Despite Uncertainty in Washington, Solid Advice Abounds
By Kristina Drzal Houghton, CPA
As we come to the end of 2024, it’s time to discuss end-of-year tax planning. This past year has seen some significant tax legislation that, if enacted in its current form, would impact year-end tax strategy. Understanding this legislation, and how it might affect 2024’s tax obligations, is essential for making informed tax-planning decisions.
Kristina Drzal Houghton
In this article, I will address both business and individual tax-planning strategies and provide some insight on how possible legislation might affect your year-end planning decisions. Many of my clients ask me about my thoughts on taxes depending on a Republican or Democratic victory for president. My reply is that no one person can determine legislation, and the makeup of the House and Senate need to be considered.
One of the most notable legislative proposals this year was the Tax Relief for American Families and Workers Act of 2024. This bipartisan bill would have provided tax relief to parents by enhancing the Child Tax Credit.
For businesses, the bill would have restored immediate expensing for U.S.-based research and development (R&D) investments, instead of deducting such expenses over five years. Full and immediate expensing for investments in machinery, equipment, and vehicles would also have been restored, and the amount of investment that small businesses can immediately write off would have been increased to $1.29 million. The bill also addressed the treatment of business interest expense, bonus depreciation, and research and experimental costs.
Although the bill failed to pass in the Senate, various provisions have been resurrected separately. However, Congress has yet to pass a 2025 budget or address various expiring provisions and extenders, including the expiring provisions of the Tax Cuts and Jobs Act.
Possible legislative changes, which may include an increase in the corporate tax rate to 28%, along with adjustments to tax brackets, retirement contribution limits, and the gift-tax exclusion, underscore the importance of staying informed and prepared.
YEAR-END TAX PLANNING FOR BUSINESSES
Whether or not tax increases become effective next year, the standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most small businesses, as will the bunching of deductible expenses into this year or next to maximize their tax value.
If proposed tax increases do pass, however, the highest-income businesses and owners may find that the opposite strategies produce better results: pulling income into 2024 to be taxed at currently lower rates, and deferring deductible expenses until 2025, when they can be taken to offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.
What’s New for Businesses in 2024?
As noted earlier, one of the most notable legislative proposals this year was the Tax Relief for American Families and Workers Act of 2024.
Without more legislation, bonus depreciation will fall to 60% for most qualified business property placed in service in 2024 (down from 100% in 2022 and 80% in 2023).
However, more taxpayers can deduct business loan interest in 2024 as the adjusted gross income limit for small taxpayers increases to $30 million.
Depreciation and Expensing
One consideration is the possibility of changes in the taxpayer’s tax rate in future years, whether based on predictions about the taxpayer’s business or about legislative changes in tax rates. For example, a possibility of sufficiently higher future rates may result in trying to defer deductions by deferring purchases of property eligible for full expensing or bonus depreciation. On the other hand, an example of a reason not to defer purchases is that the rate of bonus depreciation is phasing down to 0% in 2027.
Bonus Depreciation
For 2024, a first-year bonus depreciation deduction falls to 60% of the adjusted basis of depreciable property allowed for qualified property acquired and placed in service during the year.
For 2024, the maximum amount of section 179 property that can be expensed is $1,220,000 ($1,250,000 for 2025). That full amount is available until qualifying property placed in service during the year reaches $3,050,000 ($3,130,000 for 2025), at which point a phaseout begins.
Proposed Changes
While not actually proposed legislation, a presidential candidate has discussed the idea of raising the corporate income-tax rate to 28%. This adjustment would raise federal revenue but could impact the bottom line of large corporations. These companies may need to reassess their financial strategies, including cost management and investment plans, to accommodate the higher tax burden.
Net Operating Losses
For the 2024 tax year, net operating losses (NOLs) of corporate taxpayers may not be carried back (except for farm losses, which may be carried back two years), but may be carried forward indefinitely. In addition, for the 2024 tax year, the NOL deduction is subject to an 80% of taxable income limitation (not counting the NOL or the qualified business income deduction).
