About Duane Morris LLP

Duane Morris LLP, a law firm with more than 900 attorneys in offices across the United States and internationally, is asked by a broad array of clients to provide innovative solutions to today’s legal and business challenges. Evolving from a partnership of prominent lawyers in Philadelphia over a century ago, Duane Morris’ modern organization stretches from the U.S. to the U.K. and across Asia. Throughout this global expansion, Duane Morris has remained committed to preserving its collegial, collaborative culture that has attracted many talented attorneys. The firm’s leadership, and outside observers like the Harvard Business School, believe this culture is truly unique among large law firms and helps account for the firm continuing to prosper throughout changing economic and industry conditions. Most recently, Duane Morris has been recognized by BTI Consulting as both a client service leader and a highly recommended law firm. Additionally, multiple Duane Morris offices have received recognition as top workplaces for consecutive years.

At a Glance

• Offices in 17 U.S. cities in 12 states and the District of Columbia
• Offices in Asia and the United Kingdom, and liaisons in Latin America
• More than 1,600 people
• More than 900 lawyers
• AM Law 100 since 2001

In addition to legal services, Duane Morris is a pioneer in establishing independent affiliates providing nonlegal services to complement and enhance the representation of our clients. The firm has independent affiliates employing more than 100 professionals engaged in other disciplines, such as the tax, accounting and litigation consulting services offered by the Tax Accounting Group.

About the Tax Accounting Group

The Tax Accounting Group (TAG) was the first ancillary practice of Duane Morris LLP and is one of the largest tax, accounting and litigation consulting groups affiliated with any law firm in the United States. Approaching our 45th anniversary in 2026, TAG has an active and diverse practice with over 60 service lines in more than 45 industries, serving as the entrusted advisor to clients in every U.S. state and 25 countries through our regional access, national presence and global reach. In addition, TAG continues to enjoy impressive growth year over year, in large part because of our clients’ continued expression of confidence and referrals. To learn more about our service lines and industries served, please refer to our Quick Reference Service Guide.

TAG’s certified public accountants, certified fraud examiners, attorneys, financial consultants and advisors provide a broad range of cost-effective tax compliance, planning and consulting services as well as accounting, financial and management advisory services to individuals, businesses, estates, trusts and nonprofit organizations. TAG also provides an array of litigation consulting services to lawyers and law firms representing clients in regulatory and transactional matters and throughout various stages of litigation. Our one-of-a-kind CPA and lawyer platform allows us to efficiently deliver one-stop flexibility, customization and specialization to meet each of the traditional, advanced and unique needs of our clients, all with the convenience of a single-source provider.

We serve clients of all types and sizes, from high-net-worth individuals to young and emerging professionals, corporate executives to entrepreneurs, multigenerational families to single and multifamily offices, mature businesses to startups, global professional service firms to local companies, and foundations and nonprofits to governmental entities. We assist clients with a wide range of services, from traditional tax compliance to those with complex and unique needs, conventional tax planning to advanced strategies, domestic to international tax matters for clients working abroad as well as foreign businesses and individuals working in the United States, traditional civil tax representation to those criminally charged, those in need of customary accounting, financial and management advisory services, to those requiring innovative consulting solutions and those in need of sophisticated assistance in regulatory and transactional matters and throughout various stages of litigation.

With our service mission to enthusiastically provide effective solutions that exceed client expectations, and the passion, objectivity and deep experience of our talented professionals, including our dedicated senior staff with an average of over 25 years working together as a team at TAG (with a few having more than 30 years on our platform), TAG is truly distinctive. Being “truly distinctive and positively effective” is not just our TAGline, it is our passion.

Whether you are a client new to TAG or are among the many who have been with us for nearly 45 years, it is our honor and privilege to serve you.

As we approach year-end, we are again fielding calls, outreaches and multiyear tax modeling requests from existing and new clients regarding year-end tax planning strategies available to individuals, businesses, estates, trusts and nonprofits.

Unlike recent years where we had a split Congress―and we expected no meaningful tax changes―one notable tax bill was considered by Congress in 2024: the Tax Relief for American Families and Workers Act of 2024 (TRAFWA), a bipartisan bill that included several individual and business tax breaks.

For individuals, TRAFWA would have enhanced the child tax credit and provided several disaster relief provisions. For businesses, the bill contained full and immediate expensing for R&D costs (instead of amortization over five years), restoring bonus depreciation to 100 percent for tax years 2023-25, and increasing the ability of businesses to claim the business interest expense deduction. While the bill was voted down in the Senate, it is likely that many provisions in the bill will be revisited in the coming legislation session in conjunction with the other tax priorities of the president-elect and Congress.

As previously noted, we are just a little over 12 months from the sunsetting of many provisions passed or modified under the TCJA. While the new Republican Congress will make extending these provisions a priority, many pieces of this legislation are scheduled to sunset at the end of 2025. These provisions include but are not limited to:

• Lower marginal individual income tax rates;
• Nearly doubled standard deductions;
• Elimination of the personal exemption;
• Child tax credit doubling to $2,000, with an increased income threshold;
• State and local income tax deduction limitation of $10,000;
• Reduction of mortgage interest deduction from $1 million of debt to $750,000;
• Higher alternative minimum tax (AMT) exemptions and income thresholds, which dramatically decreased the impact of the individual AMT;
• Qualified business income (QBI/199A) deduction of 20 percent;
• Doubling of the estate and gift exclusion amount;
• Deferring gains through qualified opportunity zones; and
• Establishment of an employer credit for paid family and medical leave.

With so many tax provisions set to expire in such a short time, the next administration and Congress will have their hands full in negotiating the extension and modification of these and other provisions, along with tax policy promises made during the campaign. Please see our in-depth discussion of election results and priorities of the incoming Congress in the next section of this guide. While we do expect that new Congress will be able to extend many of the TCJA provisions, it remains possible that portions of the TCJA could simply expire because our politicians fail to reach agreement on how to extend or modify them. As a result, it is reasonable to at least plan for the possibility that certain tax provisions may generate higher taxes in the future (and starting as early as 2026). It’s never too early to think about the future.

While you can depend on TAG for cost-effective tax compliance, planning and consulting services—as well as critical advocacy and prompt action in connection with your long-term personal and business objectives—we are also available for any immediate or last-minute needs you may have or those that Congress may legislate that impact your personal or business tax situation.

With same or very similar tax rates expected for 2025, the tried-and-true strategy of deferring income and accelerating deductions may be beneficial in reducing tax obligations for most taxpayers in 2024. With minor exceptions, this month is the last chance to develop and implement your tax plan for 2024, but it is certainly not the last opportunity.

For example, if you expect to be in the same tax bracket in 2025 as 2024, deferring taxable income and accelerating deductible expenses can possibly achieve overall tax savings for both 2024 and 2025. However, by reversing this technique and accelerating 2024 taxable income and/or deferring deductions to plan for a possible higher 2025 tax rate, your two-year tax savings may be higher. This may be an effective strategy for you if, for example, you have charitable contribution carryovers to absorb, your marital status will change next year or your head of household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation. Examine our “Words of Caution” section below for additional thoughts in this regard.

This guide provides tax planning strategies for corporate executives, businesses, individuals―including high-income and high-wealth families―nonprofit entities and trusts. We hope that this guide will help you leverage the tax benefits available to you presently, reinforce the tax savings strategies you may already have in place, or develop a tax-efficient plan for 2024 and 2025.

To help you prepare for year-end, below is a quick reference guide of action steps, organized by several common individual scenarios, which can help you reach your tax-minimization goals as long as you act before the clock strikes midnight on New Year’s Eve. Not all of the action steps will apply in your particular situation, but you could likely benefit from many of them. You may want to consult with us to develop and tailor a customized plan with defined multiyear tax modeling to focus on the specific actions that you are considering. We will be pleased to help you analyze the options and decide on the strategies that are most effective for you, your family and your business.

With the presidential election behind us, we now have more clarity as to what to expect in terms of possible future tax reform legislation. As everyone is aware, Donald Trump has made history by becoming the first president in over 100 years to be elected to two nonconsecutive terms. Additionally, Republicans now have a 220-215 member majority in the House of Representatives and a 53-47 member majority in the Senate.

With Republican control of the House, Senate and White House, along with an imminent effective tax hike in the form of the expiring TCJA and a long list of campaign promises made during the year, there is significant political motivation to get a tax bill through Congress. However, it is a rigorous process to get a bill passed, with a bill often undergoing several major revisions before passage. This could result in a significant difference between what the president-elect pitched during his campaign, what the president initially proposed to Congress and the American people, and what actually makes it into the final legislation. Also, since the Republican majority in the Senate is narrow, with less than 60 seats, and it’s unlikely that any Democrat would vote for a tax bill the Republicans are sponsoring, the budget reconciliation procedure will likely need to be used which requires only a simple majority of at least 51 percent of the Senate. This avoids the filibuster, which could potentially stall the bill from passing indefinitely.

The budget reconciliation process does come with significant limitations, however. Bills passed under budget reconciliation cannot significantly increase the deficit beyond a 10-year window, which is why many of the provisions of the TCJA are set to expire after 2025. However, some items in the TCJA, such as the reduction in the corporate tax rate, are permanent. The drafters of the TCJA argued that the economic stimulation that these tax cuts would increase the tax base through growth, which would more than make up for the immediate lost revenue from the rate cut. As a result, these permanent items were deemed to be revenue-neutral after the 10-year window by the Congressional Budget Office, which “scores” bills by calculating their impact on federal revenue and expenses.

Most of the provisions of the TCJA pertaining to individual income taxes are set to expire after December 31, 2025. This includes the qualified business income deduction, reduced tax brackets, increase of the standard deductions, the state and local tax (SALT) deduction limitation, suspension of personal exemptions, doubling of the estate tax exclusion, and doubling of the child tax credit, among others. With the exception of the SALT deduction limitation (which he proposed to eliminate), President-elect Trump has expressed quite often his desires to extend the provisions of the TCJA that are set to expire.

