Timely Tax Planning Techniques for 2024

As we near the end of each year we make a point to revisit tax planning considerations in our discussions with clients. Below we summarize some of the opportunities that may be available to help minimize taxes and review strategies we deploy in our client portfolios.

• Maximize use of tax-deductible retirement plan contributions each year to lower your tax liability as much as possible. This includes employees with the option to use 401k or other similar retirement plans, and also IRA savers who can continue to make tax-deductible contributions even after age 70½ if they still have earned income.
• Make annual or one-time gifts of securities to family members to transfer future taxable income and gains from your portfolio to theirs, which may reduce family-wide tax liability and reducing your taxable estate during your lifetime. (For 2024, the annual “gift tax exclusion” amount is $18,000 from each giver to each recipient.)
• Gift appreciated securities held for more than one year directly to charities or to a charitable donor-advised fund (DAF).Your tax deduction is based on the value of the gift in the tax year of the gift, and may remove your tax liability on any unrealized capital gains. Be aware that to receive the full tax benefit of your charitable gifts your itemized deductions will need to exceed the standard deduction amount.
• Consider concentrating multiple years of charitable gifting into one tax year (which we refer to as “charitable bunching”) in order to maximize the tax deduction benefits of gift amounts above the standard deduction.
• Consider qualified charitable distributions (QCDs) from IRAs for those age 70½ or over, especially if you would not otherwise receive as advantageous a tax deduction for gifting taxable assets. QCDs also count towards any required minimum distributions (RMDs), but each IRA owner is limited to a total of $100,000 in QCDs each year. Unfortunately, a QCD can not be made into a donor-advised fund (DAF) account, and must be donated directly to a qualified charity.
• Consider a Roth IRA or Roth 401(k) conversion from a tax-deferred IRA, or possibly make discretionary distributions of taxable IRA assets, especially if this will be a low-income-tax-rate year for you and/or if you have an IRA account where values are down. If you have not begun taking required minimum distributions (RMDs) from IRAs, this strategy may also help reduce the balance of your pre-tax traditional IRA assets before your RMDs begin.

In addition to the strategies just described, we regularly look for opportunities throughout the year to maximize after-tax portfolio returns. These are techniques that are mostly individualized to each client and go beyond the investment selection, allocation, and periodic rebalancing that are part of our core portfolio management.

As part of our strategic focus on tax sensitivity in managing investment strategies we utilize some of the following techniques in our client portfolios:

• We aim to hold investments in taxable accounts for more than one year before selling them so that long-term capital gains tax rates will apply. (However, we always assess the potential risk and return tradeoffs that result from any decision to extend an investment holding period.)
• When raising cash, we do so by selecting securities or individual tax lots of a security that have the lowest taxable gain  consequences.
• We consider carefully before selling investments with large built-in gains, unless the sale is justified by a higher expected return from another investment or is necessary to maintain portfolio asset allocation objectives.
• We seek to place the interest-earning portion of portfolios in tax-deferred accounts given interest income is taxed at the top marginal rate, unlike long-term capital gains, which are taxed at preferential rates.
• For portfolios without significant tax-deferred assets, we will generally recommend holding some tax-exempt bonds in lieu of taxable bonds, depending on the client’s marginal tax rate.
• We look for opportunities to “harvest” capital losses if there is market volatility throughout the year, as well as during our year-end review. These realized losses can then be used to offset realized gains elsewhere within or outside the portfolio, either in the same tax year or rolled forward to future tax years. Proceeds can then be placed in comparable investments so the portfolio allocation remains intact.
• We consider any anticipated taxable year-end distributions from investments within a portfolio when rebalancing, raising cash or harvesting taxable losses.

We welcome the opportunity to discuss these planning topics with you and to coordinate with your tax advisor to determine the best techniques for your individual tax situation. Please contact your Advisor for more information and to review your situation.

Note: As with all tax planning strategies, every situation is different. We suggest additional consultation with your tax advisor before implementing any of these tax planning techniques.

KEY TAX CHANGES IN 2024 & 2025 

Several tax related changes went into effect that may impact your tax planning situation. Here are a few key highlights for changes effective starting 2024 and those expected for 2025:

Important Disclosure

This report is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. The opinions expressed herein represent the current views of the author(s) at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such.

This post is for informational purposes only and should not be considered tax, legal, or investment advice. The strategies discussed may not be suitable for all individuals and depend on personal circumstances. Tax laws are subject to change, and it is recommended to consult with a tax professional to determine the best approach for your situation.

Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.