For a PDF of this Year-End Tax Planning Letter, click here.
Dear JMF Clients and Friends:
As this tumultuous year draws to a close and a new administration begins to take shape in our nation’s capital, both individuals and small business owners may benefit from tax strategies designed to reduce tax liability for 2024. At the same time, you should be aware of potential tax pitfalls.
In addition, you must ensure that your tax moves are based on the latest legislation, IRS guidance and court rulings. Notably, a trio of recent laws—the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the Inflation Reduction Act (IRA) and finally SECURE 2.0—have had a major impact on year-end tax planning.
There are other steps you can take to prepare for your tax return filing for next year. The accounting industry is not immune to staffing challenges, which have affected most industries over the last few years. Our firm has taken measures to ensure that we can provide you with quality service while efficiently working to prepare your income tax return. You can partner with us by making sure you provide your documents to us early. We request that you provide us with your documents at least four weeks prior to the filing deadline in order for us to file timely. We will request an extension for you if your documents arrive less than four weeks prior to the deadline, and we will put your return in line for preparation soon after the deadline passes.
For your convenience, we have prepared the following 2024 Year-End Tax Letter, running the gamut from A to Z. Of course, the concepts discussed in this letter are intended to provide only a general overview of year-end tax planning. It is recommended that you review your personal situation with a JMF tax professional before taking any action.
Alternative Minimum Tax
Certain high-income taxpayers must pay the alternative minimum tax (AMT) in lieu of regular income tax. This complex calculation involves technical adjustments, adding “tax preference items” and subtracting an exemption amount (subject to a phaseout).
IDEA IN ACTION: Have your professional advisor “take your temperature” before year-end. If it makes sense, you may arrange to reduce your AMT income for 2024.
During the last few years, fewer taxpayers have owed the AMT due to increases in the exemption amounts. Consider the following recent increases for single and joint filers.
Filing status 2020 2021 2022 2023 2024
Single filers $72,900 $73,600 $75,900 $81,300 $85,700
Joint filers $113,400 $114,600 $118,100 $126,500 $133,300
Note: The AMT rate is 26% on up to $232,600 of AMT income and 28% above that threshold. But the top AMT rate is still lower than the top ordinary income tax rate of 37%. Therefore, you might accelerate income into 2024 to benefit from a lower AMT rate.
Business Repairs
As more remote employees return to the regular workplace, your business may need to fix up the place. While expenses spent on making repairs are currently deductible, the cost of improvements to business property must be capitalized.
IDEA IN ACTION: When appropriate, complete minor repairs before the end of the year. The deductions for these expenses can offset taxable income in 2024.
Generally, a repair keeps property in efficient operating condition, while an improvement prolongs the property’s life, enhances its value or adapts it to a different use. For example, fixing a leaky faucet is a repair, but adding a new parking deck is an improvement.
Note: IRS regulations allow a qualified business to make a safe-harbor election to currently deduct costs relating to certain improvements.
Charitable Donations
The tax law allows itemizers to deduct charitable donations within generous limits if certain recordkeeping requirements are met.
IDEA IN ACTION: Step up charitable gift-giving before the end of the year if you expect to itemize in 2024. This may include donations of cash and/or property.
Generally, your current deduction for cash donations cannot exceed 60% of your adjusted gross income (AGI). If you donate appreciated property held longer than one year (i.e., it would qualify for a long-term capital gain if sold), you can generally deduct an amount equal to its fair market value (FMV) on the donation date, up to 30% of your AGI.
Note: If you donate to a cause online by credit card in December, the donation is deductible in 2024, even if you do not make the credit card payment until 2025.
Depreciation Deductions
Besides “expensing” under Section 179, a business can recover the cost of qualified business property through depreciation deductions. This may include “bonus depreciation” in the first year the property is placed in service and regular depreciation over multiple years.
IDEA IN ACTION: Try to place qualified property in service before the end of the year. This will provide a bigger first-year bonus depreciation deduction than it will next year.