The following provisions are among the most impactful TCJA provisions set to expire at the end of 2025:

Key TCJA Provisions Scheduled to Sunset in 2025
Topic	Current Law	2026 Law with no Action	TAG Comments
Marginal tax rates (married filing jointly shown)	10% at $0	10% at $0	If the TCJA is allowed to expire in full, the tax rate impact would be immediate. Seven tax rates would still be in place, but five out of seven of those tax rates would be higher. Additionally, the TCJA modified tax brackets so the top rates did not begin to apply until higher income thresholds were crossed. All 2026 numbers are estimates based on inflation.
	12% at $24,500	15% at $24,400
	22% at $99,550	25% at $99,200
	24% at $212,200	28% at $200,100
	32% at $405,050	33% at $304,950
	35% at $514,400	35% at $544,550
	37% at $771,550	39.6% at $615,100
Capital gains tax brackets	0%, 15% and 20% rates based on taxable income.	0%, 15% and 20% capital gains rates tied to ordinary tax bracket. 0% - 10% and 15% brackets 15% - 25%, 28%, 33% and 35% brackets 20% - 39.6% bracket	Planning should be considered as to whether there is an advantage to recognizing capital gains in 2025 or 2026, as depending upon income, the gain could be subject to a different capital gains rate.
Standard deduction	$15,450 for single taxpayers. $30,850 for those married filing jointly.	$8,350 for single taxpayers. $16,700 for those married filing jointly.	Without action the standard deduction would be reduced to about half of current levels. If reduced, it may be beneficial to defer itemized deductions into 2026 where possible. All 2026 numbers are estimates based on inflation.
State and local tax (SALT) deduction	$10,000 limitation for both single and married taxpayers.	Unlimited deduction.	While an unlimited deduction may sound the most taxpayer friendly, other sunsetting items, such as the Pease limitations and the increased AMT exclusion, will limit the deductibility of these taxes.
Mortgage interest deduction	Deductible interest limited to debt of $750,000 used to buy, build or substantially improve a primary or secondary residence.	Deductible interest limited to debt of $1 million used to buy, build or substantially improve a primary or secondary residence plus an additional $100,000 of home equity indebtedness (not used to buy, build or substantially improve).	With mortgage rates and home prices remaining high, this is one area taxpayers may wish to see sunset. However, the $100,000 home equity indebtedness is an AMT preference item (if not used to buy, build or substantially improve) so AMT considerations may need to be evaluated.
Miscellaneous itemized deductions	Suspended.	Miscellaneous itemized deductions (unreimbursed employee expenses, investment expenses, legal and accounting fees, custodial fees, convenience fees and safe deposit box fees) deductible to the extent that the total exceeds 2% of adjusted gross income.	Also an area some taxpayers may wish to see sunset. If sunsetting, it may be beneficial to delay some expenses into 2026.
Personal and dependent exemptions	Suspended.	$5,200 (estimated) per taxpayer and qualified dependent. Exemptions phase out at higher income levels.	Depending on income level and how many dependents are in each household, this could be a major change.
“Pease” limitation on itemized deductions	Suspended.	Reduction of itemized deductions by the lesser of 3% of adjusted gross income (AGI) in excess of specified dollar thresholds, or 80% of total itemized deductions otherwise allowable. The limitation did not apply to medical expenses, investment interest expense, casualty or theft losses, or gambling losses.	The itemized deduction phaseout could limit the SALT deduction, mortgage interest deduction and charitable deductions. Therefore, if the TCJA sunsets, taxpayers will need to consider the impact of the Pease limitation on their personal tax situation, including whether it makes sense to accelerate certain itemized deductions (such as charitable contributions) into 2025.
Child tax credit	$2,000 per qualifying child (under age 17), $500 for other dependents. Phaseout of $400,000 for those married filing jointly.	$1,000 per qualifying child (under age 17). Income phaseout beginning at $110,000 for those married filing jointly. No credit for other dependents.	Higher credits and higher income phaseouts make this an item taxpayers with dependents would want extended.
Alternative minimum tax for individuals	Increased exemption ($133,300 for those married filing jointly) and exemption phaseout begins at higher income levels ($1,218,700 for married filing jointly)	Exemption is reduced to an estimated $104,800 for joint filers and the exemptions phaseout would begin at $199,500.	With no action, the reduced AMT exemption together with the sunsetting of the $10,000 cap on the SALT deduction would leave more taxpayers back into the land of AMT. AMT exposure would increase particularly for those earning between $400,000 to $600,000 on a joint filing.
Charitable contribution deduction (cash)	60% of AGI	50% of AGI	It may be beneficial to accelerate charitable deductions into 2025.
Section 199A qualified business income (QBI) deduction	20%	0%	If the TCJA sunsets, sole proprietors and pass-through businesses may need to reevaluate whether they should continue to operate as an unincorporated entity due to the loss of the QBI deduction and any other changes in the corporate income tax rates.
Estate, gift and generation-skipping transfer tax exemption	$13,610,000	Approximately $7 million.	If TCJA sunsets, estate planning should be carried out in full during 2025. Please look for continued Alerts on this important matter.

Since Congress is now in a very similar situation to eight years ago, with a slim majority in the Senate, it is almost certain that they will need to utilize the budget reconciliation procedure again to pass any type of TCJA extension or tax reform legislation. This will again restrict the increase that any new legislation can have on the budget deficit to a 10-year window. So, it is possible that the aforementioned TCJA provisions set to expire in 2026 will be extended for up to 10 additional years. While Republicans may want to make many of these cuts permanent, they might not have the ability to do so―and America may not be able to afford to.

In addition, the 2024 presidential campaign saw a lot of promises being made. The most prominent tax proposals President-elect Trump made during his 2024 presidential campaign included:

• Exempt tip income and overtime pay from tax;
• Eliminate tax on Social Security benefits;
• Create family tax credits for caregivers who care for a parent or loved one;
• Allow an interest deduction for personal car loans;
• Eliminate tax filing requirements for American citizens living abroad;
• Decrease the U.S. corporate tax rate to flat 15 percent (potentially just for companies that manufacture products in the United States);
• Reenact 100 percent expensing on the purchase of business assets;
• Repeal the state and local tax deduction limitation; and
• Extend TCJA provisions set to expire in 2026, with particular emphasis on extending the:
  • QBI deduction;
  • Reduced tax brackets;
  • Increased standard deductions; and
  • Doubled estate tax exemption.

Whether or not Republicans can form a coalition to enact all of these proposals remains to be seen. In our view, it is unlikely. With the slim majorities in both the House and Senate, Republicans cannot afford to lose more than two votes in each chamber. Also, external factors have changed since 2017 and need to be considered in the context of any potential legislation. Obviously, the world has changed significantly since 2016 when President Trump was first elected and the TCJA was born. Since then, there has been a global pandemic as well as two major wars that the United States has contributed substantial funds and resources to help fight. The U.S. national debt at the time the TCJA was passed was about $20 trillion―now it is a little over $35 trillion. As a result, the annual interest expense eats up a bigger portion of the federal budget each year, making discretionary spending cuts to offset tax cuts more difficult to achieve. Any proposed legislation will be scrutinized by fellow Republicans in Congress, so any disagreements about specific details of the legislation may result in the need for revision, which could significantly slow the process or change the desired outcome.

Getting everyone to agree on all provisions of the tax legislation, particularly new provisions, and ensuring that the legislation meets the budgetary constraints of the reconciliation process will be a tall order indeed. This is why we expect Republicans to break up their tax agenda into two components―first, by extending the TCJA quickly via a reconciliation bill early in the year, which, as of this writing, has the needed support on the Republican side of the aisle. While President-elect Trump’s campaign proposals seem to have support and few critics, some Republican members of Congress are likely to be hesitant to enact tax cuts that would further increase the deficit, even within the 10-year reconciliation window. Thus, any new proposals are likely to have to wait until later in 2025 for consideration, though we expect many proposals to surface in the TCJA extension discussions, as President-elect Trump and Congress attempt to gauge interest and votes. Stay tuned, as this will be an exciting year for tax policy in the United States!

Whether you should accelerate taxable income or defer tax deductions between 2024 and 2025 largely depends on your projected highest (aka marginal) tax rate for each year. While the highest official marginal tax rate for 2024 is currently 37 percent, you might pay more tax than in 2023 even if you were in a higher tax bracket due to credit fluctuations, compositions of capital gains and dividends, and a myriad of other reasons.

The chart below summarizes the most common 2024 tax rates together with the corresponding taxable income levels presently in place. Effective management of your tax bracket can provide meaningful tax savings, as a change of just $1 in taxable income can shift you into the next higher or lower bracket. These differences can be further exacerbated by other income thresholds throughout the Internal Revenue Code, discussed later in this guide, such as those for determining eligibility for the child tax credit and qualified business income deductions, among others. Income deferral and acceleration, while being mindful of bracket thresholds, can be accomplished through numerous income strategies discussed in this guide, such as retirement distribution planning, bonus acceleration or deferral, and harvesting of capital gains and losses.

