Page 27 - BusinessWest November 11, 2024

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 accelerat- ing 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 tax- payer 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 taxpay- ers, 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 cer- tain 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 individu- als 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
“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.”
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