By Judy Mason, CPA, CVA, CEPA – Partner and Nathan Sharp, CPA – Senior Manager
Midyear tax planning enables individuals and businesses to proactively manage their tax obligations, identify potential savings, and make informed decisions for the remainder of the year. In this article, we will discuss key considerations and actionable tips for effective 2024 midyear tax planning.
Expiration of the Tax Cuts and Jobs Act
The expiration of the Tax Cuts and Jobs Act (TCJA) is on the horizon. Since its enactment in 2017, the TCJA has had a substantial impact on the tax landscape but is set to expire after December 31, 2025. A few key provisions to keep an eye on for the remainder of 2024 and especially 2025 as these tax provisions are set to revert to the pre-TCJA tax rules:
- Top marginal tax bracket starting in 2026 of 39.6% (compared to 37% under the TCJA)
- The 20% qualified business income deduction for partnerships and S Corporations will expire
- The $10,000 state and local tax cap on deductions for individuals will expire
The potential future expiration of the TCJA does not directly affect tax year 2024, but it will affect future planning as we head into the second half of 2024 and 2025.
Potential Decrease of Estate Tax Exemption
The 2024 estate tax exemption is $13,610,000 per person ($27,220,000 for a married couple) but is set to decrease with the expiration of the Tax Cuts and Jobs Act at the end of 2025. The projected estate tax exemption for 2026 is estimated to be about $7,000,000 per person ($14,000,000 for a married couple). Any gifts made before the reduction of the exemption will be permanent. The next year and a half is a good time to review your estate plan to make sure you take advantage of the higher estate tax exemption.
Review Your Withholding, Estimated Tax Payments, Pre-tax Deductions
A good starting point for your 2024 midyear planning is your 2023 tax return. Did you owe money to the IRS or a state, or did you receive a big refund? If you answered “yes,” you may want to assess whether your current withholding and estimated tax payments align with your projected tax liability for the year. Furthermore, if you have had significant life changes such as marriage, divorce, the birth of a child, or a change in employment, it is crucial to update your W-4 form with your employer. Adjusting your withholdings or making additional estimated tax payments can ensure that you are paying the appropriate amount of taxes throughout the year. Beware that large raises and bonuses can cause tax bracket creep, which is where the additional income pushes you into higher tax brackets and reduces the value of credits, deductions, and exemptions. This is especially true in dual-income families where both spouses are high earners. Take advantage of taxable wage reducing benefits offered by your employer such as 401k, HSA, and FSA plans.
INCOME, DEDUCTIONS, AND CREDITS
Deferring Receipt of Income Until 2025
If you expect your adjusted gross income (AGI) to be higher in 2024 than in 2025 or anticipate being in the same or a higher tax bracket, you may benefit by deferring the receipt of income until 2025. Common methods of deferring income include delaying the receipt of payments, negotiating the timing of bonuses or commissions, and postponing the sale of assets with potential gains.
Accelerating the Receipt of Income into 2024
Conversely, if you anticipate being in a higher tax bracket in 2025 than in 2024 or need additional income in 2024 to take advantage of an offsetting deduction or credit that will not be available in future tax years, it may make sense to accelerate the receipt of income into 2024.
Investment Income
The timing of your investment activities can have a significant impact on your tax position. For example, capital gains on property and securities held for less than one year are taxed at an individual’s ordinary income tax rate. Capital gains on property and securities held for more than one year are taxed at more favorable capital gains tax rates. Using this concept to time the harvest of capital gains while keeping in mind any capital loss carryovers from your 2023 return can help you minimize your taxable gains and reduce your overall tax liability. To avoid recognizing capital gains altogether, you should consider donating appreciated property to charity rather than selling it. We discuss optimal timing for charitable contributions under the Itemized Deductions Planning section.
Defer Taxes on Gains by Investing in Qualified Opportunity Funds (QOFs)
Taxpayers who invest in Qualified Opportunity Zone property through a QOF can temporarily defer tax on the amount of eligible gains they invest. In some cases, taxpayers can permanently exclude 10% or 15% of invested eligible gains. The taxpayer must invest in a QOF within 180 days of realizing a qualified gain, which includes both capital gains and qualified 1231 gains. You can defer tax on eligible gains you invest in a QOF until you have an “inclusion event” or by December 31, 2026, whichever is earlier.
