By John Pollard, CPA
INTRODUCTION
It’s hard to believe we are nearing the end of another year. Before we say goodbye to 2024, we believe it’s important to take a moment and review year-end tax planning opportunities. Examining your 2024 tax situation before year-end could lead to tax savings when you file your tax returns in 2025. As a result, we have included our 2024 year-end income tax planning letter to assist you with this process. We’ve included selected traditional as well as some new planning ideas for your consideration. If you have questions or want to discuss planning ideas not included in our letter, please call our firm.
Caution! The IRS continues to release guidance on various important tax provisions. We closely monitor new tax legislation and IRS releases. Please call our firm if you want an update on the latest tax legislation, IRS notifications, announcements, and guidance or if you need additional information concerning any item discussed in this letter.
Be Careful! We suggest you call our firm before implementing any of the tax planning techniques discussed in this letter. You cannot properly evaluate a particular planning strategy without calculating your overall tax liability with and without that strategy. This letter contains ideas for Federal income tax planning only. State income tax issues are not addressed.
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POSSIBLE LEGISLATION BEFORE YEAR-END
Each year we work to provide you with our year-end planning letter in time to implement possible tax saving strategies before December 31st. As a result, it’s possible Congress could pass new legislation between your receipt of this letter and year-end. Congress has not acted concerning several expiring provisions and extenders, including those introduced by the Tax Cuts and Jobs Act. At this point, it is uncertain whether there will be new legislation after the election and before 2025. Therefore, please contact our firm if you would like an update on possible legislation and how it could affect you.
HIGHLIGHTS OF PROVISIONS INCLUDED IN SECURE 2.0 ACT FIRST EFFECTIVE IN 2024
On December 29, 2022, President Biden signed the “Consolidated Appropriations Act, 2023.” In the following summary, we’ve listed a few provisions of the SECURE 2.0 segment of the Consolidated Appropriations Act, 2023 that could impact your 2024 year-end planning.
Exceptions From 10% Penalty Tax For Certain “Early Distributions” From Retirement Accounts
Exception From 10% Penalty Tax Relating To Federally Declared Disasters. With the recent hurricane disasters, etc. it’s important to note that individuals living in a Federally Declared Disaster may be able to withdraw up to $22,000 from their retirement plan (including an IRA), penalty-free, as a Qualified Disaster Recovery Distribution (QDRD). There is a 180-day window within which the amounts may be withdrawn penalty free. Caution! Even though there is no penalty on the amount withdrawn, the amount withdrawn will generally be included in your income.
Exception For Distributions To Domestic Abuse Victims. Distributions from an eligible retirement plan (generally qualified plans, other than defined benefit plans) to a domestic abuse victim will not be subject to the 10% penalty tax if such distribution is made to an individual during the one-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. This includes qualifying distributions from an IRA. A domestic abuse victim distribution is includible in gross income but is not subject to the 10% penalty tax. Domestic abuse means physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household. Note! Employers are not required to allow distributions from an employer sponsored retirement plan because of domestic abuse.
No 10% Penalty Tax On Certain Emergency Personal Expenses “Emergency Personal Expense Distribution.” Any distribution from a retirement plan, other than a defined benefit plan, to an individual to meet unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses will not be hit with the 10% penalty tax. One distribution per calendar year for personal or family emergencies, up to the less of $1,000 or vested account balance over $1,000. Note! An employer is not required to include an “Emergency Personal Expense Distribution” provision in the employer’s retirement plan.
Increase In Age For Required Minimum Distributions (RMDs)
Required minimum distributions (RMDs) from IRAs and qualified plan accounts were generally required to begin no later than April 1st following the calendar year in which an individual reached age 72. Note! RMDs are now required after 73, for individuals who attain age 72 after 2022. The Act provides:
For an individual born after 1950, RMDs are required to begin no later than April 1 following age 73, and
For an individual born after 1959, RMDs are required no later than April 1 following age 75.
Trustee-To-Trustee Tax-Free Transfer Allowed From 529 Plan To Beneficiary’s Roth IRA
A trustee-to-trustee tax-free transfer is allowed after 2023 from a 529 plan to a beneficiary’s Roth IRA without tax or penalty if the following requirements are met: 1) The 529 plan has been maintained for at least a 15-year period ending on the date of the transfer, 2) The amount of transfer to the Roth IRA does not exceed the aggregate amount of contributions and earnings prior to the 5-year period ending on the date of transfer, 3) Transfers for any one taxable year cannot exceed the IRA contribution limitation for the year reduced by the amount of all contributions made to all IRAs maintained for the beneficiary’s benefit during the year, 4) The aggregate of all qualified transfers for the current and all prior years does not exceed $35,000.
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