Year-end Tax Planning Tips for Individuals
By: Tax Hotline
Fall 2024 (Vol. 42, No. 3)
1. Strategize on the Standard Deduction vs. Itemizing
If your total itemized deductions for 2024 will be close to your standard deduction, consider making additional expenditures for itemized deduction items between now and year end to surpass your standard deduction. Those extra expenditures will allow you to itemize and reduce your 2024 federal income taxes. The 2024 standard deduction is $29,200 for married couples filing jointly, $29,200 for heads of household and $14,600 for singles and married couples filing separately.
To boost your itemized deductions, consider prepaying your mortgage payment due in January. Accelerating that payment into this year will give you 13 months’ worth of itemized home mortgage interest deductions in 2024. You may want to pay state and local income and property taxes now that are due early next year. You can also increase deductions by making bigger charitable donations to IRS-approved charities this year and accelerate elective medical procedures, dental work and expenditures for vision care if you think you can qualify for a medical expense deduction. You can claim an itemized deduction for medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI).
2. Manage Gains and Losses in Your Taxable Investment Accounts
If you’re holding some investments that are currently worth less than you paid for them, consider harvesting those capital losses between now by selling those investments. Harvested losses can shelter capital gains from the sale of appreciated stocks this year. Sheltering short-term capital gains with harvested losses is an especially tax-smart move because net short-term gains are taxed at higher income tax rates that can reach 37%, plus another 3.8% if the NIIT applies.
If harvesting losing stocks would cause your 2024 capital losses to exceed your 2024 capital gains, the result would be a net capital loss for the year. The net capital loss can be used to shelter up to $3,000 of 2024 higher-taxed ordinary income. Ordinary income can include salaries, bonuses, self-employment income, interest income and royalties. Any excess net capital loss is carried forward to next year — and beyond, if you don’t use it up next year. In fact, having a capital loss carryover to next year and beyond could turn out to be beneficial. The carryover can be used to shelter future capital gains (both short-term and long-term) next year and beyond. That can give you extra investing flexibility in those years because you won’t have to hold appreciated securities for over a year to get a lower tax rate. You’ll pay 0% to the extent you can shelter gains with your loss carryover. Remember, if you sold a home earlier this year for a taxable gain, you may be able to offset some or all of that taxable gain with harvested capital losses from the sale of losing securities.
3. Donate Stock to Charity
If you itemize deductions and want to donate to IRS-approved public charities, you can combine your generosity with an overall revamping of your taxable investment portfolio of stock and/or mutual funds. You can sell holdings that are worth less than they cost and claim the tax-saving capital loss. Then give the sales proceeds to a charity and deduct your donation. Donate directly to charity publicly traded securities that are currently worth more than they cost. If you’ve owned them for more than one year, you can claim a charitable deduction equal to the market value of the shares at the time of the gift. Plus, you escape any capital gains taxes you’d pay on those shares if you sold them.
4. Gift Wisely
The principles behind donating tax-smart gifts to charities also apply to making gifts to relatives and other loved ones. That is, don’t give underperforming taxable investments directly to your loved ones. Instead sell the stock or mutual fund shares and claim the tax-saving capital losses. Then give the cash proceeds to loved ones. Another strategy is to give appreciated investments directly to loved ones in lower tax brackets. When they sell the shares, they’ll probably pay a lower tax rate than you would.
5. Make Charitable Donations from Your IRA
In 2024, IRA owners and beneficiaries who’ve reached age 70½ are permitted to make cash donations totaling up to $105,000 to IRS-approved public charities directly out of their IRAs. The SECURE 2.0 Act now allows eligible taxpayers to also make a one-time QCD of up to a limit that’s annually indexed for inflation ($53,000 for 2025) through a charitable gift annuity or charitable remainder trust. Additional rules apply to such QCDs. You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction. The upside is that the tax-free treatment of QCDs means you can enjoy a tax benefit even if you don’t itemize deductions or if your charitable deduction would be reduced because of AGI-based limits. Also, QCDs can count toward your required minimum distribution (RMD), if applicable.
6. Prepay College Bills
If you paid higher education expenses for yourself, your spouse or a dependent, you may qualify for The American Opportunity credit for up to a $2500 credit and The Lifetime Learning credit that equals up to $2000 credit.
7. Convert a Traditional IRA into a Roth IRA
If you anticipate being in a higher tax bracket during retirement than you are now and have a traditional IRA, consider a Roth conversion. The downside is that there’s a current tax cost for converting. That’s because a conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth account.