Itemized Deduction Planning
When filing your taxes, you have the option to claim the standard deduction or itemize your deductions, whichever provides a greater tax benefit. For 2024, the standard deduction is $29,200 for joint filers and $14,600 for single filers. Bunching itemized deductions is a tax strategy that aims to optimize your tax situation by strategically concentrating itemizable deductions into specific years, thereby exceeding the standard deduction threshold and allowing you to itemize. For example, consider doubling up on charitable contributions every other year instead of making donations each year.
Home Energy Tax Credits
Taxpayers can claim either the Energy Efficient Home Improvement Credit (EEHIC) or the Residential Energy Clean Property Credit (ECPC) in the year qualified improvements are made. Some qualified improvements for the EEHIC include exterior doors, windows, skylights, central air conditioners, water heaters, and furnaces. For 2024 the amount of credit you can take under the EEHIC is 30% of the total improvement expenses, up to a maximum of $1,200. Some qualified improvements for the ECPC include solar, wind, and geothermal power generation; solar water heaters; and battery storage. The amount of credit you can take under the ECPC is 30% of the total improvement expenses.
Qualified Clean Vehicle Credits
The Inflation Reduction Act of 2022 amended the tax credit for buying an electric car. There are now stricter requirements for a car to qualify, but the credit was also opened back up to manufacturers whose vehicles no longer qualified for the credit due to the sales cap. Taxpayers who purchase a qualified vehicle can qualify for a credit up to $7,500 and the credit is now eligible for qualified used cars as well (limited to a $4,000 credit). You can transfer the credit at the time of purchase to the dealership to be applied to the purchase price instead of waiting to claim the credit on your tax return. One item to be aware of is there are phase-out limits based on adjusted gross income, so you should make sure you will qualify for the credit before transferring it to the dealership, otherwise you will have to repay the credit with your tax return.
American Opportunity and Lifetime Learning Tax Credits for Education
The American Opportunity Tax Credit (AOTC) is available for qualified tuition and fees paid on behalf of a student (i.e., you, your spouse, or a dependent) who is enrolled on at least a half-time basis. The maximum credit is $2,500 and is available for the first four years of the student’s post-secondary education. The Lifetime Learning Credit (LLC) is available for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate, and professional degree courses along with courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. For 2024, the maximum credit is $2,000. Both credits phase out at modified AGI levels between $160,000 and $180,000 for married filing joint taxpayers and, between $80,000 and $90,000 for single taxpayers. Tax planning for these credits can create eligibility for family members with lower income.
Contributions to 529 Plans
A 529 Plan allows you to save for future education expenses in a tax-advantaged savings plan. These plans generally are available in the form of a prepaid tuition plan or a more traditional investment account that grows tax-deferred if used for qualified education expenses. Besides college expenses, 529 distributions may be made tax-free for elementary and secondary tuition of up to $10,000 per year per student. They can also be used to pay up to $10,000 of student loans per beneficiary. Up to $18,000 in contributions to a 529 Plan are free from federal gift taxation ($36,000 if gift-splitting with a spouse). Under a special rule, you can “front-load” five years’ worth of annual gift tax exclusions and make up to a $90,000 contribution per beneficiary in 2024 ($180,000 if gift-splitting with a spouse). Illinois allows a deduction of $10,000 for single taxpayers ($20,000 for joint filers) for contributions to the state’s Bright Start and College Illinois plans. A new provision of the Secure Act 2.0 allows up to a lifetime total of $35,000 to be rolled over from a 529 Plan to a Roth IRA established in the name of the beneficiary. Many states offer a deduction or credit for contributing to the state-sponsored 529 Plan. As of now, about 35 states provide a tax benefit for making contributions.
RETIREMENT PLANNING
401K Plans
The 401K elective deferral limit is $23,000 for 2024 plus $7,500 catch-up contributions if you reach age 50 by December 31. If you are not contributing the maximum amount permitted to your 401K account, you still have time to increase contributions for the remainder of the year.
Traditional IRA
If you are not an active participant in an employer retirement plan you may make deductible contributions to an IRA. The deadline for 2024 contributions is April 15, 2025. The annual deductible contribution limit for an IRA for 2024 is $7,000 plus a $1,000 catch-up contribution for taxpayers aged 50 or older by the close of 2024.
Roth IRA
This type of IRA allows you to make nondeductible contributions of up to $7,000 ($8,000 if making an eligible catch-up contribution) for 2024. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the contribution and the individual has reached age 59½. The maximum contribution for 2024 is phased out for persons with an AGI from $230,000 to $240,000 for married taxpayers filing jointly, and $146,000 to $161,000 for single taxpayers.
