Year-End Tax Planning: Top Strategies for High Earning Households

5 Key Points

1. TCJA Expiration: The Tax Cuts and Jobs Act (TCJA) is set to expire at the end of 2025, potentially leading to higher tax rates and a lower standard deduction.
2. Retirement Contributions: Maximize contributions to 401(k)s, IRAs, and Solo 401(k)s before year-end to reduce taxable income and leverage potential tax-deferred growth.
3. Charitable Giving: Optimize charitable donations through bunching, Donor-Advised Funds (DAFs), and Qualified Charitable Distributions (QCDs) to maximize tax benefits.
4. HSA/FSA: Utilize Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) for triple tax advantages on healthcare expenses.
5. Tax-Loss Harvesting: Offset capital gains with losses through tax-loss harvesting to minimize your tax liability, especially if you anticipate higher taxes after 2025.

Year-End Tax Planning: Top Strategies for Households Earning $300K+

For high earning households, the end of the year isn't just about holiday shopping; it's a crucial time to optimize your tax strategy and prepare for potential shifts in the tax landscape. With key provisions of the Tax Cuts and Jobs Act (TCJA) set to expire at the end of 2025, proactive planning is more critical than ever.

Failing to act now could mean missing out on significant savings and leaving yourself exposed to higher tax liabilities in the years to come.

In this article, we'll equip you with the top tax planning strategies to implement before the clock runs out on 2024 (less than 90 days left – YIKES!). We'll explore how potential changes in the tax code could impact your finances and why taking action today is essential for securing your financial future.

The Tax Cuts and Jobs Act: A Brief Overview

Enacted in December 2017, the TCJA represented the most significant overhaul of the U.S. tax code in over three decades. It introduced substantial changes to both individual and corporate taxation, aiming to simplify the tax system and stimulate economic growth. Key provisions included:

• Lowered Individual Tax Rates: The TCJA reduced tax rates across most income brackets.
• Increased Standard Deduction: The standard deduction nearly doubled, reducing the number of taxpayers who itemize deductions.
• Elimination and Limitation of Deductions: Certain deductions were capped or eliminated, such as the state and local tax (SALT) deduction, which was limited to $10,000.
• Increased Child Tax Credit: The credit was doubled and made available to more families due to higher phase-out thresholds.

What’s Changing After 2025?

Many individual tax provisions in the TCJA are set to expire at the end of 2025 unless Congress acts to extend them. For high earning households, the following changes could have significant implications:

• Reversion to Higher Tax Rates: Individual tax rates are scheduled to increase, meaning higher income taxes for many.
• Reduced Standard Deduction: The standard deduction will decrease, potentially leading to higher taxable income (which will be taxed at higher rates!).
• Return of Personal Exemptions: Personal exemptions, which were eliminated, may return, altering taxable income calculations. This will benefit some and hurt others.
• Changes in Deductions and Credits: Limitations on deductions like SALT may be lifted, which could be good in high state income tax locations like New Jersey, but overall tax liabilities could still increase due to higher rates.

Here is a summary table of the changes:

Top Year-End Tax Planning Strategies

Given the potential changes ahead, now is the time to implement tax strategies that can help you minimize your tax liability and secure your financial future. Here are the top strategies to consider:

1. Maximize Tax-Deferred Retirement Contributions

Why This Matters

Contributing to tax-deferred retirement accounts not only secures your financial future but also reduces your taxable income for the year. With possible increases in tax rates after 2025, maximizing these contributions now could be more beneficial.

Action Steps

• 401(k) and 403(b) Plans: For 2024, the contribution limit is $23,000, with an additional $7,500 catch-up contribution if you're 50 or older. Aim to max out these contributions.
• Traditional IRAs: Contribute up to $7,000 for 2024, plus a $1,000 catch-up if you're over 50.
• Solo 401(k): If you're a solo business owner, these plans offer unique advantages and higher contribution limits. In 2024, you can contribute up to $23,000 as an "employee," plus up to 25% of your net adjusted self-employed income as an "employer," with a maximum total contribution of $69,000 to a Solo 401(k). If you  don’t have one set up, act now because the plan must be set up year-end to make contributions for the 2024 tax year.
• Other Retirement Plans: If your business has employees, a Solo 401(k) is not an option but depending on your situation, a SIMPLE IRA or a SEP IRA may be options to evaluate. Research which is best for you and make sure you are aware of when the plan needs to be set up before year end (such as the Solo 401(k) mentioned above) while others have more time, with deadlines matching your tax filing date for the year. We can help.
• Consider Future Tax Implications: If tax rates increase after 2025, the tax-deferred growth and current tax deductions become even more valuable.