That is because bonus depreciation is being phased out. For 2024, you can deduct 60% of the cost (down from 80% in 2023). It is scheduled to reach zero after 2026.
Note: The bonus depreciation deduction also applies to used, as well as new, business property that otherwise qualifies for the first-year write off.
Estate and Gift Taxes
The gift tax exclusion allows you to give each recipient gifts valued up to an annual limit with no gift tax. The limit is indexed for inflation in $1,000 increments as shown below.
Tax year Amount per recipient
2018–2021 $15,000
2022 $16,000
2023 $17,000
2024 $18,000
IDEA IN ACTION: Maximize use of the gift tax exclusion to reduce your taxable estate. For instance, you can give up to $18,000 to a family member in both December and January without any gift tax liability. The limit is doubled for gifts by joint filers.
Any excess gifts are sheltered from tax by the unified estate and gift tax exemption of $10 million (indexed to $13.61 million in 2024).
Note: The exemption is scheduled to revert to $5 million, plus indexing, in 2026. Consult with your tax advisor concerning your estate plan.
Flexible Spending Accounts
With a flexible spending account (FSA), you can make contributions on a pre-tax basis within certain limits to an account set up for healthcare or dependent care expenses. The distributions are exempt from tax if they are used to pay qualified expenses.
IDEA IN ACTION: Manage your account. Depending on your employer’s plan, you may have to forfeit any unused funds at the end of the year under the “use it or lose it” rule.
However, if the plan permits it, you may be able to benefit from a 2½ month grace period or carry over funds up to an annual limit ($640 for 2024 carried into 2025).
Note: The contribution limits in 2024 are $3,200 for healthcare expenses and $5,000 for dependent care expenses. If you have both FSAs, they are managed separately.
Gains and Losses
The end of the year is often the optimal time for investors to “harvest” capital gains or losses from securities sales.
IDEA IN ACTION: Review your portfolio. When appropriate, realize losses before 2025 to offset capital gains, plus up to $3,000 of high-taxed ordinary income. Any remainder is carried over to the next year. Conversely, gains can be absorbed by prior losses.
In particular, you may harvest losses to offset short-term gains of securities owned a year or less. Normally, such gains are taxed at ordinary income rates as high as 37%.
Note: The maximum tax rate on long-term capital gains is generally 15% (20% for certain high-income investors).
Home Energy Credits
Under the IRA, you may benefit from two types of “home energy” tax credits on your 2024 return.
IDEA IN ACTION: Make energy-saving installations before the end of the year to lock in credits for qualified improvements. The two credits are as follows:
• Energy efficient home improvement credit: This is a 30% credit for qualified expenses like insulation, central air conditioners, water heaters, furnaces, heat pumps, biomass stoves and boilers, and home energy audits, up to a maximum of $3,200.
• Residential clean energy credit: This is a 30% credit for the cost of new qualified clean energy property like solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage technology.
Note: Other special rules and limits may apply. Obtain confirmation of tax breaks before making any commitments.
Installment Sales
If you sell real estate property at a gain, you must pay tax on the full amount of the capital gain in the year of the sale.
IDEA IN ACTION: Arrange to sell real estate on the installment basis. If you receive installment payments over two or more tax years, the tax is limited to a proportionate share of the gain that is paid over the years in which payments are actually received.
Not only does this technique defer some of the tax due on a real estate deal, it also often reduces your overall tax liability, because you may end up paying tax on a greater portion of the gain at the 15% capital gain rate, as opposed to the 20% rate.
Note: When it makes sense (e.g., you have a low tax year or you are carrying over losses), you may “elect out” of installment sale treatment on your 2024 return. Otherwise, the tax treatment is automatic.
Job-hiring Credits
Is your company’s busy season coming up? You may expand your staff during the holidays. Consider all the relevant factors, including tax incentives, in your hiring decisions.
IDEA IN ACTION: If they are good candidates, you may hire workers eligible for the Work Opportunity Tax Credit (WOTC). The credit is available to employers that hire workers from several designated “target” groups.
