2024 YEAR-END INCOME TAX PLANNING FOR INDIVIDUALS (Part Two)
by John Pollard, CPA
HIGHLIGHTS OF TRADITIONAL YEAR-END TAX PLANNING
Each year, we discus several traditional year-end tax planning strategies to help reduce taxable income. One of those strategies is reducing current year taxable income by deferring taxable income into later years and accelerating deductions into the current year. This strategy is beneficial when your income tax rate in the coming year is expected to be the same or lower than the current year. Consequently, in the following discussion we include traditional year-end tax planning strategies that would allow you to accelerate your deductions into 2024, while deferring your income into 2025. Planning Alert! For individuals who expect their 2024 income tax rate to be much lower than their 2025 income tax rate, the opposite strategy might be more advantageous. For example, individuals who have a significant drop in income during 2024, may decide it’s better to accelerate income into 2024 (to be taxed at lower rates), while deferring deductions into 2025 (to be taken against income taxed at higher rates).
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503 Trade Street┃Tarboro, North Carolina 27886┃pollard.cpa┃P: (252) 823-1040
Tax Benefits Of Above-The-Line Deductions. Traditional year-end planning includes accelerating deductible expenses into the current tax year. So-called “above-the-line” deductions reduce both your “adjusted gross income” and your “modified adjusted gross income”, while “itemized” deductions (i.e., below-the-line deductions) do not reduce either adjusted gross income or modified adjusted gross income. Deductions that reduce your adjusted gross income (or modified adjusted gross income) can generate multiple tax benefits by reducing your taxable income and allowing you to be taxed in a lower tax bracket and potentially freeing up other deductions (and tax credits) that phase out as your adjusted gross income (or modified adjusted gross income) increases.
If you think that you could benefit from accelerating above-the-line deductions into 2024, consider the following:
Possible Above-The-Line Deductions. Above-the-line deductions include: Military Moving Expenses; Qualifying Alimony Payments (if the divorce or separation instrument was executed before 2019); Deductions for IRA or Health Savings Account (HSA) Contributions; and, Student Loan Interest. Note! For 2018 through 2025, the deduction for moving expenses has been suspended for most individuals. Planning Alert! Generally, active members of the Armed Forces who move pursuant to a military order because of a permanent change of station may still deduct un-reimbursed qualified moving expenses as above-the-line deductions and may exclude the employer reimbursements of those moving expenses from income. For 2024, an Armed Forces Member may use the standard rate of 21 cents per mile to determine the deduction for automobile expenses related to a qualified move.
Historically, an individual making qualified alimony payments was allowed an above-the-line deduction for the payments and the recipient of the payments was required to include the payments in income. However, effective for “Divorce or Separation Instruments” executed after 2018, the deduction for alimony payments has been repealed altogether. The good news is that these alimony payments are no longer taxable to the recipient. Alimony paid under a divorce instrument executed before 2019 will generally be grandfathered under the previous rules. Planning Alert! If you are currently paying or receiving alimony pursuant to a divorce or separation instrument executed before 2019, the tax treatment of the alimony payments does not change. That is, if your alimony payments were deductible before 2019, they should continue to be deductible (and includible in the recipient’s income).
Contributions To A Health Savings Account (HSA). You may be eligible for an above-the-line deduction for contributions to an HSA if you are covered under a high-deductible health plan during 2024. The maximum deduction for a self-only coverage plan is $4,150 and $8,300 for a family coverage plan. In addition, if you are at least 55 by the close of 2024, you can add $1,000 ($5,150 & $9,300).
Student Loan Interest Deduction. The $2,500 maximum deduction is phased out between $165,000 and $195,000 of modified adjusted gross income if filing a joint return ($80,000 and $95,000 if filing single). Caution! The deduction is not allowed to: 1) A taxpayer filing as married filing separately, or 2) A taxpayer who may be claimed as a dependent on someone else’s tax return.
Itemized Deductions. Although itemized deductions (i.e., below-the-line deductions) do not reduce your adjusted gross income or modified adjusted gross income, they still may provide valuable tax savings if your itemized deductions exceed your standard deduction. For 2024, the Standard Deduction is: Joint Return - $29,200; Single - $14,600; and Head-of-Household - $21,900.
The following are ideas for planning with itemized deductions:
Medical Expense Deductions. For 2024, you are allowed to take an itemized deduction for medical expenses only to the extent your aggregate medical expenses exceed 7.5% of your AGI. Planning Alert! It may be possible to deduct expenses for your “medical dependent”. If you paid medical expenses for a child, parent, etc. who you are unable to claim as a dependent due to their 2024 gross income, please call us so we can determine if those expenses qualify to be reported as medical expenses on your return.