How We Can Help

Our financial planning services can help you determine the optimal contribution amounts and select the right retirement accounts based on your individual circumstances.

2. Review Charitable Giving Strategies

Why This Matters

Purpose Built believes in giving back to causes you believe in and charitable giving is a powerful way to accomplish it. Plus, it comes with valuable tax advantages. When your itemized deductions surpass the standard deduction, these strategies can significantly reduce your tax liability.

Action Steps

• Bunching Donations: Maximize your deductions by concentrating several years' worth of charitable contributions into a single year. This can help you exceed the standard deduction threshold and unlock greater tax savings.
• Donor-Advised Funds (DAFs): A DAF acts like a charitable investment account. Contribute now, claim the immediate tax deduction, and then recommend grants to your favorite charities over time. It's a flexible and tax-smart way to give.
• Qualified Charitable Distributions (QCDs): If you're 70½ or older, bypass taxes on your IRA withdrawals by donating directly to qualified charities. QCDs count towards your Required Minimum Distributions (RMDs) while reducing your taxable income. If you are under 70½, QCDs are not an option for required distributions from inherited IRAs but other tax planning opportunities could lower the tax impact.
• Donate Appreciated Assets: Gift stocks, bonds, or mutual funds that have increased in value directly to charity. You'll avoid capital gains taxes, and the charity receives the full value of the asset.
• Anticipate Tax Code Changes: Stay informed about potential shifts in deductions and credits after 2025. Proactive planning ensures your charitable giving strategy remains aligned with your financial goals and tax situation.

Need Guidance?

Navigating the world of charitable giving can be complex. We can help you explore strategies like DAFs and QCDs, ensuring your generosity is maximized and your tax benefits are optimized.

3. Utilize Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)

Why This Matters

HSAs and FSAs are the only savings vehicle to offer triple tax advantages: pre-tax contributions, tax-free growth (on HSAs), and tax-free withdrawals for qualified medical expenses.

Action Steps

• Maximize HSA Contributions: To participate in an HSA, you must be enrolled in a high-deductible healthcare plan. This option may not be suitable for all families, especially those with ongoing or recurring medical costs. However, for those who qualify, HSAs offer powerful savings benefits. In 2024, the family contribution limit is $8,300. Unlike FSAs, HSA funds roll over year after year and can be invested in various investment options. Your plan provider determines the fund selection, but low-cost options are usually available.
• Spend FSA Funds Wisely: Use FSA funds before year-end to avoid forfeiture unless your plan offers a grace period or carryover. FSA spending options have been greatly increased so be sure to use the funds and not lose them.
• Plan for Future Healthcare Costs: HSAs can serve as an additional retirement savings vehicle, as funds can be used for any purpose without penalty after age 65 (though withdrawals for non-medical expenses are taxable). The best game plan however is to use these for medical expenses in retirement including any long term care costs that might arise.

How We Can Help

Selecting the right benefits package can be confusing.  Purpose Built can help you determine if a high-deductible healthcare plan and an HSA are appropriate for your family, while also helping you maximize other available benefits. We'll seamlessly integrate HSAs and FSAs into your overall financial plan, ensuring you reap their full benefits and achieve your long-term goals.

4. Tax-Loss Harvesting and Capital Gains Management

Why This Matters

Tax-loss harvesting is a strategic way to offset investment gains and potentially lower your tax bill. It's particularly valuable in years when you've realized substantial gains, whether from traditional investments, equity compensation (like stock grants or options), or the sale of a business or property.

Action Steps

• Review Investment Portfolios: Take a close look at your investments. Identify any underperforming assets that could be sold to generate losses.
• Offset Gains with Losses: Use those realized losses to offset any capital gains you've incurred, effectively reducing your taxable income.
• Be Mindful of Future Tax Rates: If you anticipate higher capital gains tax rates after 2025, it might be beneficial to accelerate some gains now while rates are potentially lower. Remember the goal is to reduce your lifetime tax burden, not just the current year.
• Avoid Wash-Sale Rules: Remember the 30-day rule! You can't repurchase the same or substantially identical securities within 30 days before or after selling them at a loss without triggering the wash-sale rule, which would disallow the loss.
• Consider Holding Periods: The tax rate on your capital gains depends on how long you've held the asset. Long-term gains (held for more than one year) are generally taxed at lower rates than short-term gains.

Need a Portfolio Review?

We can provide personalized investment portfolio reviews and implement tax-loss harvesting strategies that remain focused on lowering your lifetime tax burden while ensuring compliance with IRS regulations.

