This is usually the optimal time of year for individual tax planning.
Alert: Stay on your toes. With a new administration taking shape in our nation’s capital, big tax changes could be in store for 2025. However, it’s unlikely that any new tax law provisions would be retroactive to 2024. Keeping that in mind, here are 10 sensible strategies for this year-end.
1 Wrap up charitable gifts. Generally, the tax law allows donors to deduct the full amount of their charitable donations for the year within generous limits. Strategy: “Bunch” your charitable donations in a year you’re likely to itemize. If you don’t itemize and claim the standard deduction instead, you get no tax benefit for your charitable gifts. Currently, if you have the required records, you can deduct monetary donations of up to 60% of your adjusted gross income (AGI). Any excess may be carried over for up to five years. Tip: If you charge a donation in 2024 and pay the credit card company in 2025, the donation is still deductible in 2024
2 Turn up the tax heat. The tax law allows you to claim two types of home energy credits for qualified expenditures. Strategy: Understand all the rules and limits for the credits, then maximize your tax benefits. The two credits are as follows: • Energy Efficient Home Improvement Credit. For 2024, this credit equals 30% of the cost of energy-saving improvements like skylights, central air conditioning, water heaters, etc., up to an annual credit limit of $1,200. Heat pumps, biomass stoves and boilers have a separate annual credit limit of $2,000. Separate limits apply to certain improvements. • Residential Clean Energy Credit. This credit equals 30% of installations that provide solar, wind or geothermal power, like solar panels for your roof. There are no dollar limits. Tip: The home must be used as your residence.
3 Pick a bumper crop of losses. Typically, investors “harvest” capital losses from securities sales at the end of the year to offset capital gains. Strategy: Review your portfolio held in taxable accounts. Then pick out the losers you don’t mind giving up. If your losses exceed your capital gains, you have a net capital loss that you can use to offset up to $3,000 of ordinary income like wages and interest income. Any remainder is then carried over to future years until it is exhausted. Losses that offset short-term capital gains are especially valuable. Otherwise, those gains are taxed at ordinary income rates reaching 37%. Tip: The maximum tax rate for long-term gains is generally 20% for high-income taxpayers, but most taxpayers won’t pay more than 15%.
4 Dodge the AMT. Despite changes in the Tax Cuts and Jobs Act (TCJA), millions of taxpayers still must pay the “alternative minimum tax” (AMT) instead of their regular tax liability. The complex AMT calculation involves certain “tax preference” items, tax adjustments and an exemption amount subject to a phase-out. Strategy: Assess your AMT exposure now. If you could be hit by the tax this year, make the appropriate tax moves. For instance, you might shift tax preferences like the one for exercising incentive stock options (ISOs) into 2025. If you can’t avoid the AMT in 2024, the tax rate is 26% on the first $220,700 of AMT income and 28% above that for both singles and joint filers. Tip: If your regular tax bracket exceeds 28%, you might accelerate AMT income into 2024, but consult your tax advisor first to make sure this benefits your situation.
5 Nail down home improvements. Before the TCJA, itemizers could deduct mortgage interest paid on the first $1 million of acquisition debt, plus the first $100,000 of home equity debt. However, the TCJA lowered the limit to $750,000 for new acquisition debt and suspended the write-off for home equity debt for 2018 through 2025. Strategy: Use a home equity loan (when permitted by state law) to substantially improve your principal residence. This may qualify as deductible acquisition debt. For example, you might take out a new loan to install an in-ground pool and deduct the interest, within applicable limits. Tip: This tax break is also available for one other home, such as a vacation home.
6 Avoid RMD penalties. If you have a qualified retirement plan account or IRA, you must currently receive required minimum distributions (RMDs) after reaching age 73. The amount of the RMD is based on life-expectancy tables and your account balance at the end of the prior year. Strategy: Arrange to receive RMDs before January 1, 2025. Despite recent tax law liberalizations, failing to make withdrawals on time can result in a tax penalty equal to 25% of the shortfall below the required amount (down from 50%). However, if you fail to take a timely RMD and promptly correct it, the penalty is reduced to 10% of the shortfall. The penalty is added to the regular income tax due on the RMD. Tip: According to current IRS guidance, most non-spouse beneficiaries of qualified plans and IRAs must take annual RMDs over a 10-year period before liquidating their inherited accounts at the end of that period (see SBTS Oct. 2024).
7 Use a PIG in a poke. Under the “passive activity loss” (PAL) rules, the losses you can claim from passive activities in which you don’t materially participate—like most real estate activities—are limited to the amount of income from your passive activities. Strategy: Invest in passive activity generators (PIGs) designed to produce current income. Those losses can then be used to absorb PALs. However, be aware of a special rule. If you “actively participate” in a loss-producing rental real estate activity, you can use up to $25,000 of loss to offset income from non-passive sources, even if you have no passive income. You are considered to actively participate if you do things like arrange rental agreements with tenants, schedule repairs, etc. Tip: This special rule is phased out for an AGI between $100,000 and $150,000.
8 Accelerate EV tax credits. Are you checking out the new 2025 car models? Strategy: If it suits your needs, buy an electric vehicle (EV) or plug-in hybrid. Under the Inflation Reduction Act (IRA), you can claim a credit of up to $7,500 if certain conditions are met. Beginning in 2024, you can realize the tax benefit at the point of sale. However, this credit is only available to single filers with a modified adjusted gross income (MAGI) of $150,000 or lower, or $300,000 for joint filers. Plus, it can’t be claimed for passenger vehicles costing more than $55,000, or $80,000 for vans, sports utility vehicles (SUVs) and pickup trucks. Tip: Single filers with a MAGI of up to $75,000 (or $150,000 for joint filers) can claim a credit of up to $4,000 for used EVs.
9Improve your tax health. Currently, itemizers can only deduct unreimbursed medical and dental expenses above 7.5% of their AGI. For instance, if you have $8,000 in unreimbursed expenses in 2024 with an AGI of $100,000, your deduction is limited to $500. If you have a shot at a deduction this year, schedule discretionary visits, such as dental cleanings and physicals, for December. On the other hand, if you definitely won’t qualify for a deduction in 2024, you may as well postpone those types of medical expenses to next year. Tip: You can count qualified expenses paid for a dependent toward your deduction threshold.
10 Get ahead on tuition. If your child is in college, you may be able to claim one of two higher education credits—the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC)—for qualified expenses. Strategy: If you qualify for a credit, you can prepay tuition this year for academic periods that begin in the first three months of 2025. That may allow you to claim a bigger credit on this year’s tax return. The maximum AOTC is $2,500 per eligible student, while the LLC is limited to $2,000 per taxpayer. However, both credits are phased out for moderate- to upper-income taxpayers. The phase-out begins at $80,000 of MAGI for single filers and $160,000 for joint filers. Tip: For one particular eligible student, you can claim the AOTC or the LLC, but not both.