2024 Federal Income Tax Rate Schedule

While reviewing this guide, please keep the following in mind:

• Never let the tax tail wag the financial dog, as we often preach. Always assess economic viability. This guide is intended to help you achieve your personal and business financial objectives in a “tax efficient” manner. It is important to note that proposed transactions should make economic sense in addition to generating tax savings. Therefore, you should review your entire financial position prior to implementing changes. Various nontax factors can influence your year‑end planning, including a change in employment, your spouse reentering or exiting the work force, the adoption or birth of a child, a death in the family or a change in your marital status. It is best to look at your tax situation for at least two years at a time with the objective of reducing your tax liability for both years combined, not just for 2024. In particular, multiple years should be considered when implementing “bunching” or “timing” strategies, as discussed throughout this guide.
• Be very cautious about accelerated timing causing you to lose too much value, including the time value of money. That is, any decision to save taxes by accelerating income must consider the possibility that this means paying taxes on the accelerated income earlier, which would require you to forego the use of money used to satisfy tax liabilities that could have been otherwise invested. Accordingly, the time value of money can make a bad decision worse or, hopefully, a good decision better―a delicate balance, indeed.
• While the traditional strategies of deferring taxable income and accelerating deductible expenses will be beneficial for many taxpayers, with exceptions, you can often achieve overall tax efficiency by reversing this technique. For example, waiting to pay deductible expenses such as mortgage interest until 2025 would defer the tax deduction to 2025. Or, waiting to pay state and local taxes (SALT) until 2025 if you have already paid SALT of $10,000 in 2024 could also be worthwhile. You should consider deferring deductions and accelerating income if you expect to be in a higher tax bracket next year, you have charitable contribution carryovers to absorb, your marital status will change next year or your head of household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation.
• Both individuals and businesses have many ways to “time” income and deductions, whether by acceleration or deferral. Businesses, for example, can make different types of elections that affect the timing of significant deductions. Faster or slower depreciation, including electing in or out of bonus depreciation, is one of the most significant. This type of strategy should be considered carefully as it will not simply defer a deduction into the following year but can push the deduction out much further or spread it over a number of years.

With these words of caution in mind, the following are observations and specific strategies that can be employed in the waning days of 2024 regarding income and deductions for the year, where the tried-and-true strategies of deferring taxable income and accelerating deductible expenses will result in maximum tax savings.

Below is a quick and easy reference guide of action steps that can help you reach your tax-minimization goals, as long as you act before year-end. In this guide, we have identified the best possible action items for you to consider, depending on how your income shapes up as the year draws to a close.

Not all of the action steps will apply in your particular situation, and some may be better for you than others. In addition, several steps can be taken before year-end that are not necessarily “quick and easy” but could yield even greater benefits. For example, perhaps this is the year that you finally set up your private foundation or a donor-advised fund to achieve your charitable goals (see item 113) or maybe you decide it is time to review your estate plan in order to utilize the current unified credit (see items 117-132). Consultation to develop and tailor a customized plan focused on the specific actions that should be taken is paramount.

To help guide your thinking and planning in light of the multiple situations in which you may find yourself at year-end, we have compiled Quick-Strike Action Steps that follow different themes depending on several common situations. Due to the changing legislative environment, you may wish to consider several situations below and identify the most relevant and significant steps for your particular situation.

Quick-Strike Action Step Themes

Situation	Reason	Theme	Action
You expect higher ordinary tax rates in 2025	Increased income Getting married, subject to marriage penalty	Accelerate income into 2024 Defer deductions until 2025	Accelerate installment sale gain into 2024 (item 106) Defer SALT payments to 2025 (item 19) Bunch itemized deductions (item 21)
You expect lower ordinary tax rates in 2025	Retirement Income goes down	Accelerate deductions into 2024 Defer income until 2025	Defer income until 2025 (item 13) Maximize medical deductions in 2024 (item 18) Prepay January mortgage (item 20) Consider deduction limits for charitable contributions (items 22 and 23) Sell passive activities (item 39) Increase basis in partnership and S corporation to maximize losses (item 40) Maximize pre-tax retirement contributions (item 41) Maximize contributions to FSAs and HSAs (items 53 and 54)
You have high capital gains in 2024	Business or property sold An investment ends Employee stock is sold	Reduce or defer gains	Invest in qualified opportunity zones (item 8) Invest in 1202 small business stock (item 28) Perform a like-kind exchange (item 36) Harvest losses (item 27)
You have low capital gains in 2024	Carry forward losses	Increase capital gains	Maximize preferential gains rates (item 25)

1. Be aware of increased Form 1099-K reporting for users of Venmo, PayPal, CashApp, Uber, DoorDash and Airbnb users. While Forms 1099-K were initially required to be issued for calendar year 2021 when gross payment card transactions for goods or services exceeded $600, the IRS has once again delayed implementation of this rule. For 2024, the IRS has lowered the threshold to $5,000 from the previous threshold of $20,000, with thresholds dropping to $2,500 in 2025 and $600 in 2026 and after.

2. Take advantage of a 529 to Roth rollover. New for 2024, the SECURE Act 2.0 permits beneficiaries of 529 college savings accounts to make up to $35,000 of direct trustee-to-trustee rollovers from a 529 account to their Roth IRA without tax or penalty. In order to qualify, two requirements must be met:

1. The 529 account must have been open for more than 15 years; and
2. The rollover must consist of amounts contributed to the 529 account more than five years prior to the conversion, plus earnings on those contributions.

Additionally, rollovers are subject to the Roth IRA annual contribution limits, but are not limited based on the taxpayer's adjusted gross income. Therefore, if a married couple has earned income in 2024 of at least $6,500, they can begin transferring up to the annual contribution limit ($6,500) from the 529 plan account to a Roth IRA, assuming the other provisions above are met. They can make these rollover contributions each year until they max out at the lifetime cap of $35,000. This new provision helps to alleviate any worry taxpayers may have about any surplus 529 plan funds going to waste or being taxed and penalized on distribution. It allows for 529 contributions to potentially be beneficial for more than just a child’s education and help start saving for retirement.

3. Automatic enrollment required beginning January 1, 2025, for newer employer retirement plans. The SECURE Act 2.0 includes an auto-enrollment provision, which for 2025 requires employers to automatically enroll eligible employees into any new 401(k) or 403(b) plans adopted after December 29, 2022. Employees may opt out of participation or reduce the default contribution rate (between 3 percent and 10 percent). For retirement plans already existing prior to December 29, 2022, automatic enrollment would remain optional. Exemptions for this new provision include small businesses with 11 or fewer employees, as well as government and church plans.

4. Enjoy increased contributions to retirement plans in 2025 for individuals between 60 and 63. Beginning in 2025, individuals aged 60 to 63 years old will be allowed to make even higher catch-up contributions, indexed to inflation. For tax year 2025, most 401(k), 403(b), governmental 457 plans and the federal government’s Thrift Savings Plans will allow catch-up contributions for those 50 and over of $7,500. For those taxpayers who are age 60, 61, 62 or 63 in 2025, the catch-up limit is $11,250.

Similarly, taxpayers age 50 and over can contribute catch-up contributions to SIMPLE plans of $3,500 for 2025. However, for those aged 60, 61, 62 and 63, the catch-up contribution limit is $5,250.

5. Not-for-profit and governmental entities can now take advantage of clean energy credits through new IRS election. Newly released regulations now give applicable entities, such as states, local governments, not-for-profits, tribal entities, U.S. territories and other quasi-government agencies, the opportunity to use a new direct pay funding mechanism to promote and accelerate clean energy infrastructure projects. The alternative to the new direct pay funding are traditional financing and debt methods. The entity may elect to treat certain tax credits as a payment against U.S. federal income tax, which would potentially turn the applicable tax credit into a refundable credit from the government, useful for these entities which pay no tax.

This election is available for a number of energy credits under the Inflation Reduction Act of 2022, including the alternative fuel vehicle refueling property credit, renewable electricity production tax credit, commercial clean vehicle and energy ITC credit, to name a few.

6. Claim a deduction for casualty and disaster losses. Notably in 2024, multiple states including all of Alabams, Florida, Georgia, North Carolina and South Carolina, and parts of Tennessee and Virginia, suffered major damage from Hurricanes Helene and Milton and received filing and payment delays. In early October 2024, the IRS announced that affected taxpayers (individuals and/or businesses) in the above areas would have until May 1, 2025, to file and pay their 2024 taxes. Additionally, any taxpayer who did not file their 2023 tax return in the above affected areas also has until May 1, 2025, to file their 2023 individual and/or business tax return. The 2023 penalty relief is limited to late filing as payment for 2023 returns should have been made before the disaster occurred.

Separately, due to other storms, wildfires, landslides, mudslides, straight-line winds, flooding and tornados, affected taxpayers in all of Louisiana and Vermont, all of Puerto Rico and the Virgin Islands and parts of Arizona, Connecticut, Illinois, Kentucky, Minnesota, Missouri, New York, Pennsylvania, South Dakota, Texas and Washington state have until February 3, 2025, to file 2023 returns. Again, this is just a filing delay, as payment should have been made before the disaster occurred. If you have any questions about whether an event qualifies, please do not hesitate to ask for clarification.

For tax purposes, any losses attributed to a federally declared emergency in 2024 can be pushed back into 2023, such as the closure of stores, losses on mark-to-market securities and permanent retirement of fixed assets. However, lost revenues and the decline in fair market value of property as a direct result of economic hardships would not constitute a loss under disaster rules.

For victims of these disasters that have not yet filed their 2023 tax returns, these losses can be included with their 2023 returns filed prior to the extended filing deadline. Currently, taxpayers choosing to claim their losses on their 2023 returns have until October 15, 2025, to make this election. For those that have already filed 2023 returns, it is still possible to go back and amend 2023 filings, especially if 2023 profits could be offset with 2024 disaster losses. The subject of disaster losses remains a very complicated matter, and there are many rules and stipulations that would prevent taxpayers from taking advantage of the election. There are also certain reasons why taxpayers would not want to make the election and, for these reasons, we recommend consulting with us or your qualified tax professional before delving into the amendment process.

7. Consider upgrading to solar panels and take advantage of the updated credit. For the past three years, we have seen continued interest in the expanded solar credits from our clients. The solar investment tax credit currently stands at 30 percent of eligible expenses for projects installed between 2022 and 2032. After 2032, this credit will drop to 26 percent of eligible expenses in 2033 and 22 percent in 2034.