5. Consider Roth Conversions and Income Shifting

Why This Matters

Converting traditional retirement accounts to Roth accounts now could save you money in the long run if tax rates increase after 2025.

Action Steps

• Assess Your Tax Bracket: If you have a lower-income year, it may be an ideal time for a Roth conversion.
• Income Shifting Strategies: Transfer income-generating assets to family members in lower tax brackets, such as children, while being mindful of the Kiddie Tax rules.
• Plan for Estate Taxes: Roth accounts are not subject to RMDs during the owner's lifetime, potentially reducing estate taxes. Conversions can also help you avoid the widow penalty.
• Execute Roth Conversions: After carefully considering the previous steps, proceed with the Roth conversion based on your analysis. You'll pay taxes on the converted amounts now, potentially at lower rates, enabling tax-free growth and withdrawals in the future.

How We Can Help

We can analyze your specific situation to determine if a Roth conversion makes sense for you and help implement income-shifting strategies within legal guidelines.

Bonus Strategy: Estate and Gift Tax Planning

Why This Matters

The current lifetime estate and gift tax exemption is $12.92 million per individual for 2024 but is set to decrease by about half after 2025.

Action Steps

• Utilize Annual Gift Exclusions: Gift up to $17,000 per recipient for 2024 without incurring gift tax or using your lifetime exemption.
• Establish Trusts: Consider irrevocable trusts to remove assets from your taxable estate while providing for your beneficiaries.
• Lock in Higher Exemptions: Make larger gifts now to take advantage of the higher lifetime exemption before it potentially decreases.

How We Can Help

We can help you to develop a comprehensive plan that protects your assets and ensures your legacy. Set up a time to talk to us today.

The Importance of Proactive Planning

The potential expiration of TCJA provisions introduces uncertainty into future tax liabilities. High earning households are particularly susceptible to these changes due to their income levels and the specific provisions that may affect them.

Key Considerations:

• Higher Tax Rates: Prepare for increased marginal tax rates that could impact take-home pay and investment growth.
• Itemized Deductions: Reevaluate the benefits of itemizing deductions versus taking the standard deduction in future years.
• Investment Strategies: Adjust investment strategies to account for changes in capital gains taxation and potential shifts in market conditions.
• Long-Term Financial Goals: Align tax strategies with retirement planning, education funding, and other long-term objectives.

Why Partner with a Financial Professional

Navigating the complexities of tax planning, especially with impending legislative changes, can be daunting. A financial professional can provide:

• Expertise: Up-to-date knowledge of tax laws and how they impact your specific situation.
• Customized Strategies: Tailored advice that aligns with your financial goals and risk tolerance.
• Peace of Mind: Confidence that you're making informed decisions to protect and grow your wealth.

Take the Next Step Toward Financial Security

Year-end tax planning is more than a checklist—it's a strategic approach to securing your financial future in the face of changing tax laws. By implementing these strategies, you can minimize your tax liability, maximize your wealth, and position yourself advantageously for any legislative changes ahead.

Ready to Optimize Your Tax Strategy?

Purpose Built is here to help you navigate these complexities. We'll work with you to develop a personalized plan that addresses your unique needs and goals.

Contact us today to schedule a consultation and take the first step toward a more secure financial future.

FAQs

Q: What are the potential tax implications of the TCJA expiring?

A: Individual income tax rates could increase, the standard deduction may decrease, and certain tax credits and deductions could be modified or eliminated.

Q: What is the deadline for setting up a Solo 401(k) for the 2024 tax year?

A: The Solo 401(k) plan must be established by December 31, 2024, to make contributions for the 2024 tax year.

Q: Can I still contribute to a Traditional IRA if I have a 401(k) through my employer?

A: Yes, you can contribute to both a Traditional IRA and a 401(k), but there may be income limitations that affect the deductibility of your Traditional IRA contributions.

Q: What are the benefits of using a Donor-Advised Fund (DAF) for charitable giving?

A: DAFs allow you to make a charitable contribution and receive an immediate tax deduction, while providing flexibility to distribute the funds to charities over time.

Q: What is the wash-sale rule, and how does it affect tax-loss harvesting?

A: The wash-sale rule prevents you from claiming a loss on the sale of a security if you repurchase the same or a substantially identical security within 30 days before or after the sale.

About the Author

Sean Lovison, CPA, CFP®, is a flat fee-only financial planner based in Moorestown, New Jersey, serving clients virtually nationwide. After spending 14 years as a corporate chief financial officer (CFO), receiving and designing compensation plans, he decided to help others navigate their plans.

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