Year-End Tax Planning for 2024
Essential Deadlines for Retirement, Charitable Contributions, and More
As 2024 comes to a close, taking a strategic approach to your finances can make a significant difference. Effective year-end tax planning isn't just about reducing your tax bill; it's about setting up a strong financial foundation for the future. Here are the key deadlines and strategies to consider, especially for retirement accounts, charitable contributions, and general wealth management.
Retirement Accounts
December 31, 2024
- Fully Utilize Employer Retirement Plans
Max out your tax-deductible 401(k) contributions of $23,000 if under 50, $30,500 if over 50. - Mega Backdoor Roth Contributions Using Your Company 401(k) Assuming that fully tax-deductible contributions have been maximized, consider making post-tax contributions to your 401(k) account and immediately converting those post-tax contributions to a Roth IRA account where they will grow tax-free forever and won’t be subject to Required Minimum Distributions (RMDs). The 401(k) plan must allow post-tax contributions to carry out the Mega Backdoor Roth strategy. The maximum contribution (pre- and post-tax) to a 401(k) for 2024 is $69,000 and $76,500 (if over 50). These maximums consider all pre-tax (deductible) employee contributions, employer match, and employee post-tax (non-deductible) contributions to the plan.
- Convert Traditional IRA Accounts to Roth IRAs
Convert Traditional IRAs to Roth IRAs accounts where they can grow tax-free indefinitely, as no Required Minimum Distributions (RMDs) are required for Roth IRA accounts. Roth conversions work best in years with lower total income. Unlimited amounts can be converted to Roth under this strategy; however, the conversion is considered a taxable event at ordinary income rates. - Required Minimum Distributions
Unless it is the first RMD, which can be taken up until April 1st of the following year.
For inherited IRAs, where the original account holder died after 12/31/2019, there is no requirement to take an RMD under the 10-year rule for 2024 due to a special waiver being granted by the IRS. Where the account holder died before 2020, there is no waiver on 2024 RMDs.
April 15, 2025
- Traditional IRA contributions
Where the taxpayer or the taxpayer’s spouse are covered by a qualified plan with an employer, the deductibility of the contribution may be limited or lost entirely. The deduction for the contribution starts to be limited at modest income levels ($77,000 for 2024 if single, $123,000 if MFJ). Where a plan at work covers neither of the spouses, contributions can be made on a fully deductible basis, regardless of income. - Contribute to Your Spouse
For those filing joint returns, there is no earned income requirement for IRA contributions made by a nonworking spouse if the earned income of the couple exceeds the combined IRA contribution amount. Such contributions are also subject to income limits when deductibility is assessed. - Fund Roth IRA Accounts
Contributions can be made up to $7,000 for 2024 from earned income (with a $1,000 catch-up contribution if over 50 years old). Roth contributions are subject to income limits ($161,000 if filing single for 2024 and $240,000 for MFJ). Due to the income restrictions, direct Roth contributions may only be relevant for younger, lower-earning taxpayers.
- “Backdoor” Roth IRA Conversion
Consider a backdoor Roth Conversion where income exceeds the direct Roth contribution limits. Make contributions to a Traditional IRA on a post-tax (non-deductible) basis, then convert that Traditional IRA contribution to a Roth IRA. Because of the Aggregation Rule, this strategy is not appropriate for those clients with existing pre-tax IRA accounts, such as rollovers.
Charitable Contributions
December 31, 2024
- Contribute highly appreciated assets (stocks)
Contribute to charity to avoid paying capital gains and receive tax deductions. Such contributions also remove assets from the taxable estate. The tax deduction will be equal to the Market Value of the stocks, even if there is a very low or no tax basis. The tax deduction may be limited to 30% of adjusted gross income (AGI); however, any unused deduction in the year may be carried forward for five years. - Contribute cash to a public charity or DAF
For 2024, up to 60% of AGI can be deducted if paid in cash to a public charity. - Make use of Qualified Charitable Distributions (QCDs)
Due to the large Standard Deduction ($32,300 for MFJ 2024) if both spouses are over 65 years old, charitable donations claimed as itemized deductions are often not tax effective. In these circumstances, it is more beneficial to make a yearly QCD from an IRA to a public charity if you are over 70.5 years old. Such QCDs count towards meeting your RMDs for the year and transfer highly taxed ordinary income to the charity without creating taxable income for you. There is a limit of $105,000 per year for a QCD per tax return. - Consider Bunching of Donations
Often a donation delivers no tax benefit if the client does not naturally itemize deductions. Bunching several years of donations together can lead to itemized deductions that exceed the standard deduction in the bunched year and obtain at least partial deductions for the client.
December 31, 2024
- Harvest unrealized capital losses
Stock with an unrealized loss can be sold, creating a tax loss that can be banked or used to offset realized taxable gains. Net short-term losses can offset Net long-term gains and vice versa. This is especially relevant for non-BakerAvenue managed accounts where no active management is in place. Such strategies need to consider the Wash Sale rules. - Use the Annual Gift Tax Exclusion amount
$18,000 per individual recipient of a gift in 2024. Married couples can gift the same recipient $18,000 each. An unlimited number of recipients. - Consider taking taxable IRA Distributions in years up to RMD age
May be relevant for those clients with large, deferred balances where the first RMD may automatically be in a very high tax bracket.
Use margin accounts to meet short-term cash requirements rather than sell appreciated stock or take a taxable distribution just before the year's end.
If you have any questions about this tax update, please contact BakerAvenue.
