By Allen Giese, CLU®, ChFC®, ChSNC®
As we approach the end of the year, time’s quickly running out to consider ideas on how to lower your 2024 income tax bill.
1. Consider Itemizing Instead of the Standard Deduction
If your itemized deductions will be close to your standard deduction, you might want to consider making additional expenditures before the year’s end that would go toward itemized deductions. The standard deduction for 2024 is $29,200 for married filing jointly, $21,900 for heads of household, and $14,600 for singles. If you’re over 65, there may be higher standard deductions.
Perhaps one of the easiest itemizable expenses to prepay is your January 2025 mortgage payment. Paying that a little early, in 2024, will allow you 13 months of itemizable mortgage interest deductions. Consult with your tax advisor to make sure you are not affected by limits on mortgage interest deductions under current law.
State and local income and property taxes for next year may also be able to be paid now, increasing your itemized deductions for this year. However, you may only be able to deduct a maximum of $10,000 under current law ($5,000 if you use the “married filing separately” status). However, if you owe Alternative Minimum Tax (AMT), no deductions are allowed for state and local taxes.
2. Tax-Loss Harvesting in Your Brokerage Accounts
If you have positions in your brokerage account showing losses, you might want to realize those losses by selling the positions.
Harvesting losses from positions held for more than one year (long-term capital losses) offsets an equal amount of long-term capital gains that have been realized, directly lowering your tax bill.
Selling short-term loss positions, or positions held for less than one year, is particularly advantageous. Those losses can reduce any realized short-term gains, which are taxed at typically higher ordinary income tax rates.
Any losses realized above gains realized can be deducted against $3,000 of ordinary income in the tax year, while realized gains above that amount can be “carried forward” to future years.
3. Donating 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:
Underperforming stocks. Sell taxable investments that are worth less than they cost and claim the tax-saving capital loss. Then give the sale proceeds to a charity and deduct your donation.
Appreciated stocks. Donate publicly traded securities that are currently worth more than they cost. As long as 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. Be Smart About Giving to Loved Ones
Just like donating to charities, when giving money to a loved one, there are dos and don’ts. Don’t give depreciated stocks to your loved one. Instead, sell them first, take the tax-saving losses, and then give the loved one the cash. Do give appreciated positions—chances are your loved one is in a lower tax bracket than you are and will pay less when they sell the shares.
Do be careful, however, of any gift tax consequences before making gifts. And if any potential recipients are children, check whether they’d be subject to the “kiddie tax.”
5. Make Charitable Donations from Your IRA
Once you’ve attained the age of 70 ½, you can donate directly to IRS-approved charities from your IRA up to $105,000. This is called a qualified charitable distribution (QCD) and has multiple advantages.
First, it saves you from having to pay income tax on the distribution amount. Second, you can apply the QCD to your required minimum distribution (RMD) and save paying taxes on that. Third, if you claim the standard deduction AND make charitable contributions anyway, then you are not getting any tax benefits for making the charitable contribution. If you make the charitable contribution as a QCD, you get tax benefits where, before, there were none.
A word of caution: Don’t wait until the last minute to do this. Custodians get swamped with these requests at year-end, and at some point, you run the risk your QCD won’t get processed in time.
6. Convert a Traditional IRA to a Roth IRA
From a longer-term perspective, consider converting traditional IRA dollars to a Roth IRA. Reasons for doing this may differ for one person vs another; however, in either case, the benefit comes with time and growth of those dollars.
The downside is, when you convert traditional IRA dollars to Roth IRA dollars, you owe the tax on the conversion amount as if you had taken a distribution. It becomes ordinary income to you. However, once those dollars have been converted to a Roth IRA, they will never be taxed again (according to the current tax code).
If you plan to take distributions for yourself in later years, Roth IRA dollars are available tax-free (once at least five years have passed since the conversion), and the compounding effect with earnings can really add up.
If legacy and providing funds for heirs is what’s driving the conversion, then you are, in essence, prepaying the tax your heirs would have paid in a discounted way. The longer the time and more growth in the account, the bigger the discount.
But the same word of caution as Item #5 applies: Don’t wait until the very end of the year to get it done, or you run the risk of it not getting done, with overwhelmed custodians desperately trying to process the paperwork in time.
Anything here spark any questions? Please feel free to give us a call!
Special thanks to David Huppert, CPA, for his input on this article.