$10,000 Cap On State And Local Taxes. From 2018 through 2025, your aggregate itemized deduction for state and local real property taxes, state and local personal property taxes, and state and local income taxes (or sales taxes if elected) is limited to $10,000 ($5,000 for married individuals filing separately). Note! You are still allowed a full deduction for state, local, and foreign property or sales taxes paid or incurred in carrying on your trade or business (e.g., your Schedule C, Schedule E, or Schedule F operations).
Limitations On The Deduction For Interest Paid On Home Mortgage “Acquisition Indebtedness.” The Tax Cuts And Jobs Act (TCJA) reduced the dollar cap for Acquisition Indebtedness incurred after December 15, 2017, from $1,000,000 to $750,000 ($375,000 for married filing separately) for 2018 through 2025. Generally, any Acquisition Indebtedness incurred on or before December 15, 2017, is “grandfathered” and will still carry the $1,000,000 cap. Planning Alert! If you think your itemized deductions this year could likely exceed your Standard Deduction, paying your January 2025 qualifying home mortgage payment before 2025 should accelerate the interest deduction portion of that payment into 2024.
Charitable Contributions. If you think your itemized deductions this year could likely exceed your Standard Deduction of $29,200 if filing jointly ($14,600 if single) and you want to accelerate your charitable deduction into 2024, please note that a charitable contribution deduction is allowed for 2024 if the check is “mailed” on or before December 31, 2024, or the contribution is made by a credit card charge in 2024. However, if you merely give a note or a pledge to a charity, no deduction is allowed until you pay the note or pledge. Planning Alert! If you are considering a significant 2024 contribution to a qualified charity, it will generally save you taxes if you contribute appreciated long-term capital gain property, rather than selling the property and contributing the cash proceeds to the charity. By contributing capital gain property held more than one year, a deduction is generally allowed for the full value of the property, but no tax is due on the appreciation. If instead you intend to use loss stocks to fund a charitable contribution, you should sell the stock first and then contribute the cash proceeds. This will allow you to deduct the capital loss, while preserving your charitable contribution deduction.
Casualty Losses. From 2018 through 2025, the itemized deduction for personal casualty losses and theft losses has been suspended. Note! Personal casualty losses generally continue to be deductible to the extent the taxpayer has personal casualty “gains” for the same year. In addition, casualty losses with respect to property held in a trade or business or for investment are still allowed. Planning Alert! Personal casualty losses attributable to a Federally declared disaster continue to be deductible. If you have a casualty or theft loss resulting from a federally declared disaster, you have the option of taking the loss in the tax year of the loss or the tax year prior to the loss. Alert! Businesses located in and individuals living in a hurricane Helene Disaster Zone have until May 1, 2025, to file returns and make certain tax payments. The IRS has announced that individuals living in, and businesses located in Alabama, Georgia, North Carolina, South Carolina and certain counties in Florida, Tennessee and Virginia now have until May 1, 2025, to file various returns and to make certain payments. Note! Please see https://www.irs.gov/newsroom/tax-relief-in-disaster-situations concerning disaster filing and payment relief details concerning these and other areas provided disaster relief during 2024. Please call our firm if you are located in one of these disaster areas and have questions.
Postponing Taxable Income May Save Taxes. Generally, deferring taxable income from 2024 to 2025 may also reduce your income taxes, if your effective income tax rate for 2025 will be lower than your effective income tax rate for 2024. Moreover, deferring income from 2024 to 2025 may provide you with the same tax benefits of accelerating deductions into 2024. Planning Alert! The deferral of income could cause your 2024 taxable income to fall below the thresholds for the highest 37% tax bracket (i.e., $731,201 for joint returns; $609,351 if single). If you have income subject to the 3.8% Net Investment Income Tax (3.8% NIIT) and the income deferral reduces your 2024 modified adjusted gross income below the thresholds for the 3.8% NIIT (i.e., $250,000 for married filing joint, $125,000 for married filing separate, and $200,000 for all others), you may avoid this additional 3.8% tax on your investment income. In addition, if you reduce your modified adjusted gross income below the NIIT thresholds above, you may not be subject to the additional Medicare tax of 0.9% on your wages and/or self-employment income. Planning Alert! If you are a self-employed individual using the cash method of accounting, consider delaying year-end billings to defer income until 2025. Remember, if you receive the check in 2024, deferring the deposit of the check until 2025 does not defer the income. Caution! You may not want to defer billing if you believe this will increase your risk of not getting paid.
Contact Pollard CPA
503 Trade Street┃Tarboro, North Carolina 27886┃pollard.cpa┃P: (252) 823-1040
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