8. Invest in qualified opportunity zones to defer capital gains for two years. Gains can be deferred on the sale of appreciated stock that is reinvested within 180 days into a qualified opportunity fund (QOF). This gain is deferred until the investment is sold or December 31, 2026, whichever is earlier. An individual is able to defer a capital gain as long as the property was sold to an unrelated party. In addition to the deferral of gain, once the taxpayer has held the QOF investment for five years, they are able to increase their basis in the asset by 10 percent of the original gain. Due to this five-year holding period requirement, the QOF investment must have been acquired by December 31, 2021, in order to benefit from this basis step-up.

Although the contribution deadline for this basis increase has passed, a QOF still provides taxpayers the ability to defer capital gains until 2026 or the year in which the investment is sold, whichever is earlier. In addition, tax on the appreciation of the QOF may be avoided if the investment is held for over 10 years. 

All states have communities that now qualify. Besides investing in a fund, one can also take advantage of this opportunity by establishing a business in the qualified opportunity zone or by investing in qualified opportunity zone property.

9. Pay close attention to beneficial ownership information reporting (BOIR) originally required by December 31. The Corporate Transparency Act (CTA) of 2021 implemented uniform BOIR requirements for corporations, limited liability companies and other business entities that were created in or are registered to do business in the United States, effective January 1, 2024. In a nutshell, the CTA will require owners of small companies (including single member LLCs) to file a report with the Financial Crimes Enforcement Network (FinCEN) detailing basic information about the beneficial owners of the company, such as names, dates of birth, addresses and identifying numbers. Violations of the CTA and noncompliance with reporting requirements can have severe consequences (a $500-a-day penalty, up to $10,000, and up to two years’ imprisonment), so timely compliance is key.

So who is required to file a beneficial ownership information report, what information must be included and when does it need to be filed? The answer can be found in our June 13, 2023, Alert and December 7, 2023, Alert. Countless businesses are expected to be impacted, and if you assume you will not be affected, you may be risking severe penalties.

On December 3, 2024, the United States District Court for the Eastern District of Texas issued a nationwide preliminary injunction with regard to the CTA and issued a stay with respect to the December 31, 2024, deadline for CTA reports. On December 5, the government appealed this decision to the Fifth Circuit Court of Appeals.

On December 9, 2024, FinCEN posted a statement on their website indicated their intent to comply with the order, and that “reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”

Thus, while companies are currently not required to register with FinCEN, if the injunction is lifted, compliance may once again be required, and it is unknown what kind of grace period, if any, will be given should the injunction be lifted close to or after December 31, 2024. Therefore, if companies plan to rely on this stay and not file their beneficial ownership reports, they need to be vigilant in monitoring developments as the court cases proceed.

In our view at this moment, the safest course of action is to continue to prepare the BOIRs but refrain from filing them unless/until the injunction is lifted. That way, if the injunction is set aside, you will be ready and able to file on short notice. Otherwise, you run the risk of late filing and penalties.

10. Review the proposed regulations and final regulations for the 1 percent excise tax on stock repurchases. The Inflation Reduction Act added a 1 percent excise tax on the value of corporate stock buybacks of publicly traded companies, which applies to tax years beginning after December 31, 2022. Only repurchases that are treated as redemptions for tax purposes are subject to the tax, and a $1 million exemption is provided. The IRS and Treasury Department released proposed regulations on April 12, 2024, and final regulations on June 28, 2024. Acquisitions of stock of an applicable foreign corporation or a covered surrogate foreign corporation may be treated as stock repurchases subject to the stock repurchase excise tax and treated to different rules depending on if the repurchase occurred before or after the release of the proposed regulations on April 12, 2024.

11. Avoid scams and file a valid employee retention or other expanded tax credit. Due to a growing number of scams and fraudulent activity surrounding the employee retention credit (ERC), the IRS placed an immediate moratorium on the processing of new ERC claims on September 14, 2023. In August, the IRS began processing claims filed after September 14, 2023, but still has a long way to go to clear the 11-month backlog of unprocessed returns. The deadline for filing an ERC claim for the 2020 tax period was April 15, 2024; and the deadline for the 2021 tax period is April 15, 2025. So, if you have not filed already, and your business was eligible for the ERC for any period in 2021, Form 941-X needs to be filed for the applicable quarter soon. While the ERC was designed to encourage businesses to keep workers on their payroll and support small businesses and nonprofits throughout the COVID-19 pandemic, as the economic recovery progressed, the credit was no longer serving its original purpose and expired on October 1, 2021. To qualify for the credit, the business must have paid wages while its operations were either completely or partially suspended by government order or during a quarter in which receipts were down 20 percent or more over the same quarter in 2019. A business may also qualify as a recovery startup business that began operations after February 15, 2020.

Another credit, the family and medical leave credit, has been extended through 2025. In order to qualify for this credit, employers’ written policies must provide at least two weeks of paid leave for eligible full-time employees and paid leave must be at least 50 percent of wages paid during a normal workweek. The credit ranges from 12.5 percent to 25 percent of wages paid to qualified employees who are out for a maximum of 12 weeks during the year.

Finally, the work opportunity tax credit is a nonrefundable credit for employers who employ certain individuals from targeted groups, such as veterans, low-income individuals and ex-felons. The size of the credit depends on the hired person’s target group, the number of individuals hired and the wages paid to each. This credit is also scheduled to expire at the end of 2025.

12. Consider withdrawing erroneous employee retention credit claims. Despite increasing scrutiny and direct warnings from the IRS, ERC solicitors are still pushing businesses to submit aggressive and ineligible ERC claims. With the increased funding the IRS has received from the Inflation Reduction Act of 2022, the IRS has turned its attention to enforcement in this area, resulting in several lawsuits against these unscrupulous promotors, both by the IRS and their clients. Any business with a pending ERC claim that they realized after filing was ineligible can voluntarily withdrawal the claim, as long as the following conditions are met:

1. You filed an amended employment tax return to claim the ERC (Forms 941-X, 943-X, 944-X, CT-1X).
2. You made no other changes on your amended return besides claiming the ERC.
3. You intend to withdraw the entire amount of your ERC claim for the quarter.
4. You have yet to receive the refund checks for the claim or you have not cashed or deposited the refund check if the IRS has already processed your returns and paid your claim.

You will receive a letter from the IRS stating whether the withdrawal request was accepted or rejected. Without the acceptance letter, the withdrawal request is not considered completed. If your withdrawal is accepted, an amended income tax return may need to be prepared.

Nearly all cash-basis taxpayers can benefit from strategies that accelerate deductions or defer income, since it is generally better to pay taxes later rather than sooner (especially if income tax rates are not scheduled to increase). For example, a check you send in 2024 generally qualifies as a payment in 2024, even if it is not cashed or charged against your account until 2025. Similarly, deductible expenses paid by credit card are not deductible when you pay the credit card bill (for instance, in 2025), but when the charge is made (for instance, in 2024).

With respect to income deferral, cash-basis businesses, for example, can delay year-end billings so that they fall in the following year or accelerate business expenditures into the current year. On the investment side, income from short-term (i.e., maturity of one year or less) obligations like Treasury bills and short-term certificates of deposit is not recognized until maturity, so purchases of such investments in 2024 will push taxability of such income into 2025. For a wage earner (excluding an employee-shareholder of an S corporation with a 50 percent or greater ownership interest) who is fortunate enough to be expecting a bonus, he or she may be able to arrange with their employer to defer the bonus (and tax liability for it) until 2025. However, if any of this income becomes available to the wage earner, whether or not cash is actually received, the bonus will be taxable in 2024. This is known as the constructive receipt doctrine.

13. Defer income until 2025 to take advantage of sizable inflation adjustments to tax brackets. For 2024, the top individual tax rate remains 37 percent and is applied to joint filers with taxable income greater than $731,200 and single filers with taxable income greater than $609,350. These thresholds will rise in 2025 to $751,600 for joint filers and $626,350 for single filers. It might be advantageous for many taxpayers to accelerate their deductions into 2024, reducing their potential tax liability this year. Additionally, for those who are able, taxpayers should plan to defer income into 2025 to take full advantage of the threshold increases to the tax brackets. While there are many ways to defer your income, waiting to recognize capital gains or exercise stock options are popular options that would not only lower your investment income, but your taxable income as well. Depending on your situation, these strategies could reduce tax due for 2024 and potentially 2025 as well.

14. Be aware of the second largest increase to the standard deduction since the Tax Cuts and Jobs Act. Thanks to high inflation adjustments for 2024, the standard deduction has again increased meaningfully to $29,200 for a joint return (an increase of $1,500) and $14,600 for a single return (an increase of $750) for those who do not itemize deductions. Taxpayers 65 years or older and those with certain disabilities may claim additional standard deductions.

 

15. Carefully consider obtaining an IP PIN. The Identity Protection (IP) PIN is a six-digit number assigned by the IRS (and known only by the IRS and the taxpayer) that adds an additional layer of protection to the taxpayer’s sensitive tax information. Using an IP PIN prevents someone else from filing a return just by using your Social Security number or Individual Taxpayer Identification Number. Rather, the return must also include your unique IP PIN. Therefore, receiving and using an IP PIN will further protect your tax information whether you have previously been a victim of identity theft or just want to take precautions to plan ahead and avoid potential identity theft in the future. After you receive your IP PIN from the IRS, it is valid for one calendar year and, for each subsequent year, a new IP PIN will be generated and must be obtained. For greater detail, we previously wrote on this topic in an Alert. Additionally, the IRS has an FAQ about the IP PIN.

