It is that time of year again when we revisit year-end tax planning with clients. Some of the key tax strategies listed below must be implemented before the end of the year, while others have until each client’s tax filing deadline. Below are some important tax planning opportunities to discuss with Hollow Brook before the end of the year.
- Looking at 2025 Tax Changes
At the end of 2025 tax year, many tax provisions from the Tax Cuts and Jobs Act (TCJA) will expire and we will see many clients subject to higher tax brackets. Some key provisions that will expire unless Congress extends the provisions, include (but is not limited to): a lower standard deduction, higher marginal tax brackets (the top rate jumps to 39.6%), unlimited state and local tax deduction (no longer capped at $10,000), a lower child tax credit, the 20% deduction for qualified pass-through income will expire, AMT thresholds will capture more clients, and the estate tax exemption will be cut in half. Given these potential changes, the 2024 and 2025 tax year may be the ideal years to realize income, perform Roth conversions, or gift assets out of estates before the tax changes come into effect.
- Estate and Gift Tax Exclusions
Each year, you can make gifts of securities or cash to individuals up to the gift tax exclusion and incur no gift tax and it will not deplete your estate tax exclusion amount. In addition to gifting the annual gift tax exclusion amount, individuals can pay for medical or education expenses directly to a provider on behalf of someone else and not pay any gift taxes or use their gift tax exclusion amount.
Taxes are imposed on transfers by gift or death above the applicable estate tax exclusion amount. There is a higher estate tax exclusion amount set to expire on December 31st, 2025 at which time it would revert back to $5 million from 2018 adjusted for inflation (expected to be between $7 million and $8 million). With proper planning, you might take advantage of these higher exemption amounts before it changes.
Some of the current most popular estate planning techniques we are seeing with clients are those that take advantage of the increased lifetime estate tax exemption such as a Spousal Lifetime Access Trust (SLAT), Dynasty Trust or Irrevocable Life Insurance Trust (ILIT). Other strategies that have become more attractive in a higher interest rate environment are a Qualified Personal Residence Trust (QPRT) or Charitable Remainder Trust (CRT).
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Estate and Gift Taxes
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Applicable estate tax exclusion amount (per individual)
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$13.61 million
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Applicable generation-skipping tax exclusion amount (per individual)
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$13.61 million
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Estate tax rate
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40%
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Gift tax exclusion (per beneficiary)
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$18,000
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- Retirement Account Contributions
Before the end of the year, check that you have maxed out all available qualified retirement accounts. Making contributions into workplace retirement accounts must be made before December 31st, while IRA contributions can be made up to the tax filing deadline regardless of tax extensions. This year’s contribution limits are listed below.
We view Health Savings Accounts as even more favorable retirement accounts compared to traditional 401(k) or IRA accounts given the distributions can also be tax-free, while traditional accounts have taxable distributions in retirement. If you have access to an HSA, be sure to max it out and allow the account to compound.
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401(k), 403(b), 457, Roth 401(k), or Roth 403(b)
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Employee maximum deferral contributions
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$23,000
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Catch-up contribution (if age 50 or older)
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$7,500
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Traditional and Roth IRAs
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Maximum contribution
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$7,000
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Catch-up contribution (if age 50 or older)
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$1,000
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Health Savings Account
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Maximum contribution - Single
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$4,150
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Maximum contribution - Family
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$8,300
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Catch-up contribution (if age 55 or older)
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$1,000
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- Required Minimum Distributions (RMDs)
If you are required to take a RMD from qualified retirement accounts, it must be withdrawn from an account before December 31st each year. If you withdraw less than your RMD, you may owe a penalty on the balance not withdrawn. Some of the ways to avoid taking RMDs is to either continuing to work (under the “still working” exception) or through charitable giving as mentioned in the next item on our list. If you want to know if these strategies apply to you, feel free to contact us for more information.
- Qualified Charitable Distributions (QCDs)
Once you are age 70 ½, you can send cash donations directly to qualified charities from your qualified retirement accounts and completely avoid generating ordinary income on the donation, while still satisfying your RMDs. The maximum allowable amount per year that can be distributed as a QCD is $100,000 per individual ($200,000 as a married couple) and it must transfer directly to a charitable institution. Starting after 2024, the $100,000 will be indexed for inflation.
- Roth IRA Conversions
If you find yourself in a lower income tax year and believe you may be in a higher tax bracket in the future, it may be a good time to consider converting some of your Traditional IRA assets into Roth IRA assets. Roth IRAs do not require RMDs. Assets converted into a Roth account grow tax-free, and distributions can be taken tax-free and penalty-free five years after the conversion. When we work with clients, we generally look to make Roth conversions up to certain amounts to fill up tax brackets. For example, based on their income so far this year, we can calculate how much space a client has available to fill up the 32% tax bracket, and only convert that amount.
- Unused Flexible Spending Account (FSA) Money
Now is a good time to review FSA balances and spend down the accounts before the end of the year. FSAs are tax-advantaged accounts provided by employers which allow employees to make pre-tax contributions up to $3,200 per year and not be subject to federal income tax, Social Security tax or Medicare tax. The major downside of a FSA is that unused money at the end of the year is removed from the account.
- Donate Appreciated Securities
Consider gifting highly appreciated securities as an alternative to making cash donations to avoid capital gains taxes on those appreciated securities. For securities held for longer than one year, you can deduct the donation at the average of high and low selling price on the date of delivery and deduct up to 30% of your adjusted gross income. Donations can be made directly to a charity of your choice or a Donor Advised Fund (DAF), which could allow you to use the donation to gift to charity over many years.
- Coordinate Tax Loss/Gain Planning Across Accounts
If you have separately managed accounts outside of your primary advisor’s management, consider coordinating gain/(loss) planning by providing the year-to-date profit and loss details on outside investment accounts to your advisor, particularly if there are significant gains or losses to harvest. Each year you can deduct $3,000 of capital losses against ordinary income and carry forward any excess capital losses into future tax years.
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Disclaimer: Information provided is for educational purposes only. HBWM does not provide tax, legal, compliance, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Further, HBWM makes no warranties with regard to such information, or a result obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.