Roth IRA Conversions
Funds in a traditional IRA (including SEPs and SIMPLE IRAs), Section 401(a) qualified retirement plan, Section 403(b) tax-sheltered annuity, or Section 457 government plan may be rolled over into a Roth IRA. No penalties will apply if all the requirements for such a transfer are satisfied.
Required Minimum Distributions
If you are turning 73 in 2024 and taking your first Required Minimum Distribution (RMD), you have until April 1, 2025, to do so. For each subsequent year, your RMD must be taken by December 31. Keep in mind, that if you delay your initial RMD until April 1, 2025, you will have two RMD withdrawals for 2025.
IRA Donations to Charity
If you are 70½, you can make direct contributions from your IRA to charity of up to $105,000 during 2024, but you can’t claim a charitable contribution deduction. Conversely, the amounts are not included in your taxable income and can be used to satisfy your RMD.
BUSINESS OWNERS AND SELF-EMPLOYED INDIVIDUALS
20% Qualified Business Income Deduction
A hallmark provision of the Tax Cuts and Jobs Act (TCJA), section 199A provides for a 20% deduction for “qualified business income” and certain other types of income. The deduction is available to individuals, estates, and trusts. The deduction is based on the “qualified business income” of a company but can be limited on the owner’s tax return due to the type of company and the owner’s adjusted gross income. For 2024, owners of “specified service” businesses are phased out of the deduction starting at $191,950 for single filers and $383,900 for married filing joint filers. For non-Specified Service companies, once an owner’s adjusted gross income reaches these levels, an additional test which involves wages paid and the unadjusted basis of assets is used to determine the allowable qualified business income deduction. Proper planning, including contributions to retirement plans, can help maximize this deduction.
Reevaluate Your Retirement Planning
Consider evaluating your company’s retirement plan. Does it provide the owners with an opportunity to maximize contributions? Do employees participate in the plan? Should changes be considered to increase employee participation and possibly improve employee retention? Illinois requires businesses that do not sponsor a retirement plan and have more than five eligible employees to enroll in the state-sponsored Illinois Secure Choice Plan.
Pass-through Entity Tax
Many states including Illinois have enacted a pass-through entity tax provision. This allows your business to elect to pay state income taxes on your behalf which provides a 100% deduction of the tax and avoids the $10,000 state and local income tax itemized deduction limit on your return.
Depreciation and Section 179 Expense Election
The 179 election allows your business to expense the entire cost of equipment placed in service during the year. For 2024, the maximum deduction is $1,220,000 (with a phase-out beginning at $3,050,000 assets placed in service).
Bonus Depreciation
Business or investment property placed in service in 2024, including certain used property, may be eligible for a 60% bonus depreciation deduction. Notably, Illinois no longer conforms with the federal bonus depreciation regulations, so if your business is in Illinois consider Section 179 expensing instead of bonus depreciation. You may need to consider the same for other states that disallow or limit bonus depreciation.
Employee Retention Credit
The Employee Retention Credit is a refundable credit that businesses impacted by the pandemic can claim on qualified wages. If your business qualifies, there is still time to file amended payroll tax returns to receive the credit. Our experts can assess your business to determine if your company is eligible for this credit and provide you with the information needed to support your claim.
Midyear tax planning is an essential practice for individuals seeking to optimize their tax situation and make informed financial decisions. MichaelSilver’s team of trusted advisors is ready to help. Our goal is to increase your awareness of tax planning opportunities and potential moves to minimize your tax liability. Contact us at 847.982.0333 if you would like more details about any of the topics discussed or if you have questions or concerns.
Judy Mason, CPA, CVA, CEPA – Partner, has over 25 years of tax, accounting, business consulting, and compliance experience, serving closely-held and start-up businesses, entrepreneurial and family-owned companies, their owners, and families. Her expertise is in federal, state, and local taxation. Judy has a broad depth of expertise in state and local tax research, planning, and compliance matters for entities and individuals with multi-state businesses and/or investments. She has successfully managed a broad range of federal income, and state sales and use tax audits for entities and individuals. As a Certified Valuation Analyst (CVA), Judy prepares business valuations used for various purposes such as estate and gift planning, business succession, buy/sell agreements, and litigation support.
Nathan Sharp, CPA – Senior Manager, has over 15 years of tax, individual planning, business consulting, and compliance experience serving closely-held businesses, entrepreneurial and family-owned companies, their owners, and families. His tax expertise includes planning and compliance services for high-net-worth individuals, S corporations, partnerships, trusts, and estates.
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