16. Maximize child and dependent care credits. For tax year 2024, you may be able to claim the nonrefundable child and dependent care credit if you pay qualified expenses when you (and your spouse if filing a joint return) work. This credit is generally not allowed for married filing separately taxpayers. Your dependent must be under age 13, or an individual who was physically or mentally incapable of self-care with certain conditions. The maximum qualifying expenses you may use to calculate the credit are $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals. In 2024, there is no limit to a taxpayer’s adjusted gross income (AGI) in qualifying for the credit; however, the percentage of expenses available for credit would be reduced to 20 percent for most middle-income taxpayers whose AGI exceeds $43,000.

Percentage of Expenses Available for Dependent Care Credit (Based on Income)
	35%	34% to 21%	20%
Adjusted gross income	$0 to $15,000	$15,001 to $43,000	$43,001 and above

17. Claim the maximum child tax credit. For 2024, the maximum credit remains at $2,000 per dependent under the age of 17. The refundable portion of the credit can go up to $1,700 per qualifying child (up from $1,600 in 2023 to adjust for inflation), depending on your income, and you must have earned income of at least $2,500 to even be eligible for the refund. Similar to 2023, the credit begins to phase out at incomes above $400,000 for married filing jointly taxpayers and $200,000 for any other filing status.

Phaseout Range of Child Tax Credit by Modified Adjusted Gross Income

Single/Married Filing Separately	Head of Household	Married Filing Jointly
$200,000 - $240,000	$200,000 - $240,000	$400,000 - $440,000

 

Itemized Deduction Planning

18. Pay any medical bills in 2024. The medical expense deduction floor remains at 7.5 percent of AGI for taxpayers who itemize their deductions. Additionally, the deduction is not an alternative minimum tax (AMT) preference item, meaning that even taxpayers who are subject to the AMT benefit from deductible medical expenses.

Therefore, be sure to pay all medical costs for you, your spouse and any qualified dependents in 2024 if, with payment, your medical expenses are projected to exceed 7.5 percent of your 2024 AGI, as this will lower your tax liability for 2024. You also may wish to accelerate any qualified elective medical procedures into 2024 if appropriate and deductible.

19. Defer your state and local tax payments until 2025. The limitation of the state and local tax deduction was one of the most notable changes enacted by the TCJA in 2017. In 2024, the deduction limit for state and local income or sales and property taxes of $10,000 per return ($5,000 in the case of a married individual filing separately) remains unchanged, though each year more and more states introduce measures to try and circumvent this limitation, such as pass-through entity (PTE) tax arrangements that will enable a deduction at the individual level. See the next observation below.

20. Prepay your January mortgage payment if you will be under the mortgage interest limitation. For acquisition indebtedness incurred after December 15, 2017, the mortgage interest deduction is limited to interest incurred on up to $750,000 of debt ($375,000 in the case of a married individual filing a separate return). The mortgage interest from both a taxpayer’s primary and secondary residences remains deductible up to this balance limit on newer debt. For debt existing prior to December 15, 2017, the limit remains at the pre-TCJA amount of $1 million for original mortgage debt.

Regardless of the date incurred, home equity indebtedness not used to substantially improve a qualified home is no longer deductible. However, if a portion of the funds taken from home equity indebtedness are used to improve the property, an equal percentage of the interest paid on that debt can be deducted.

21. Consider paying state and local taxes, mortgage interest, medical expenses, charitable gifts, etc. (subject to limits noted within this guide) in the same year as opposed to spreading the payments over two years. By bunching deductions and deferring taxable income along with using AGI‑reducing techniques, you increase the value of all deductions and reduce your overall tax liability.

In considering the strategies noted below, however, keep in mind that if you pay a deductible expense in December 2024 instead of January 2025, you reduce your 2024 tax instead of your 2025 tax, but you also lose the use of your money for one month. Generally, this will be to your advantage from a tax perspective, unless in one month you can generate a better return on use of the funds than the tax savings. In other words, you must decide whether the cash used to pay the expense early should be for something more urgent or more valuable than the increased tax benefit.

The following chart illustrates the tax treatment of selected types of interest.

Interest Expense Deduction Summary*
Type of debt	Not deductible	Itemized deduction	Business or above-the-line deduction
Consumer or personal	✔
Taxable investment [1]		✔
Qualified residence [2]		✔
Tax-exempt investment	✔
Trading and business activities			✔
Passive activities [3]			✔

 * Deductibility may be subject to other rules and restrictions.

[1] Generally limited to net investment income.

[2] For 2024, including debt of up to $750,000 ($1 million for debt incurred prior to December 16, 2017) associated with primary and one secondary residence. Home equity loan interest deduction is suspended, unless the loan proceeds are used to buy, build or substantially improve the taxpayer’s home securing the loan.

[3] Subject to passive activity rules.

Charitable Contributions

You may wish to consider paying 2025 pledges in 2024 to maximize the “bunching” effect, perhaps through a donor-advised fund, which is a charitable giving vehicle that can assist with bunching of charitable contributions into a given year. This can be useful when you are able to make a donation but have yet to determine the timing of the distributions out of the donor-advised fund or which charities will receive the gift.

Investment Interest

This is interest on loans used to purchase or carry property held for investment purposes (e.g., interest on margin accounts, interest on debt used to purchase taxable bonds, stock, etc.). Investment interest is fully deductible to the extent of net investment income, unless incurred to purchase securities that produce tax-exempt income. Net investment income is equal to investment income less deductible investment expenses. Sources of investment income include income from interest, nonqualified dividends, rents and royalties. Investment expenses include depreciation, depletion, attorney fees, accounting fees and management fees. If you bunch your deductible investment expenses in one year so that little or no investment interest is deductible, the nondeductible investment interest can be carried forward to the following year.

By rearranging your borrowing, you may be able to convert nondeductible interest to deductible investment interest. In addition, you may be able to increase your otherwise nondeductible investment interest by disposing of property that will generate a short‑term capital gain. The extra investment interest deduction may even offset the entire tax on the gain. Disposing of property that will generate long‑term capital gain will not increase your investment income unless you elect to pay regular income tax rates on the gain. Accordingly, you should review your debt and investment positions before disposing of such property.

Medical and Dental Expenses

As discussed in item 18 above, a medical deduction is allowed only to the extent that your unreimbursed medical outlays exceed 7.5 percent of your AGI. To exceed this threshold, you may have to bunch expenses into a single year by accelerating or deferring payment as appropriate.

Charitable Giving

22. Plan for deduction limits when donating noncash charitable contributions. Donating appreciated securities such as stocks, bonds and mutual funds directly to charity allows a taxpayer to avoid taxes on these capital gains, though the deduction for capital gain property is generally limited to 30 percent of AGI.

For personal property, the charitable deduction for airplanes, boats and vehicles may not exceed the gross proceeds from their resale. Form 1098-C must be attached to tax returns claiming these types of noncash charitable contribution. Furthermore, donations of used clothing and household items, including furniture, electronics, linens, appliances and similar items, must be in “good” or better condition to be deductible. You should maintain a list of such contributions together with photos to establish the item’s condition. To the extent they are not in “good condition,” you will need to secure a written appraisal to deduct individual items valued at more than $500.

Noncash Contribution Substantiation Guide
Type of donation	Amount donated
	Less than $250	$250 to $500	$501 to $5,000	Over $5,000
Publicly traded stock	•Receipt •Written records	•Acknowledgment •Written records	•Acknowledgment •Written records	•Acknowledgment •Written records
Nonpublicly traded stock	•Receipt •Written records	•Acknowledgment •Written records	•Acknowledgment •Written records	•Acknowledgment •Written records •Qualified appraisal •Form 8283 Section B
Artwork	•Receipt •Written records	•Acknowledgment •Written records	•Acknowledgment •Written records	•Acknowledgment •Written records •Qualified appraisal •Form 8283 Section B
Vehicles, boats and airplanes	•Receipt •Written records	•1098-C or •Acknowledgment	•1098-C and •Written records	•1098-C •Written records •Qualified appraisal •Form 8283 Section B
All other noncash donations	•Receipt •Written records	•Acknowledgment •Written records	•Acknowledgment •Written records	•Acknowledgment •Written records •Qualified appraisal •Form 8283 Section B
Volunteer out-of-pocket expenses	•Receipt •Written records	•Acknowledgment •Written records	•Acknowledgment •Written records	•Acknowledgment •Written records

 

23. Make intelligent gifts to charities. With many stocks gaining ground in 2024, gifts of appreciated stock remain a great way to maximize charitable gifting while also avoiding capital gains taxes. Do not give away loser stocks (those that are worth less today than what you paid for them). Instead, sell the shares and take advantage of the resulting capital loss to shelter your capital gains or income from other sources, as explained above. Then give cash to the charity since you just sold the stock and will have the cash on hand. As for winner stocks, give them away to charity instead of donating cash, as long as you have held the stock for more than one year. Under either situation, you recognize multiple tax benefits. When gifting appreciated stock to charity, you not only avoid paying taxes on capital gains, gifts and estates, but you may be able to deduct the value of the stock for income tax and AMT purposes as well. As always, be aware that gifts to political campaigns or organizations are not deductible.

Charitable donations are subject to the same AGI limitations in 2024 as for 2023.

Deductions Allowable for Contributions of Various Property
	Cash	Tangible personal property	Appreciated property
Public charity	60% of AGI	50% of AGI	30% of AGI
Private operating foundation	60% of AGI	30% of AGI	30% of AGI
Private nonoperating foundation	30% of AGI	30% of AGI	20% of AGI
Donor-advised fund	60% of AGI	30% of AGI	30% of AGI

 

24. Consider an investment in a special-purpose entity. As an additional workaround to the SALT limitations mentioned previously in items 19 and 21, certain states also employ special-purpose entities, which allow taxpayers to make charitable contributions to certain nonprofits (usually schools) while claiming a state tax credit for the contribution. While the taxpayer generally does not receive a federal charitable contribution deduction for the amount of the contribution for which they will receive a state credit, taxpayers often receive a much greater return in tax benefits dollar-for-dollar than contributions made outside of these special-purpose entity programs. In Pennsylvania, for example, the educational improvement and opportunity scholarship tax credits (EITC/OSTC) allow taxpayers to effectively divert state tax payments to donations to private schools, scholarship organizations, pre-K programs and other education initiatives.

