Take Control: Year-End Planning Tips for Success

The end of the year is upon us. With a little bit of planning, strategies are available to reduce your income taxes, maximize your charitable giving, and position yourself favorably as the new year begins. 

An 8-Step Year-End Checklist:

 1.Harvesting Losses

Even in the best of times, not every investment may perform as expected. Tax-loss harvesting refers to selling a security in a taxable brokerage account that is worth less than its purchase price .

The loss can be used to offset a gain in a taxable account or reduce your income by up to $3,000. If greater than $3,000, losses can be carried forward in future years to offset ordinary income or capital gains.

It’s important, however, to be aware of a couple of things.

First, a stock or security held for one year or less is taxed as ordinary income, i.e. your marginal tax rate. The tax on a long-term capital gain (held longer than one year) receives favorable tax treatment and is taxed at the long-term capital gains rate, from 0% to 23.8% (including the 3.8% net investment income tax).

Segregate long-term and short-term gains/losses separately and apply the appropriate tax rate. If you have taken or will take gains this year, you may consider netting gains out with securities being held at a loss.

Second, be aware of the wash sale rule. If you sell a security at a loss and buy the same or a “substantially identical” security within 30 calendar days before or after the sale, you won’t be able to take a loss for that security on your current-year tax return.

2.Harvesting Gains

 In 2024, single filers with a taxable income of $47,025 or less, joint filers with a taxable income of $94,050 or less, and heads of households with a taxable income of $63,000 or less pay no federal tax on qualified long-term capital gains, i.e., a rate of 0%.

In this case, taxable income is defined as the income subject to federal income tax. It is income after all deductions, whether itemized or taken via the standard deduction.

Here lies a lesser-known but profitable strategy. If you choose to realize a long-term capital gain for an asset that has appreciated, you sell the asset that you have held for more than a year, record the gain, and immediately repurchase it without incurring federal income taxes.

By entering such a transaction, you raise the cost basis of that investment without paying federal income taxes.

Just be careful. A higher adjusted gross income could be subject to state taxes and may raise your premium if you obtain health insurance through the marketplace.

Combining this strategy with a Roth conversion could also push you into a higher tax bracket, defeating any strategy to harvest capital gains without paying taxes.

3.If required, take your RMD

What is an RMD? An RMD is the minimum required distribution you must withdraw from select retirement accounts (such as traditional IRAs) each year. There is no such requirement for a Roth IRA. Miss an RMD and you’ll be penalized by the IRS.

When are withdrawals required? If you were born between 1951 and 1959, you must take your RMD starting at age 73. If you were born after 1959, your first RMD begins at age 75.

Why the discrepancy? Congress enacted changes to our retirement laws in 2019 (The Secure Act) and again in 2022 (Secure 2.0). If you have already begun your RMD, you must continue, even if you are under the prescribed ages.

You may delay your first RMD until April, but you must take two RMDs the following year. The first must be taken by April 1, and the second must be taken by December 31.

Please be aware that the delay may push you into a higher tax bracket or trigger the additional Income-Related Monthly Adjustment Amount (IRMAA), which is a surcharge you pay on top of your Medicare Part B and Part D premiums if you exceed the annual income threshold.

The surcharge on Medicare Part B and Medicare Part D applies only to Medicare beneficiaries with a modified adjusted gross income above $103,000 ($106,000 in 2025) for an individual return or $206,000 ($212,000 in 2025) for a joint return.

If you are enrolled in your current employer’s qualified retirement plan and don’t own more than 5% of the business, you may be able to postpone an RMD from that account until April 1 of the year following your retirement. Be sure to check with your plan administrator to confirm.

4.Lower your RMD with a QDC

A QCD is a Qualified Charitable Distribution that allows you to support your favorite qualified charity while helping you to reduce taxes from an RMD.

If you are 70½ or older, you can make a tax-free donation directly to a qualified charity from your traditional IRA, which allows you to fulfill your RMD by a direct transfer of up to $105,000 to charity.

In the past, a QCD was limited to $100,000 per year. Under Secure 2.0, the amount is now indexed to inflation, with a limit of $105,000 in 2024.

5. Does a ROTH Conversion make sense?

You are allowed to convert a traditional IRA into a Roth IRA. A Roth conversion will raise your taxes this year. However, once in a Roth IRA, qualified withdrawals will not be subject to federal income taxes.

Should I convert?

Broadly speaking, what will the tax rate be on the conversion, and what will your tax rate be when you withdraw?

For example, if the tax rate on the conversion is 25%, while the expected tax rate on withdrawals is higher, it may be best to bite the tax bullet today and convert. If the withdrawal rate is lower, a Roth conversion could disadvantage you.

Additionally, moving to a different state may result in a higher or lower state tax rate.

It is best to pay taxes on the conversion from money outside your IRA to maximize the conversion and future growth potential.

The process may create complexities, but we’re available to help you evaluate your options.

6.An HSA triple play

Maximize your Health Savings Account (HSA) contribution. These accounts offer you a triple advantage: no federal taxes on your contributions, no federal taxes on earnings, and no taxes on withdrawals if the money is used for qualified medical expenses.

After age 65, withdrawals can be used for any expense but may be subject to income tax.

In 2024, you may contribute up to $4,150 if you are covered by a high-deductible health plan for yourself or $8,300 if you have coverage for your family. At age 55, individuals can contribute an additional $1,000.

7.Consider funding a 529 education savings account

For tax purposes, a 529 plan works much like a Roth IRA. Contributions are made with after-tax dollars, but growth and withdrawals are tax-free so long as withdrawals are used to pay for qualified education expenses.

8.Donate Assets that have appreciated

Selling an asset and donating the proceeds to a qualified charity can trigger capital gains taxes.

Instead, if you itemize deductions and donate an asset held longer than one year to a qualified charity, you may be able to deduct the fair market value of the asset without paying capital gains on the sale, subject to a 30% adjusted gross income limitation.

We hope that these planning ideas have been helpful. 
If you have questions, please don’t hesitate to contact us. If you have specific tax questions, you may also want to check in with your tax advisor.