Generally, the WOTC equals 40% of the first-year wages of up to $6,000 per employee, for a maximum of $2,400. For certain qualified veterans, the credit may be claimed for up to $24,000 of wages, for a $9,600 maximum. There is no overall limit.
Note: The WOTC has expired—and then been reinstated—multiple times in the past, but it is currently available through 2025.
Kiddie Tax
The “kiddie tax” is triggered when a dependent child who is age 18 or under, or a full-time student under age 24, receives unearned income above an annual level. The threshold for 2024 is $2,600. Any excess is taxable at the parents’ top tax rate.
IDEA IN ACTION: Try to keep your child’s income below or near the threshold. For example, you might have your child shift more investments into growth stock or tax-free municipals or municipal bond funds. Also, use a Section 529 plan for college savings.
Similarly, if the kiddie tax will no longer apply to your children after 2024, they might postpone capital gains to 2025.
Note: Parents can elect to pay the kiddie tax on their own federal income tax return if certain requirements are met.
Long-term Care Insurance
The health insurance premiums you personally pay generally qualify for the medical expense deduction if you itemize and your total unreimbursed expenses exceed 7.5% of your AGI.
IDEA IN ACTION: Consider long-term care insurance (LTCI) for financial protection. The LTCI premiums also count toward the medical deduction threshold.
However, be aware that only a portion of your LTCI cost is deductible, based on your age as shown below. The deductible amounts, which are indexed annually for inflation, actually declined from 2023.
Age at end of year 2023 deduction limit 2024 deduction limit
40 and under $480 $470
41 to 50 $890 $880
51 to 60 $1,790 $1,760
61 to 70 $4,770 $4,710
Over 70 $5,960 $5,880
Note: Certain states also provide tax incentives for paying LTCI premiums. Take advantage of these tax breaks. Alabama is one such state that allows a deduction for LTCI premiums without the AGI limitation.
Medical Expenses
As explained above, you can deduct unreimbursed medical expenses above 7.5% of your AGI in 2024.
IDEA IN ACTION: If it is appropriate, move non-emergency expenses from 2025 into 2024. For example, you might arrange to have a year-end medical exam or a dental cleaning in December instead of January. This might also apply to purchasing medical supplies.
The extra expenses may push you over the 7.5% of AGI threshold for 2024 or boost an existing deduction. Conversely, if you absolutely will not qualify for a deduction, you might as well postpone these expenses to 2025 when they may do you some tax good.
Note: Remember that you can claim a medical deduction for 2024 only if you itemize deductions on your return.
Net Investment Income Tax
Certain high-income investors must cope with the 3.8% “net investment income tax” (NIIT) in addition to regular income tax.
IDEA IN ACTION: Reduce NIIT exposure for 2024. The tax applies to the lesser of net investment income—including capital gains, dividends and interest—or the modified adjusted gross income (MAGI) above $200,000 for single filers or $250,000 for joint filers.
Several potential ideas for minimizing the NIIT in 2024 are as follows:
• Invest in tax-free municipals or municipal bond funds.
• Harvest capital losses to offset gains.
• Sell real estate on the installment basis.
Note: Be aware that the NIIT thresholds are not indexed for inflation. Thus, this “hidden tax” may begin to affect you as your income rises.
Office-at-home Expenses
If you are a self-employed individual who works from home, you may have a unique opportunity to write off a portion of your everyday household expenses.
IDEA IN ACTION: Secure deductions for “home office” expenses. To qualify, you must use a portion of your home “regularly and exclusively” as your principal place of business or a place where you normally meet or deal with clients, customers or patients.
The deductible expenses include direct expenses plus a portion of indirect expenses based on business percentage use of the home. Typically, indirect expenses may include utilities, insurance, repairs, a home security system, and a depreciation allowance.
Note: In lieu of deducting actual expenses, you may use a simplified method of $5 per square foot of space used for business up to an annual maximum of $1,500.
