- Registered Domestic Partners/Civil Unions: If a couple is in a registered domestic partnership or civil union but not legally married, they generally cannot file as married for federal tax purposes, though they may be able to file jointly at the state level if their state recognizes such relationships.
Important Notes:
- This information is for general guidance and may not apply to all specific situations. Tax laws are complex and subject to change.
- It’s always recommended to consult with a qualified tax professional or advisor for personalized advice regarding your specific circumstances.
- You may be able to file amended returns for prior years if the statute of limitations is open to take advantage of tax benefits from being recognized as married for federal purposes.
- In summary, legally married same-sex couples have the same federal tax filing options and enjoy the same tax deductions and benefits as opposite-sex married couples. State tax rules may differ, so it’s important to be aware of the specific requirements in your state of residence
More health-care reform changes take effect in 2024: Several healthcare reform changes impacting the 2024 tax code were in effect, including:
- Enhanced Premium Tax Credits (PTCs) under the Affordable Care Act (ACA): The American Rescue Plan Act (ARPA) in 2021 expanded these credits, making health insurance purchased through the ACA Marketplace more affordable. The Inflation Reduction Act (IRA) extended these enhanced subsidies through the end of 2025, effectively removing the income cap for eligibility for those who met other requirements.
- Health Flexible Spending Arrangement (FSA) and Medical Savings Account (MSA) Adjustments: For 2024, the maximum contribution to health FSAs increased to $3,200, with a potential carryover of $640 for cafeteria plans. For MSAs, there were specific deductible and out-of-pocket limits for both self-only and family coverage.
- Expanded Preventive Care Benefits in High Deductible Health Plans (HDHPs): Certain preventive care items, such as over-the-counter contraceptives and continuous glucose monitors for diagnosed individuals, could be provided without meeting the HDHP deductible.
- Medical Expense Deduction for Condoms: Amounts paid for condoms were treated as medical expenses, potentially eligible for deduction if total medical expenses exceeded 7.5 percent of adjusted gross income and were not reimbursed.
Important Notes:
- Expiration of Enhanced PTCs: The enhanced PTCs are temporary and set to expire at the end of 2025 unless extended by Congress.
- Reconciliation of Advance Premium Tax Credit (APTC): If you received APTC in 2024, you must file Form 8962 to reconcile the amount received with the actual PTC you qualify for based on your final 2024 income.
- Reporting Changes in Circumstances: Promptly reporting changes in income, household size, or eligibility for other coverage to the Marketplace can help adjust your APTC and avoid potential tax issues.
- Individual Coverage HRAs and QSEHRAs: These employer-sponsored health reimbursement arrangements can affect your eligibility for the PTC.
- Please Note: This information is for general awareness and should not be considered as tax advice. It is recommended to consult with a qualified tax professional or the IRS for specific guidance regarding your individual situation.
Expiring and/or changing provisions
A number of key provisions are scheduled to expire or change at the for 2024, including:
- Various tax incentives: Several tax credits and deductions related to renewable energy and sustainable fuels were set to expire, as well as the income tax credit for sustainable aviation fuel.
- Bonus depreciation: The 100% bonus depreciation benefit, which allows businesses to immediately deduct the full cost of certain assets, began to be phased out in 2024 and will be fully eliminated by 2027.
- Telehealth safe harbor: A safe harbor for the absence of a deductible for telehealth was scheduled to expire.
- Expiration of funding for certain healthcare programs: Funding for several public health programs, including Community Health Centers, the Special Diabetes Program, and the National Health Service Corps, were set to expire.
- Expiration of Medicaid/Medicare policies: Several policies related to Medicaid and Medicare were set to expire, such as the Acute Hospital Care at Home waivers and work geographic adjustments under the Medicare physician fee schedule.
- Reauthorization of the Farm Bill: The Farm Bill, which authorizes programs related to agriculture, nutrition, and conservation, was set to expire, requiring a bipartisan effort to pass a new bill.
- Reauthorization of the National Flood Insurance Program (NFIP): The NFIP, which provides affordable insurance to property owners and encourages floodplain management regulations, was due for reauthorization.
- Reinstatement of Schedule F: An Executive Order was issued to reinstate Schedule F, which aimed to make policy-influencing positions within the federal workforce more accountable.
- Updates to the Fair Labor Standards Act (FLSA) classification: The Department of Labor revised its interpretation of the FLSA classification provision, clarifying when a worker is an independent contractor versus an employee.
- Changes to the H-1B and H-2 visa programs: Reforms were made to these programs for nonimmigrant foreign workers, including updates to requirements and protections.
- Expiration of specific authorizations of appropriations: The Congressional Budget Office tracked authorizations of appropriations that had explicit expiration dates in 2024.
It is important to note that Congress may consider legislation to extend or modify some of these provisions.
When it comes to year-end tax planning, there’s always a lot to think about. A financial professional can help you evaluate your situation, keep you apprised of any legislative changes, and determine if any year-end moves make sense for you.