A taxpayer that may have difficulty taking advantage of the full amount of an NOL carry-forward this year should consider shifting income into and deductions away from this year. By doing so, the taxpayer can avoid the intervening year modifications that would apply if the NOL is not fully absorbed in 2024. This may also avoid potentially higher tax rates next year on the accelerated income and increase the tax value of deferred deductions.
Losses and Shareholder or Partnership Basis
A shareholder can deduct its pro rata share of S-corporation losses only to the extent of the total of its basis in the S-corporation stock and debt. This determination is made as of the end of the S-corporation tax year in which the loss occurs. Any loss or deduction that can’t be used on account of this limitation can be carried forward indefinitely.
If a shareholder wants to claim a 2024 S-corporation loss on its own 2024 return, but the loss exceeds the basis for its S-corporation stock and debt, it can still claim the loss in full by lending the S corporation more money or by making a capital contribution by the end of the S corporation’s tax year (in the case of a calendar-year corporation, by Dec. 31).
Similarly, a partner’s share of partnership losses is deductible only to the extent of their partnership basis as of the end of the partnership year in which the loss occurs. Basis can be increased by a capital contribution, or in some cases by the partnership itself borrowing money or by the partner taking on a larger share of the partnership’s liabilities before the end of the partnership’s tax year.
YEAR-END TAX PLANNING FOR INDIVIDUALS
Whether or not tax increases become effective next year, 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.
If proposed tax increases do pass, however, the highest-income taxpayers may find that the opposite strategies produce better results: pulling income into 2024 to be taxed at currently lower rates, and deferring deductible expenses until 2024, when they can offset what would be higher-taxed income. This will require careful evaluation of all relevant factors.
What’s New for Individuals in 2024?
• Penalty-free withdrawals from retirement accounts. Domestic-abuse victims under age 59½ may take up to $10,000 in penalty-free withdrawals from retirement accounts. Individuals with an emergency can take a penalty-free withdrawal up to $1,000 penalty-free.
• Increased catch-up retirement contributions. IRA catch-up contributions are indexed for inflation beginning in 2024. In 2025, the 401(k) catch-up contribution amount increases from $7,500 to $10,000 for workers ages 60 to 63.
• Some catch-up contributions must be made to a Roth account. Beginning in 2024, taxpayers with income of $145,000 or more must make any catch-up contributions to a Roth or Roth 401(k) account.
• Leftover money in a 529 plan. Leftover money in a 529 plan can be rolled over tax-free into a Roth IRA. Restrictions apply.
• Increased RMD age. RMD age remains age 73 in 2024 and increases gradually to age 75 in 2033.
• Qualified charitable distribution cap. IRA owners can transfer up to $105,000 tax-free to a charity.
Filing Status and Dependents
When considering year-end tax-planning strategies, think about your expected filing status this year and next and the number of dependents that you expect to claim in each year.
Additionally, the Massachusetts millionaire’s tax allows an exemption of $1 million for all filing statuses. For 2024, Massachusetts requires, in most situations, that the Massachusetts filing status mirror the federal filing status. Potential Massachusetts savings for higher-income earners needs to be compared with any federal benefit of married filing jointly.
Who Should Increase Income?
A taxpayer who expects to be taxed at a higher rate next year should explore strategies to increase income this year by accelerating the recognition of income. An individual taxpayer might be in a higher tax bracket next year if:
• The taxpayer is graduating from school or a training program and moving into the paid workforce;
• Head-of-household or surviving-spouse status ends after this year;
• The taxpayer plans to get married next year and will be subject to a marriage penalty; or
• The taxpayer expects to be eligible for one or more credits next year (e.g., the child tax credit) that is subject to phaseout when AGI reaches specified limits and is otherwise not eligible for the credit this year.
Caution: any decision to accelerate income from a later year into an earlier one should consider the time value of money.
Who Should Decrease Income?
A taxpayer who expects to be subject to the same or a lower tax rate next year should consider deferring income recognition. A taxpayer might be in a lower tax bracket next year if:
• The taxpayer becomes eligible for head-of-household status next year;
• The taxpayer expects to have a lower income next year due to retirement, job change, or other change in circumstance; or
• The taxpayer is currently a child who will escape the kiddie tax next year and be in a lower bracket than their parents.
