Despite the challenging environment, you are still able to and should focus on traditional year-end income tax planning. While many issues are out of our control, our tax situation is not one of them. Here are several things to consider before the beginning of 2025.

1. Explore Roth Conversions

If you have considered converting your Traditional IRA or 401(k) funds to a Roth IRA, 2024 may be a fitting year to do so. Although Roth conversions generate immediate taxation, federal tax rates remain low, the markets are still off their high, and we cannot predict how much longer they will remain so. If you are reluctant to absorb a big tax bill, consider a series of smaller partial conversions over time, using up lower tax brackets. Keep in mind, Roth conversions are permanent, so be certain there are enough funds to pay the taxes before completing the conversion. All conversions must be completed by December 31 in order to qualify as 2024 taxable income.

2. Take Your RMDs

Beginning in 2023, the RMD age increased to 73, which means IRA owners age 73 or older must take RMDs. Participants in employer plans who are age 73 or older are also subject to RMDs if they do not qualify for the “still-working exception.” Beneficiaries may also be subject to RMDs.

December 31, 2024 is the deadline for most RMDs. However, there is an exception to this deadline for a person’s first RMD. If 2024 is the first year an RMD is required for a retirement account owner, the deadline for that RMD is extended to April 1, 2025.

Under the SECURE Act and SECURE Act 2.0, where the decedent’s account is payable to a Designated Beneficiary who is not an “Eligible Designated Beneficiary” listed in Section 401(a)(9)(E)(ii), and the plan participant or IRA owner died on or after reaching his or her Required Beginning Date, a “10-year” rule applies. Under that rule, all of the account’s property must be distributed in full no later than the end of the calendar year containing the 10th anniversary of the plan participant’s or IRA owner’s death. In addition, annual required minimum distributions must occur in each of the nine years following the year of death since, under IRC Section 401(a)(9)(B)(i), distributions payable to a designated beneficiary must be paid at least as rapidly as before death (“ALAR rule”). The ALAR rule was not altered by the SECURE Act nor by SECURE 2.0.

3. Consider Charitable Giving

Consider giving appreciated securities to charities and avoiding a potential taxable capital gain when sold. Avoiding the capital gains tax is one advantage, a tax deduction for those itemizing their deductions is another potential benefit, and, of course, the benefits reaped by the charity itself.

Normally, itemized deductions for cash charitable contributions can’t exceed 60% of adjusted gross income (AGI) in a single tax year. Remember, you must itemize to take advantage of this strategy. Annual income tax deduction limits for gifts to public charities, including donor advised funds, are 30% of adjusted gross income (AGI) for contributions of non-cash assets, if held more than one year, and 60% of AGI for contributions of cash.

4. Consider Qualified Charitable Distributions

Qualified Charitable Distributions, or QCDs, are distributions from your IRA account directly to a qualifying charity. IRA owners 70½ years of age and older are eligible. While the SECURE Act raised the RMD age from age 70½ to age 73, QCDs are still available at age 70½. The benefit of giving to charities from your IRA is that you do not pay income tax as you would on funds distributed from your IRA. The charity gets the full donation, and the donor does not have to claim the distribution as income.

5. Keep Tabs on the Proposed Tax Legislation—Be Prepared to Update Your Estate Plan

In an election year, parties have vastly different policies regarding estate and income taxes. Some, in fact, would dramatically alter or severely restrict traditional estate planning techniques. The lifetime estate and gift tax exemption is currently $13.61 million, and on January 1, 2025, estate exemption will increase again, and the annual exclusion should climb to $19,000 per person. But please remember --whether new legislation is passed or not, the current exemption is scheduled to sunset on January 1, 2026, and be reduced to nearly half its current amount. Therefore, it is a good time to discuss your estate planning goals with your Financial Advisor. Consider planning now and waiting until after the election results to implement your plan.

6. Interest Rates and the Effect on Planning

Estate planning and wealth transfer techniques are impacted by economic drivers, including interest rates. As interest rates go down, vehicles like Grantor Retained Annuity Trusts, Charitable Lead Trusts, and Intrafamily Loans may become beneficial.

On the other hand, Qualified Personal Residence Trusts and Charitable Remainder Trusts are two vehicles that may perform well in a higher interest rate environment.

7. Other End-of-Year Thoughts

• If you have significant gains in your portfolio and limited losses to harvest in 2024, consider making any year-end charitable contributions with appreciated assets. If you are looking for income, consider a Charitable Gift Annuity or a Charitable Remainder Trust. Also, if you are over 70 1/2, you can make a one time gift from your IRA to a Charitable Gift Annuity.
• When considering charitable techniques, don’t forget that the standard deduction is still high, and we still have limits on state taxes, so you may still want to consider bunching charitable contributions to a donor-advised fund if a QCD is not utilized.
• The election outcome could result in much higher income tax rates sooner than January 1, 2026, so people may want to take advantage of the extended tax brackets in 2024 and possibly 2025 by accelerating income or making Roth IRA conversions.

8. Maximize Retirement Savings and Health Savings Accounts

IRA and Roth IRA contributions have an April 15, 2025 deadline, but employer-sponsored retirement plans need to receive contributions by December 31, 2024. Your contribution to an HSA also needs to be received by December 31, 2024.

9. Use Your Flexible Spending Accounts

Flexible Savings Accounts (FSA) follow a “use it or lose it” rule. If you funded an FSA with pre-tax dollars, be sure to use it to its full advantage. Spend down all money that you would otherwise lose on January 1, 2025.