To illustrate, using the Pennsylvania EITC/OSTC program, suppose a taxpayer contributes $50,000 to a special-purpose LLC, which in turn contributes the funds to the EITC/OSTC program. As a member of the LLC, at year end, the taxpayer would receive a K-1 from the entity reporting a Pennsylvania state tax credit for either 75 percent or 90 percent of the contribution, depending on whether they commit to making this contribution for one or two years, respectively. Assuming a two-year commitment, the taxpayer will receive a $45,000 nonrefundable credit on their Pennsylvania income tax return, reducing the tax owed by $45,000. In addition, the taxpayer would receive a federal income tax charitable contribution deduction for the remaining $5,000. Assuming a 37 percent federal tax bracket, this would result in a federal tax benefit (reduction in tax) of $1,850. Thus, on top of the $45,000 state tax benefit, the total tax benefit from a $50,000 contribution to an EITC/OSTC would be $46,850. As the credit is nonrefundable, this assumes that the taxpayer’s state tax liability exceeds the amount of the credit. By comparison, a contribution to a non-EITC/OSTC qualifying scholarship program would realize a tax benefit of only $18,500 (37 percent of $50,000).

	EITC/OSTC contribution	“Normal” charitable contribution
Amount of contribution (A)	$50,000	$50,000
Pennsylvania tax credit (B)	$45,000	$0
Contribution for which no state credit is given (C=A-B)	$5,000	$50,000
Federal tax rate (D)	37%	37%
Federal tax savings (E=CxD)	$1,850	$18,500
Total federal and state tax benefit (B+E)	$46,850	$18,500

Tax-Efficient Investment Strategies

For 2024, the long-term capital gains and qualifying dividend income tax rates, ranging from zero percent to 20 percent, are based on taxable income and have increased incrementally, as shown below.

Long-Term Capital Gains Rate	Single	Married Filing Jointly	Head of Household	Married Filing Separately
0%	Up to $47,025	Up to $63,000	Up to $47,025	Up to $94,050
15%	$47,026 to $518,900	$63,001 to $551,350	$47,026 to $291,850	$94,051 to $583,750
20%	Over $518,900	Over $551,350	Over $291,850	Over $583,750

In addition, a 3.8 percent tax on net investment income applies to taxpayers with modified AGI that exceeds $250,000 for joint returns ($200,000 for singles). See item 64 for more information. Here are some ways to capitalize on the lower rates as well as other tax planning strategies for investors.

25. Maximize preferential capital gains tax rates. In order to qualify for the preferential lower capital gains tax rates of 20 percent, 15 percent and zero percent, a capital asset is required to be held for a minimum of one year. That is why it is paramount that, when you sell off your appreciated stocks, bonds, investment real estate and other capital assets, you are mindful of the asset’s holding period. If you have held the asset for less than one year, consider delaying the sale so that you can meet the holding period requirement (unless you have losses to offset any potential gain). Also, consider timing the sales strategically to stay within the lower tax brackets and take advantage of the zero percent or 15 percent long-term capital gains rates when possible. While it is generally unwise to let tax implications be your only determining factor in making investment decisions, you should not completely ignore them either. Also, keep in mind that realized capital gains may increase your AGI, which consequently may reduce your AMT exemption and therefore increase your AMT exposure―although this is to a much lesser extent than in prior years, given the increased AMT exemptions in recent years.

26. Reduce the recognized gain or increase the recognized loss. When selling off any securities, the general rule is that the shares acquired first are the ones deemed sold first. However, if you opt to, you can specifically identify the shares you are selling when you sell less than your entire holding of any securities. By notifying your broker of the shares you wish to have sold at the time of the sale, your gain or loss from the sale is based on the identified shares. Additionally, many self-directed brokerage accounts also allow you to choose which shares to sell first. This sales strategy gives you more control over the amount of your gain or loss and whether it is long- or short-term. A pitfall of the specific identification method is that you cannot use any different methods (e.g., average cost method or first in, first out method) to identify shares of that particular security in the future. Rather, you will have to specifically identify shares of that particular security throughout the life of the investment, unless you obtain permission from the IRS to revert to the first in, first out method.

27. Harvest your capital losses. You should periodically review your investment portfolio to determine if there are any “losers” you should sell off. This year, even if your investments are collectively up, there are likely capital losses lurking somewhere in your portfolio. As the year comes to a close, so does your last chance to offset capital gains recognized during the year or to take advantage of the $3,000 ($1,500 for married separate filers) limit on deductible net capital loses, as potentially up $3,000 of net losses can be used to offset any ordinary income reported during the year. However, please be mindful of the wash-sale rule that could negate any capital losses realized, discussed later in item 30.

Additionally, you may want to project what your taxable income is going to be for the year before selling assets at a loss to offset long-term capital gains. For taxpayers in the lower two brackets, their capital gains rate is zero percent. It does not make sense to offset capital losses against long-term capital gains in a year in which you are in a lower tax bracket, as gains subject to the zero percent rate are not taxed, so the deduction for the capital loss would essentially be wasted.

28. Take advantage of Section 1202 small business stock gain exclusion. For taxpayers other than corporations, Section 1202 of the Internal Revenue Code allows for a potential exclusion of up to 100 percent of the gain recognized on the sale of qualified small business stock (QSBS) that is held by the taxpayer for more than five years, depending on when the QSBS was acquired. The shares of the company must have been acquired after September 27, 2010, and the gain eligible for the exclusion cannot exceed the greater of $10 million or 10 times the aggregate adjusted basis of QSBS stock sold during the year. Stock issued prior to September 28, 2010, may be eligible for a smaller deferral. See the chart below. As an alternative, if the stock is held for more than six months and sold for a gain, you can elect to roll over and defer the gain to the extent that new QSBS stock is acquired during a 60-day period beginning on the date of the sale.

Stock Issuance Date		1202 Exclusion Percentage	1202 Effective Federal Tax Rate	Federal Tax Rate
Beginning	Ending
August 14, 1993	February 18, 2009	50%	15.9%	23.8%
February 19, 2009	September 27, 2010	75%	7.95%	23.8%
September 28, 2010		100%	0%	23.8%

 

29. Beware of the “kiddie tax.” For a child with no earned income (e.g., wages, self-employment income), unearned income (e.g., investment income) of up to $1,300 is not taxable in 2024. The next $1,300 of unearned income will be taxed at the child’s rate. Any amount in excess of $2,600 is taxed at the marginal tax rate of the child’s parents, under what is known as the “kiddie tax.” For kiddie tax purposes, a child is defined as someone that has not yet reached the age of 18 by the end of the year, or an 18-year-old or a full-time student ages 19-23 with earned income not exceeding half of their support.

30. Keep the wash-sale rules in mind. Frequently overlooked, the wash-sale rule makes it so that no deduction is allowed for a loss if you acquire substantially identical securities within a 61‑day period beginning 30 days before the sale and ending 30 days after the sale. Instead, the disallowed loss is added to the cost basis of the new security. However, there are ways to avoid this rule. For example, you could sell a security at a loss and use the proceeds to acquire similar but not substantially identical investments. If you desire to preserve an investment position and realize a tax loss, consider the following options:

• Sell the loss securities and then wait 31 days to purchase the same securities. The risk in this strategy is that any potential appreciation in the stock that occurs during the waiting period will not benefit you.
• Sell the loss securities and then reinvest the proceeds in shares of a mutual fund that invests in securities similar to the one you sold, or reinvest the proceeds in the stock of another company in the same industry. This approach considers an asset’s industry as a whole, rather than a particular stock. After 30 days, you may wish to repurchase the original holding. This method can reduce the risk of missing out on any potential appreciation during the waiting period.
• Buy additional shares of the same security (double up), wait 31 days and then sell the original lot, thereby recognizing the loss. This strategy will allow you to maintain your position but also increases your downside risk.

Keep in mind that the wash-sale rule typically will not apply to sales of debt securities (such as bonds) since such securities usually are not considered substantially identical due to different issue dates, rates of interest paid and other terms.

31. Lower your tax burden with qualified dividends. The favorable capital gain tax rates (20, 15 or zero percent) make dividend-paying stocks extremely attractive, since these preferential lower rates will remain intact for 2024. Keep in mind that to qualify for the lower tax rate for qualified dividends, the shareholder must own the dividend-paying stock for more than 60 days during the 121-day period beginning 60 days before the stock’s ex-dividend date. For certain preferred stocks, this period is expanded to 90 days during a 181-day period.

32. Consider tax-exempt opportunities from municipal bonds, municipal bond mutual funds or municipal exchange-traded funds. If you are in a high tax bracket, it may make sense to invest in municipal bonds. Tax‑exempt interest is not included in adjusted gross income, so deduction items based on AGI are not adversely affected. As long as your investment portfolio is appropriately diversified, greater weight in municipal bonds may be advantageous. However, be mindful of the AMT impact on income from private activity bonds, which is still a preference item for AMT purposes. In general, a private activity bond is a municipal bond issued after August 7, 1986, whose proceeds are used for a private (i.e., nonpublic) purpose. Accordingly, review the prospectus of the municipal bond fund to determine if it invests in private activity bonds. Anyone subject to the AMT, including those with incentive stock options, should avoid these funds.

33. Time your mutual fund investments. Before investing in any mutual funds prior to February 2025, you should contact the fund’s manager to confirm whether dividend payouts attributable to 2024 are expected. If such payouts do occur, part of your potential investment could be subject to tax in the prior year. In order to minimize 2024 tax implications, investments with such payouts should be avoided, especially if they will include large capital gain distributions. Additionally, not all dividends from mutual funds are considered “qualified” dividend income and therefore could be subject to your marginal income tax rate, rather than the preferential 20 percent, 15 percent or zero percent capital gains tax rates.