Numerous tax benefits phase out at specified income thresholds. As year end nears, taxpayers who otherwise qualify for a tax benefit should consider strategies to reduce income this year to keep their income level below the relevant phaseout threshold.
Capital Gains and Losses
The appropriate year-end planning strategy for capital gains and losses depends on many factors, including an individual’s taxable income, tax rate, amount of adjusted net capital gain, and whether the individual has unrealized capital losses. For high-income taxpayers, planning must also account for the 3.8% net investment income tax (NIIT).
Installment Sales
An installment sale can be an effective technique for closing certain transactions this year while deferring a substantial part of the tax on the sale to later years.
Passive-activity Limitations
Losses generated by passive activities may be used only to offset passive-activity income. Passive-activity credits may be used only to offset tax on income from passive activities, with a carryover of any unused credits. In addition, the 3.8% NIIT applies to income from passive activities, but not from income generated by an activity in which the taxpayer is a material participant. Taxpayers can employ several year-end strategies for managing passive-activity limitations.
Pass-through Income
A key dollar threshold on the 20% deduction for pass-through income rises in 2024. Self-employed individuals and owners of LLCs, S corporations, and other pass-throughs can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes of more than $383,900 for joint filers and $191,950 for all others.
Itemized Deductions and Charitable Contributions
Many taxpayers won’t want to itemize because of the high basic standard deduction amounts that apply for 2024 ($29,200 for joint filers, $14,600 for singles and for married filing separately, $21,900 for heads of household), and because many itemized deductions have been reduced (such as the $10,000 deduction limit on state and local taxes) or abolished (such as the miscellaneous itemized deduction and the deduction for non-disaster-related personal casualty losses).
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 will benefit by making two years’ worth of charitable contributions this year.
Individuals may deduct contributions to charitable organizations up to a certain percent of their contribution base (generally, AGI). Through 2025, that percentage is 60% for cash contributions and 30% for non-cash contributions.
For year-end planning, it’s beneficial to review whether you have charitable-contribution carryovers from a prior year. If income will decline, care should be taken to use the carryovers before they expire.
Taxpayers with low-basis, highly appreciated stock may want to consider funding a charitable contribution with the stock. The charity can sell the stock without incurring any income tax. The donor can also claim a charitable deduction in the year the gift was handled that is equal to the fair market value without recognizing the gain, subject to limitations.
Tuition Credits
There are two credits that taxpayers can claim to offset the cost of education: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. Both credits phase out for higher-income taxpayers.
AOTC is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. The maximum annual AOTC is $2,500 per eligible student, and it is refundable up to $1,000.
The Lifetime Learning Credit is a credit up to $2,000 per return for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This includes undergraduate, graduate, and professional degree courses, as well as courses to acquire or improve job skills. There is no limit on the number of years a taxpayer can claim this credit.
Taxpayers can claim credits for eligible expenses paid for education that begins this year or during the first three months of next year. A taxpayer who hasn’t already maximized education credits for the student this year should consider making the spring tuition payment before year end. Conversely, if a child is expected to graduate and begin employment, delaying paying tuition might give them the benefit of a tuition credit otherwise limited by the parents’ income level.
Caution: if educational expenses paid and deducted in 2024 are refunded in 2025, be mindful of the tax-benefit rule — the taxpayer may need to include the benefit amount in income this year, even if the student is no longer the taxpayer’s dependent.
Conclusion
It is difficult to do tax planning in anticipation of what might happen in Washington, especially with this being an election year and the great divide on tax policy between the parties. Maybe the best planning would be to plan for possible tax changes in 2025 depending not only on the party that wins the presidential election, but also on the makeup of the House and the Senate.
It could well be time to accelerate gifting, accelerate income, and postpone deductions. Perhaps with optimism, you can imagine that those postponed R&D and interest deductions will give you a deduction at a higher tax rate, and maybe this can lessen the pain of accepting possible increased tax rates.
Finally, remember that this article is intended to serve only as a general guideline. Your personal circumstances will likely require careful examination and should be discussed with your tax adviser.
Kristina Drzal Houghton is a partner at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.
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