2024 – Year End Tax Strategies & Tips Before the Year Is Over!

TRANSCRIPT

Welcome back to another edition of AdviserRE. My name is Stephen Morris and we’ll be going over, as we’re getting towards the end of the year, tax planning strategies, tips, and things to think about before the year end closes out. As you may know, the worst time to tax plan is, that’s right, after the year is over. It’s too late by then. So with that in mind, since we have a couple of months left before the year is over, here are the things that you need to consider as we move into the end of 2024.

The very first thing you should have is your books and records in order. If you don’t know what your numbers are, we can’t tax plan for you at all. How can we predict what your taxable amounts going to be if you don’t even know what you made for the year? Make sure it’s current through today and you might want to forecast out what the next two months might look like in terms of financial outcome. Is there any big revenue coming in? Do you have any large capital expenditures that you’re considering? And jot all these down because these are the type of things that you’re gonna wanna talk to about with us, your tax preparers, your tax professionals.

Let’s dive into some of the areas that we’re gonna wanna look at before the year is over. So number one is maximizing your retirement contributions. So whether you have a SEP IRA, whether you have a solo 401K, you’re gonna wanna consider how much you wanna contribute into that plan for the year. You might be saying, well, I don’t have to worry about that til the following year because I typically have until September 15th to make my retirement contributions. That’s true. However, I do want you to note that for you to make qualified retirement contributions, you have to have something called earned income.

Now, if you’re on schedule C, all the income that you earn from there is subject to self-employment taxes. It’s considered to be earned income. And therefore all of it is eligible for the retirement plan contributions up to the annual limits. However, if you’re in something like an S-Corp, which we mentioned in the video link below, then you’re considering, well, is the income from the S-Corp considered to be earned? And the answer is no. The only income that’s considered to be earned is the amount of wages that you pay yourself as the officer of the corporation.

Therefore, for us to be able to maximize our retirement contributions, you need to run payroll before the year is over. At an amount that results in 25% of that amount equal to the amount that you’d like to contribute towards your retirement plans because that’s the limitation under the law. Running final payroll from an S-Corp is typically something you’re gonna wanna do with us before the end of the year. And so make sure to reach out to us if you have any questions regarding that so that we can ensure that it’s run timely before December 31st.

The next area is charitable giving. If charitable giving is in your particular strategy, we have to make sure that a lot of those donations are done before the year is over again. Now, one particular strategy that we always like is donating highly appreciated stock. Donating highly appreciated stock results in a charitable deduction, as an itemized deduction, equal to the fair market value of the stock, regardless of what you paid for it. So for example, if you paid a dollar for the share and it’s worth $10 today, you would get a charitable deduction of $10, which is a far better outcome than selling the shares resulted in $9 capital gain, and then using the proceeds, assuming it’s a 20% capital gains rate, you’d be left with only $8 to donate. $10 is better than $8. We’d much rather donate highly appreciated stock.

Since we’re on the topic of stocks, let’s not forget that loss harvesting is a very common strategy that we as tax professionals always recommend by year end. And so if there are stocks that you’re considering disposing of to offset some of the capital gains that you’ve earned during the year, now’s the best time to do that. And typically you’re gonna wanna realize losses equal to the total amount of gains that you have, if possible, plus $3,000, because the $3,000 can be used to offset your ordinary income, which at the time of this video is taxed at potentially a 37% tax rate, which is a favorable outcome to you. Any remaining losses over and above that amount would be held and carried forward in future years as a long-term capital loss carried forward.(…)

Let’s jump back over to business. So as I mentioned earlier, if you have certain amounts of income coming in before the year end, or you have certain amounts of capital expenditures or large expenses that you’re considering before year end, now’s the best time to reconcile your books and determine what the taxable amount is gonna be. What we typically do here at AdviserRE is a tax projection, and we will calculate a scenario of which will show what your taxes are gonna be due based on the projected income for the rest of the year. Depending on which tax bracket you are, we may decide to do one of two things.

Either A, we wanna pull in income into this year if the tax rate is low. Why? Because we would like to have those amounts taxed at a lower tax rate, assuming maybe in the future years that we would have a higher tax rate, which we’re potentially avoiding by pulling in this income this year. Conversely, if we have a low tax rate this year, then we probably wanna hold off on deductions until later years, if possible, so that we can have the value of those deductions be worth a lot more.

For example, we would prefer to have deductions at a 37% tax bracket. In other words, for every dollar that we are deducting, we get 37 cents back. Instead of, let’s say in this year, we’re in the 22% bracket, we would prefer not to have a deduction this year where it’s worth 15 cents less, or 22 cents in the dollar.

As of the time of this video right now, we don’t know exactly what the laws are gonna be coming down the pipe. We can generally assume though, that they will be favorable towards business owners and taxpayers in general, as the upcoming administration has indicated that they would like to lower tax rates overall. We assume, but we can’t guarantee, that bonus appreciation will come back on the table. And so to the extent that you can hold off on any particular capital purchases, if you can close a real estate transaction before or after the year end, or you can hold off on any of their equipment purchases until January one of the following year, that might be more beneficial to you, assuming that they bring back the 100% bonus depreciation to the table. It’s something to keep in mind. Like I said, we can’t guarantee exactly what the tax law is going to be.

Shifting gears, although we love talking about income taxes, let’s also talk about estate and gift tax planning. If you are concerned, or if estate and gift tax planning is something that is part of your particular exercise, then one thing you’ll have to consider is making sure that you’re using your annual exclusions. As of the time of this video, $18,000 per year can be given to a donee. So you’re gonna wanna consider maximizing those, especially as it relates to things like, irrevocable life insurance trusts, or just general sort of donations to your family members.

Lastly, let’s talk about planning for education. Here at AdviserRE, we prefer income shifting over use up to 529 plans to the extent possible. And so if you are in an income shifting tax strategy, which would involve typically employing members of your own household, for legitimate business purposes I need to add, you can’t just simply employ your family members to get a deduction, they need to be actually working. With that caveat aside, as long as they are legitimately doing work for you, this would be a great opportunity to ensure that their compensation is adequate and to market, and that they’re making adequate contributions to their IRA plans, which can be used when they turn 18 to pay for college expenses as a qualified distribution, not subject to the penalty, or not subject to bringing back into taxable income for the recipient.

So I hope these tips and tricks really helped you out here and considering what to look at for the rest of the year. Unfortunately, if you’ve made a ton of money this year, you’re probably gonna end up paying a lot of taxes.

If you’re looking for substantial changes to your taxable outcome, these type of things take a long-term tax planning strategy, which is why we engage with our clients throughout the year. And if you’re looking for something along those lines, what we’re talking about usually is unlocking two areas of the tax code, number one being real estate, buying more real estate and utilizing cost aggregation studies, or number two, accessing international law, which would involve relocating and having your income sourced to different countries to take advantage of the corporate tax code.

So with that in mind, if those plans are of interest to you, reach out to us and we’ll give you some tips and tricks and guidance on how to get there so that ultimately you can be paying lower taxes and reinvest in your money and cool things like real estate. Thank you so much for watching and I hope you have a productive and fantastic rest of your year.