34. Determine if there is worthless stock in your portfolio. Stock that becomes worthless is deductible (typically as a capital loss) in the year that it becomes worthless. The loss is calculated based on your basis in the stock, though you may need a professional appraiser’s report or other evidence to prove the stock has no value. In order to avoid going through the appraisal process, consider selling the stock to an unrelated person for at least $1, or by writing a letter to the officers of the company stating that you are abandoning the stock. Doing so will eliminate the need for an appraiser’s report and further substantiates a loss deduction.

35. Consider the largest tax benefit as a homeowner. Federal law (and many, but not all, states) allows an individual to exclude, every two years, up to $250,000 ($500,000 for married couples filing jointly) of gain realized from the sale of their principal residence. To calculate the gain and support an accurate tax basis, maintain records of original cost, improvements and additions. The exclusion ordinarily does not apply to a second home or a vacation home. However, with careful planning, you may be able to apply the exclusion to multiple homes. Note that losses on the sale of personal residence are generally not deductible.

36. Consider like-kind exchanges. A like-kind exchange (aka a Section 1031 exchange) provides a tax-free alternative to selling real property held for investment or for productive use in a trade or business. The traditional sale of property may cause recognition of any gain resulting in tax on the sale. Conversely, a like-kind exchange avoids the recognition of gain through the exchange of qualifying like-kind properties. The gain on the exchange of like-kind property is effectively deferred until the property received in exchange is sold or otherwise disposed. Since 2018, like-kind exchanges are only available for real property sales. If, as part of the exchange, other (not like-kind) property or money is received, gain must be recognized to the extent of the other property and money received. Losses cannot be recognized. Also keep in mind that real property in the United States is not like-kind to real property outside the United States.

37. Understand the tax implication of any transactions involving digital assets. Exchanges of digital assets, such as cryptocurrencies, can occur on either a traditional or a decentralized exchange (DEX). Traditional exchanges are centralized financial institutions that collect know-your-customer information from taxpayers such as ID, proof of income and proof of address. A DEX is a peer-to-peer marketplace where transactions occur directly between individuals. There is no intermediary that holds the cryptocurrency and the taxpayer can currently remain pseudonymous. Taxpayers who use traditional exchanges can now expect to receive documentation such as an Excel file or brokerage statement reporting cryptocurrency transactions that occurred throughout the year. On DEX platforms, taxpayers must track the transactions involving cryptocurrency themselves in order to accurately report their income.

Gains and losses from the sale (including use or disposition) of cryptocurrencies, just like the sale of stock, must be reported on your tax return. Proper recording of basis in cryptocurrency can significantly decrease the capital gains.

38. Determine your level of participation in activities to either avoid or qualify for passive activity loss treatment. In general, losses from a passive activity are subject to more limitations (and therefore are less beneficial) than nonpassive losses. Passive activities generally occur when the taxpayer does not materially participate in the activity. The IRS regulations and statutory authority lay out a number of factors that determine whether an activity should be considered passive. Typically, when an individual spends more than 500 hours participating in an activity during the year, the activity will not be considered passive. This 500-hour requirement can include your spouse’s participation even if they do not own any interest in the activity or if you and your spouse file a separate returns. There are also other exceptions that allow passive activities to be classified as active, including participation during five of the preceding 10 tax years or having spent more than 100 hours on the activity during the year, which equals or exceeds the involvement of any other participant. You may also want to generate passive income to utilize passive losses, which would otherwise be suspended.

As for real estate professionals, eligible taxpayers may deduct losses and credits from rental real estate activities in which they materially participate since they will not be treated as passive and may be used to reduce nonpassive income. For these purposes, an eligible taxpayer spends more than 750 hours of services during the tax year in real property trades or businesses. In addition, more than 50 percent of the personal services that a taxpayer performs in all trades or businesses combined during the tax year must be performed in real property trades or businesses in which the taxpayer materially participates. On the other hand, a taxpayer’s personal use or rental to others of a vacation home during the last few days of the year may have a substantial tax impact.

39. Consider the benefits of selling your passive activities to trigger use of suspended losses. Taxpayers can use passive losses to offset nonpassive income in the year in which they dispose of or abandon their entire interest in the activity in a taxable transaction, whether the transaction results in a gain or a loss.

40. Make the most of your pass-through entities’ losses by ensuring you have adequate tax basis in your S corporations or partnerships. Losses can only be claimed from a flow-through entity if you have sufficient tax basis in the entity. In order to increase your basis and potentially free up losses, you may wish to contribute cash to the entity by either increasing your equity or debt in the venture. Keep in mind that loans made by a third-party lender to an S corporation and guaranteed by an S corporation shareholder do not increase the shareholder’s basis. The loan must be made directly from the S corporation shareholder to the S corporation in order to increase his or her debt basis. Form 7203 can be helpful in determining tax basis.

Planning for Retirement

41. Participate in and maximize payments to 401(k) plans, 403(b) plans, SEP (simplified employee pensions) plans, IRAs, etc. These plans enable you to convert a portion of taxable salary or self‑employed earnings into tax-deductible contributions to the plan. In addition to being deductible themselves, these items increase the value of other deductions since they reduce AGI. Deductible contributions to IRAs are generally limited to $7,000 in 2024, while substantially higher amounts can be contributed to 401(k) plans, 403(b) plans and SEPs. For 2024, the deduction for IRA contributions starts being phased out if you are covered by a retirement plan at work and your AGI exceeds $77,000 for single filers and $123,000 for married joint filers. In 2024, $23,000 may be contributed to a 401(k) plan as part of the regular limit of $69,000 that may be contributed to a defined contribution (e.g., money purchase, profit‑sharing) plan. This limit includes both employer and employee contributions. These limits are reflected in the table below. Don’t forget that additional catch-up contributions are allowed for those taxpayers age 50 and above, as noted in the table.

IRAs can be established and contributed to as late as April 15, and contributions can be made to an existing IRA on the due date of your return. In addition, SEPs can be established and contributed to as late as the due date of your return, including extensions, or as late as October 15, 2025, for tax year 2024.

Annual Retirement Plan Contribution Limits
Type of plan	2023	2024	2025
Traditional and Roth IRAs Catch-up contributions (ages 50-plus) for traditional and Roth IRAs	$6,500 $1,000	$7,000 $1,000	$7,000 $1,000
Roth and traditional 401(k), 403(b) and 457 plans Catch-up contributions (ages 50-59, and 64-plus) for 401(k), 403(b) and 457 plans Catch-up contributions (ages 60-63) for 401(k), 403(b) and 457 plans	$22,500   $7,500     $7,500	$23,000   $7,500     $7,500	$23,500   $7,500     $11,250
SIMPLE plans Catch-up contributions (ages 50-59, and 64-plus) for SIMPLE plans* Catch-up contributions (ages 60-63) for SIMPLE plans	$15,500 $3,500     $3,500	$16,000 $3,500     $3,500	$16,500 $3,500     $5,250
SEPs and defined contribution plans**	$66,000	$69,000	$70,000

*Beginning in 2024, SIMPLE elective deferral limits are increased by 10 percent of the amount shown above if the employer has 25 or fewer employees or 26 to 100 employees when the employer contributes either 3 percent of compensation or 4 percent of an employee’s elective deferrals. For 2024, this 10 percent increase will translate to $17,600 for employees under 50 and $21,450 for employees age 50 or older.

**Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2024, the limit as adjusted for inflation is $345,000.

42. Contribute to an IRA even after traditional retirement age. With the passage of the original SECURE Act in 2019, there is no longer an age limit for individuals who choose to contribute toward a traditional IRA. Before 2020, those who turned 70½ during the taxable year were ineligible to make any further contributions to their retirement account. Keep in mind that in order to contribute to a traditional IRA, a taxpayer needs to have earned income from a job or self-employment, so this only affects those seniors that are continuing to work after age 70½. The contribution limit for IRAs has increased to $6,500 ($7,500 for those age 50 and over), and the deductibility of contributions may be limited based on income or your eligibility for an employer plan.

43. Avoid potential penalties for not taking a required minimum distribution (RMD). Due to the passage of the SECURE Act 2.0, the required RMD from traditional IRA, SEP IRA, SIMPLE IRA and retirement plan accounts must be made by an account owner who reaches age 73. Generally, you must take your RMDs by December 31 each year, except that you can delay your first RMD until April 1 of the year after you reach 73. For example, if you turned 73 during 2024, you would have until April 1, 2025, to take your first RMD. However, if you opt to delay taking your first RMD until the first quarter of 2025, be aware that for 2025, you will technically be taking two years’ worth of RMD, which will increase your 2025 taxable income. The penalty for not taking an RMD can be excessive: 25 percent of the required distribution that is not taken by the deadline. However, if you can rectify the missed RMD within two years, the penalty could be lowered to only 10 percent.

44. Maximize wealth planning through Roth conversions. Converting a traditional retirement account such as a 401(k) or IRA into a Roth 401(k) or Roth IRA will create taxable income upon conversion and allow tax-free distributions in retirement. There are many good reasons (and a few bad ones) for converting a 401(k) or traditional IRA to a Roth account. Good reasons include:

• You have special and favorable tax attributes that need to be consumed such as charitable deduction carryforwards, investment tax credits and net operating losses, among others;
• You expect the converted amount to grow significantly, and tax-free growth is desired;
• Your current marginal income tax rate is likely lower than at the time of distribution (retirement);
• You have sufficient cash outside the 401(k) or traditional IRA to pay the income tax due as a result of the conversion;
• The funds converted will not be required for living expenses or other needs for a long period;
• You do not expect to need the distributions from the IRA in retirement, since Roth IRAs do not require RMDs;
• You expect your spouse to outlive you and will require the funds for living expenses;
• You expect to owe estate tax, as the income tax paid in connection with the conversion would reduce the taxable estate; and
• Your assets in the traditional IRA currently may have depressed in value.