Passive Activity Losses
Under the “passive activity loss” (PAL) rules, the losses you can claim from passive activities in which you don’t materially participate—like real estate—are generally limited to the amount of income from your passive activities.
IDEA IN ACTION: Invest in passive income generators (PIGs) designed to produce current income. Those losses can then be used to absorb PALs.
Although real estate is automatically treated as a passive activity, “active participants” can use losses to offset up to $25,000 of non-passive income. This tax break is phased out for investors with MAGI between $100,000 and $150,000.
Note: To qualify as an active participant, you typically would manage the property, arrange rental agreements with tenants, schedule repairs, etc. Offering the property for rental is not, by itself, sufficient.
Qualified Retirement Plans
If you participate in a qualified retirement plan at work, such as a 401(k) plan, you build up tax-favored savings. With a 401(k), you can defer part of your salary on a pre-tax basis, including both income and payroll taxes, within generous limits. Plus, employees age 50 or older can add “catch -up contributions” to 401(k)s in 2024, as shown below.
Age of participant Deferral limit Catch-up contribution limit Maximum
total
Under age 50 $23,000 N/A $23,000
Age 50 or older $23,000 $7,500 $30,500
IDEA IN ACTION: Allocate payroll tax savings to your 401(k) after you clear the Social Security tax “wage base” of $168,600 for 2024. Doing so lets you increase contributions without any effective reduction of your take-home pay for the rest of 2024.
In addition, your company may provide participants with the option of a Roth 401(k) account. As with Roth IRAs, future distributions are generally exempt from tax.
Note: Under SECURE 2.0, any catch-up contributions by employees earning over $145,000 a year must be made to Roth 401(k)s. But this rule has been postponed from 2024 to 2026.
Required Minimum Distributions
Usually, participants in qualified retirement plans and traditional IRAs must take “required minimum distributions” (RMDs) from qualified retirement plans and IRAs after reaching a specified age. Currently, the age is 73 after SECURE Act and SECURE 2.0 changes (scheduled to increase to age 75 in 2033). The amount of each annual distribution is based on IRS life expectancy tables and your account balance at the end of last year.
IDEA IN ACTION: Arrange to receive RMDs before 2025. Otherwise, you will have to pay a tax penalty on top of the tax liability. For 2024, the penalty is 25% of the shortfall (10% if corrected promptly), due to a reduction from 50% by SECURE 2.0.
Other complex rules apply to beneficiaries of qualified plans and IRAs. Generally, non-spouse beneficiaries must empty out accounts within ten years. See your JMF tax advisor for more details.
Consider a qualified charitable distribution (QCD). If you are age 70½ or older, you can transfer up to $105,000 of IRA funds directly to a charity. Although the contribution is not deductible, the QCD is exempt from tax. This is a popular option if you have to make a required minimum distribution from a Traditional IRA and do not have enough itemized deductions to receive a tax benefit from making charitable contributions. This tax planning strategy may improve your overall tax picture. Consult your JMF tax advisor for proper execution of a QCD.
Note: Previously, participants in Roth 401(k)s had to take RMDs, as required with regular 401(k)s. Beginning in 2024, this is no longer required for Roth 401(k) participants.
Start-up Costs
Normally, the costs incurred with starting up a new business venture must be amortized over 180 months. However, the tax law allows an entrepreneur to claim a current deduction of up to $5,000 for qualified start-up costs, subject to a phaseout above $50,000.
IDEA IN ACTION: Officially “open for business” before January 1, 2025. Typically, this means your business must begin offering goods or services. Otherwise, you are not entitled to claim the current $5,000 deduction.
Generally, start-up costs are those that would be deductible as business expenses, such as studies of potential markets, products, labor supply, transportation facilities, etc.; advertisements for the opening of the business; salaries and wages for employees who are being trained and their instructors; travel costs to secure prospective distributors, suppliers, customers or clients; and salaries and fees for executives and consultants or similar services.
Note: Your business may be entitled to an additional current deduction of up to $5,000 for qualified organizational expenses (e.g., expenses of a CPA).
