Additional Tax Planning Considerations
Planning for capital gains and investment income
Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income.
Investors should consider the following when planning for capital gains:
- Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate.
- Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones.
- Investing in, and holding, “qualified small business stock” for at least five years.
- Donating appreciated property to a qualified charity to avoid long-term capital gains tax.
Timing of Income and Deductions
Taxpayers should consider whether they can reduce their tax bills by shifting income or deductions between 2024 and 2025. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate.
If the marginal tax rate is the same in both years, deferring income from 2024 to 2025 will produce a one-year tax deferral, and accelerating deductions from 2025 to 2024 will lower the 2024 income tax liability.
Reduction or Deferral of Taxes
Actions to consider that may result in a reduction or deferral of taxes include:
- Delaying closing capital gain transactions until after year-end or structuring 2024 transactions as installment sales so that gain is deferred past 2024.
- Triggering capital losses before the end of 2024 to offset 2024 capital gains.
- Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.
- Deferring commission income by closing sales in early 2025 instead of late 2024.
- Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2024 (subject to adjusted gross income (AGI) limitations).
- Evaluating whether non-business bad debts are worthless — and should be recognized as a short-term capital loss — by the end of 2024.
- Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years
Moving Taxable Income
Taxpayers that will be in a higher tax bracket in 2025 may want to consider potential ways to move taxable income from 2025 into 2024, so that the taxable income is taxed at a lower tax rate.
Current-year actions to consider that could reduce 2025 taxes include:
- Accelerating capital gains to 2024 or deferring capital losses until 2025.
- Electing out of the installment sale method for 2024 installment sales.
- Deferring deductions such as large charitable contributions to 2025.
Small Business Deductions
Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum amount set by the IRS each year to a simplified employee pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2024 is $69,000. The maximum SEP contribution for 2025 is $70,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).
Net operating losses (NOLs) generated in 2024 are limited to 80% of taxable income and are not permitted to be carried back. Any unused NOLs are carried forward subject to the 80% of taxable income limitation in carryforward years.
A non-corporate taxpayer may deduct net business losses of up to $305,000 ($610,000 for joint filers) in 2024. The limitation is $313,000 ($626,000 for joint filers) for 2025. A disallowed excess business loss (EBL) is treated as an NOL carryforward in the subsequent year, subject to the NOL rules. With the passage of the Inflation Reduction Act, the EBL limitation has been extended through the end of 2028.
Additional Considerations to Note
SALT Deduction
For individual taxpayers who itemize their deductions, the Tax Cuts and Jobs Act introduced a $10,000 limit on deductions of state and local taxes paid during the year ($5,000 for married individuals filing separately). The limitation applies to taxable years beginning on or after December 31, 2017, and before January 1, 2026. Various states including Michigan have enacted new rules that allow owners of pass-through entities to avoid the SALT deduction limitation in certain cases.
Energy Tax Credits
“Going green” continues to offer significant tax incentives. The Inflation Reduction Act of 2022 included new and expanded tax credits for solar panels, electric vehicles (EVs) and energy-efficient home improvements. While the rules are complex, there is time to benefit from these credits in the current year. It’s important to note that these credits have specific eligibility requirements and limitations.
The tax credits for energy efficient home improvements recently underwent significant changes. This credit now has an annual limit rather than the lifetime limit that was in place previously. This change allows homeowners to benefit from the credits year after year if they continue to make energy-efficient upgrades. The energy efficient home improvements credit covers a wide range of improvements, including installing windows, doors, insulation, and various types of heat pumps.
Life Changes
Let us know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business and significant expenditures (real estate purchases, college tuition payments, etc.).
Capital Gains and Loss Harvesting
Consider tax benefits related to using capital losses to offset realized gains. Think about selling portfolio investments that are underperforming before the end of the year. Net capital losses can offset up to $3,000 of the current year’s ordinary income. The unused excess net capital loss can be carried forward to use in subsequent years.
State and Local Taxes
Remote working arrangements or moving your residency could potentially have tax implications to consider. We can help you with your state income, sales and use tax questions.
Education Planning
Save for education with Sec. 529 plans. There can be income tax benefits to do so, and there have been changes in the way these funds can be used. We can help you with any questions.
Updates to Financial Records
Determine whether any updates are needed to your insurance policies or beneficiary designations.
Roth IRA Conversions
Evaluate the benefits of converting your traditional IRA to a Roth IRA to lock in lower tax rates on some of your pre-tax retirement accounts.
Estimated Tax Payments
With underpayment interest rates currently at 5% for federal, it is a good idea to review withholding and estimated tax payments and assess any liquidity needs. If you have income flowing through from a business, you may benefit from a state’s Pass-Through Entity (PTE) provisions.