Tuition Expenses
Although you can no longer deduct tuition expenses, the tax law still provides two tax credits for tuition and other qualified higher education expenses. However, both credits are phased out based on MAGI.
IDEA IN ACTION: If you qualify, pay for next year’s first semester in December. The tuition can count toward a 2024 credit even though the semester starts in 2025.
The two available credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).
• The maximum annual AOTC is $2,500 per student for up to four years of study.
• The maximum annual LLC is $2,000 per family for all years of study.
Note: Generally, you can claim either one of the two credits, according to your preference, but not both in the same tax year.
Underpayment of Tax
If you do not pay enough “estimated tax” during the year, through any combination of quarterly installments and wage withholding, the IRS may assess an underpayment penalty, unless a safe-harbor rule applies.
IDEA IN ACTION: Adjust to qualify under one of the safe-harbor rules. For instance, you may increase withholding at the end of the year or add to an installment.
Notably, no penalty will be imposed if you pay during the year—
• At least 90% of the current year’s tax liability; or
• At least 100% of the prior year’s tax liability (110% if your AGI exceeded $150,000). This second safe harbor rule is easier to plan for than the first.
Note: Another safe harbor rule is available to certain seasonal businesses. Contact your JMF tax advisor for more details.
Vacation Home Rentals
If you own a vacation home in a resort area, you may rent out the home to tenants while you and your family are not using it personally.
IDEA IN ACTION: Steer clear of a tax trap. If your personal use exceeds the greater of 14 days or 10% of the time the home is rented out, you cannot claim a tax loss.
This may require some astute planning to avoid the 14 day/10% limit. For instance, you might postpone a December ski trip to January if it would trigger excess personal use.
Note: A day spent making minor repairs or sprucing up the home for rental does not count as a “personal use” day—even if the rest of the family tags along just for fun.
Wash Sale Rule
As indicated earlier, you may harvest capital losses from securities sales at the end of the year to offset high-taxed capital gains.
IDEA IN ACTION: Watch out for the “wash sale” rule. Under this tricky rule, you cannot deduct a loss from a sale of securities if you reacquire “substantially identical” securities within 30 days of the sale.
However, you can easily avoid the wash sale rule by waiting at least 31 days before you reacquire substantially identical securities. Alternatively, to preserve a current position, you can buy more shares of the securities and wait at least 31 days to sell the original shares.
Note: If a loss is disallowed due to the wash sale rule, the amount is added to your basis in the securities, so it may reduce a taxable gain on a future sale.
X-pensing Deduction
Under Section 179 of the tax code, a business can “x-pense” (taking liberty here) in one year the entire cost of qualified property placed in service, up to a generous annual limit.
IDEA IN ACTION: Start using qualified property before 2025. The property cannot be considered as “placed in service” until it is ready to be used.
The limit for 2024 is the lesser of $1.22 million or taxable income from business activities. This tax break begins to phase out for property costing more than $3.05 million.
Note: A business may combine Section 179 expensing with bonus depreciation to write off most, if not all, of the cost of qualified property placed in service in 2024.
Year-end Bonuses
Normally, wages paid to employees by cash-basis companies—including commissions and year-end bonuses—are deductible in the year in which they are paid and received. But there is a special tax break for accrual-basis companies.
IDEA IN ACTION: Delay bonuses to 2025 but deduct them in 2024. An accrual-basis company operating on a calendar year can do this if the bonuses are paid within 2½ months after the close of the tax year, or March 17, 2025.
To sweeten the deal, the employees are not taxed on the bonuses until the year they are received—in this case, 2025.
Note: The early deduction is not available for bonuses paid to C corporation shareholders or owners of S corporations or personal service corporations.
Zero Percent Capital Gains Taxes
As explained earlier, recipients of long-term capital gains may often benefit from favorable tax treatment with a rate as low as 15%.
IDEA IN ACTION: A family member, like a child, may do even better when they sell securities qualifying for long-term capital gains. The rate is a rock-bottom zero percent!
The 2024 tax brackets, which are based on total taxable income, are shown below.
Filing status 0% rate 15% rate 20% rate
Single $47,025 and under $47,026–$518,900 $518,901 and above
Joint $94,050 and under $94,051–$583,750 $583,751 and above
Note: If this is a low tax year for you—say, your S corporation incurred an overall loss—a portion of your long-term capital gains may qualify for the zero percent rate.
In addition to the federal items of consideration, there are state items to consider as well.
Back to Alabama State Taxes
• Year-end tax projections are especially important for state taxes. Just like the IRS, states generally impose withholding and estimated tax requirements. States also charge underpayment penalties if sufficient payments are not made during the year.
• Alabama passed the Pass-Through Entity Act that affects owners of pass-through entities. This allows S-Corporations and Partnerships to pay state tax at the entity level. If paid prior to December 31st (for cash-basis taxpayers) or elected and paid with the 2024 pass-through return (for accrual taxpayers), the owner can avoid the $10,000 state tax limit on itemized deductions on the federal return. Estimates are required. You should discuss electing to pay the PTE tax with your JMF professional.
• State taxes are deductible in computing federal income tax, up to the limit of $10,000, and the timing of payments may be important. A tax planning strategy is to prepay by December 31, 2024 the state tax estimates that are due January 2025, and prepay projected balances due on April 15, 2025 to accelerate deductions into 2024.
However, this strategy is not beneficial for a year in which you are paying the alternative minimum tax since the AMT does not allow deductions for taxes, including state income taxes. If this sounds complicated, that’s because it is complicated. A tax projection by your JMF tax professional is the best way to approach this issue.
• It is also important to note that the federal 20% deduction for “qualified business income” will not be an applicable deduction on the Alabama return.
However, Alabama law actually provides several deductions not allowed by federal law. These include:
o Taxpayers may deduct up to $5,000 for a single filer and $10,000 for a joint filer for contributions to an Alabama Section 529 college savings plan.
o Even though the TCJA removed personal exemptions for federal purposes, Alabama law still allows for deductions for personal and dependent exemptions on the Alabama return.
o Like federal law, Alabama allows a deduction for insurance premiums paid for a qualified long-term care policy. But, for Alabama purposes, the premiums are not subject to the limitations for out-of-pocket medical expenses like they are for federal purposes.
o Even though disallowed for federal purposes, miscellaneous itemized deductions are still allowed for the Alabama return.
o Alabama law allows a deduction for the lesser of $3,000 or 50% of the costs to retrofit a new or existing home with a storm shelter to prevent damages associated with windstorm events or floods.
o The parent of a student enrolled in or assigned to attend a failing school qualifies for a refundable Alabama credit for the cost of transferring the student to a non-failing public school or private school of the parent’s choice. The credit equals 80% of the average annual state cost of attendance for a public K-12 student during the applicable tax year or the actual cost of attending a non-failing public school or private school, whichever is less. Private schools must participate in the scholarship contribution credit program to be eligible to participate in the failing schools credit program. A parent is allowed a credit against income tax for each taxable year. However, parents of current private school students, including those living in an area zoned for a failing school, do not qualify for the credit.
o In addition to the regular Alabama income tax deduction for medical expenses that a qualifying employee may be entitled to with respect to the payment of health insurance premiums, qualifying employees are also allowed to deduct from Alabama gross income an additional 100% of the amounts they pay as health insurance premiums as part of an employer provided health insurance plan provided by a qualifying employer. The qualifying employer is also allowed to deduct an additional 100% of the health insurance premiums they pay for qualifying employees. For more information on these tax deductions, please consult your JMF tax professional.
CONCLUSION
This year-end tax planning letter is based on the prevailing federal and Alabama state tax laws, rules and regulations. Of course, it is subject to change, especially if additional tax legislation is enacted by Congress before the end of the year.
Finally, remember that this letter is intended to serve only as a general guideline. Your personal circumstances will likely require careful examination. We would be glad to schedule a meeting with you to assist with all your tax planning needs.
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