If you decide to rollover or convert from a 401(k) or traditional IRA to a Roth account and you also expect your AGI and tax bracket to remain more or less constant, you should consider staggering the total amount you plan to shift over a period of years. For example, a taxpayer who plans to convert a total of $185,000 from a regular IRA to a Roth IRA should consider converting $37,000 per year for five years. This strategy may prevent the conversion from pushing a taxpayer into a higher tax bracket, since the conversion is fully taxable on the amount converted.

Keep in mind that a conversion cannot be recharacterized afterward, so careful planning is needed.

45. Make charitable contributions directly from 2024 IRA distributions. For 2024, retirees can now exclude up to $105,000 (up from $100,000) from gross income for certain distributions from a traditional IRA when contributed directly to a qualified tax-exempt organization to which deductible contributions can be made. For married couples, each spouse can make a $105,000 distribution from their respective retirement account for a potential total of $210,000 for year 2024. Beginning in 2024, this annual contribution limit is indexed for inflation. This special treatment applies only to distributions made on or after the date the IRA owner reaches age 70½, and the distribution must be made directly from the IRA trustee to the charitable organization. Distributions that are excluded from income under this provision are not allowed as a charitable deduction. Qualified charitable distributions (QCDs), as these are called, may be especially beneficial for those charitably minded taxpayers who claim the standard deduction or whose taxable Social Security benefits are affected by AGI thresholds.

The SECURE Act 2.0 also allows IRA owners age 70½ to make a one-time election to transfer a QCD of $53,000 for 2024 (the contribution limit is indexed for inflation) to a split-interest entity, such as a charitable remainder unitrust, charitable remainder annuity trust or charitable gift annuity. The split-interest entity is required to pay a fixed percentage of 5 percent or greater. Payments received from the split-interest entity or taxable as ordinary income.

46. Plan to stretch. The SECURE Act 2.0 maintained the original SECURE Act’s partial elimination of the “stretch IRA” strategy, whereby IRA owners would utilize their retirement accounts as a means to transfer wealth to the next generation. For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy. This strategy is particularly beneficial for taxpayers with Roth IRAs, as beneficiaries do not have to pay taxes on withdrawals from the Roth.

For deaths of plan participants or IRA owners beginning in 2020, distributions to most nonspousal beneficiaries are generally required to be distributed within 10 years following the plan participant or IRA owner’s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Planning for Higher Education Costs

Many tax-saving opportunities exist for education-related expenses. If you or members of your family are incurring these types of expenses now or will be in the near future, it is worth examining them. Here are some strategies to consider as year-end approaches.

47. Retain control and plan ahead for tax-free growth with 529 qualified tuition plans. Section 529 plans are well known for their tax benefit: Distributions of contributions and earnings are tax-free when utilized for qualified higher education expenses. However, another feature of Section 529 plans that taxpayers usually overlook is that the ownership and control of the plan lies with the donor (typically the parent or grandparent of the beneficiary student) and not with the beneficiary. Having donor control and ownership means the plan is not considered an asset of the student for financial aid purposes, generally resulting in higher financial aid.

While many states allow deduction in the year of contributions, 529 plan contributions, which are made on an after-tax basis, do not provide federal tax savings. However, the more significant federal tax benefit is that contributions and earnings on contributions that are subsequently distributed for qualified higher education expenses (including tuition, room and board, and other costs) at accredited schools anywhere in the United States are free of federal income tax and may be free of state income tax. Since 2018, 529 plan owners can use tax-free distributions for up to $10,000 of eligible expenses at elementary and secondary schools, in addition to colleges and universities. Since the SECURE Act was passed in December 2019, tax-free distributions can now also be used to pay for eligible expenses related to an apprenticeship program, in addition to higher education expenses. In addition, the SECURE Act allows up to $10,000 of distributions to pay principal or interest on a qualified education loan of the beneficiary or a sibling of the beneficiary.

To the extent that distributions are not for qualified higher education expenses, regular income tax plus a 10 percent penalty may apply to the earnings portion of the distribution. As contrasted with the other education strategies discussed below, contributions may be made regardless of the donor’s AGI. To combat this potential penalty issue for any surplus funds not being used on qualifying expenses, as discussed in detail in item 2 above, account owners can now roll unused 529 plan assets, up to a lifetime limit of $35,000, into a beneficiary’s Roth IRA account.

An election can also be made to treat a contribution to a 529 plan as having been made over a five-year period (commonly referred to as “superfunding” the account). Consequently, for 2024, a married couple can make a $180,000 contribution ($190,000 beginning in 2025) to a 529 plan without incurring any gift tax liability or utilizing any of their unified credit since the annual gift exclusion for 2024 is $18,000 per donor (increasing to $19,000 for 2025) and the contribution can be split with the donor’s spouse. It is important to note that additional gifts made in the five-year period to the same recipients have a high chance of triggering a gift tax filing obligation.

48. Take advantage of education credit options. If you pay college or vocational school tuition and fees for yourself, your spouse and/or your children, you may qualify for either the American opportunity tax credit or the lifetime learning credit to offset the cost of education. These credits reduce taxes dollar-for-dollar, but begin to phase out when 2024 modified AGI exceeds certain levels. The chart below provides a summary of the phaseouts.

2024 Education Expense and Credit Summary
Tax benefit	Single filers (not including married filing separately)	Joint filers	Maximum credit/ deduction/contribution
American opportunity tax credit	$80,000 - $90,000	$160,000 - $180,000	$2,500 (credit), up to 40% of the credit is refundable ($1,000)
Lifetime learning credit	$80,000 - $90,000	$160,000 - $180,000	$2,000 (credit)
Student loan interest deduction	$80,000 - $95,000	$165,000 - $195,000	$2,500 (deduction)
Coverdell education savings account	$95,000 - $110,000	$190,000 - $220,000	$2,000 (contribution)

 

49. Match student loan payments with retirement contributions. If you paid interest on a qualifying federal student loan, an “above the line” deduction of up to $2,500 is allowed for interest due and paid in 2024. Note that the deduction is not allowed for taxpayers electing married filing separate status. Additionally, a taxpayer who can be claimed as a dependent on another's return cannot take the deduction. The deduction is phased out when AGI exceeds certain levels. See chart above.

50. Fund contributions to a Coverdell education savings account. A Coverdell education savings account (ESA) is a tax-exempt trust or custodial account organized exclusively in the United States solely for paying qualified education expenses for the designated beneficiary of the account. At the time the trust or account is established, the designated beneficiary must be under 18 (or a special needs beneficiary). Contributions to a Coverdell ESA must be made in cash and are not tax deductible; however, the earnings grow on a tax-deferred basis. The maximum total annual contribution is limited to $2,000 per beneficiary per year, and the contribution is phased out when the modified AGI is between $190,000 and $220,000 for joint filers and $95,000 and $110,000 for single filers.

Distributions from Coverdell ESAs are excludable from gross income to the extent that the distributions do not exceed the qualified education expenses incurred by the designated beneficiary, less any amounts covered by grants or scholarships and credits received from lifetime learning or American opportunity tax credits, as discussed at item 48 above. Tax-free withdrawals can be made for qualified expenses, which also include kindergarten through grade 12 and higher education expenses. If distributions exceed qualified expenses, a portion of the distributions is taxable income to the designated beneficiary. Furthermore, to the extent that distributions are not used for educational expenses, a 10 percent penalty applies.

51. Consider education benefits from financial aid and various loan repayment plans. In October 2024, the Biden-Harris administration announced the approval of an additional $4.5 billion in debt relief fixes. These fixes are mainly for income-driven repayment plans and the public service loan forgiveness plan, but also includes automatic relief for borrowers that have permanent and total disabilities. As of July 1, 2024, no new enrollments are being accepted for the pay-as-you-earn repayment plans or income-contingent repayment plans. Beginning in December 2024, defaulted Direct Loans will now also be eligible for the income-based repayment plan. To learn more about these plans and see whether you qualify, visit the Federal Student Aid Office’s website.

Strategies for Saving

52. Use an achieving a better life experience (ABLE) account to cover qualified disability expenses. An ABLE account is a tax-advantaged savings vehicle that can be established for a designated beneficiary who is disabled or blind. Only one account is allowed per beneficiary, though any person may contribute. Contributions to an ABLE account are not deductible on the federal tax return, but some states allow a deduction for contributions to the plan. Earnings in the account grow on a tax-deferred basis and may be distributed tax-free if used for qualified disability expenses, including basic living expenses such as housing, transportation and education, as well as medical necessities. If distributions are used for nonqualified expenses, those are subject to income tax plus a 10 percent penalty tax.

Total annual contributions by all persons to the ABLE account cannot exceed the gift tax exclusion amount ($18,000 for 2024, $19,000 for 2025), though additional annual contributions may be possible if the beneficiary is employed or self-employed. An allowed rollover from the 529 college savings account to the ABLE account is considered a contribution and counts toward the maximum allowed annual limit. States have also set limits for allowable ABLE account savings. If you are considering an ABLE account, contact us for further information.

53. Achieve tax savings via health and dependent care flexible spending accounts (IRC Section 125 accounts). These so-called cafeteria plans enable employees to set aside funds on a pre-tax basis for (1) unreimbursed qualified medical expenses of up to $3,200 in 2024; (2) dependent care costs of up to $5,000 per year, per household, or $2,500 if married, filing separately; and (3) adoption assistance of up to $16,810 per year. Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes (at maximum rates as high as 13.3 percent), resulting in a tax savings of as much as 57.95 percent. Paying for these expenses with after‑tax dollars, even if they meet various AGI requirements, is more costly under the current tax rate structure. Since many restrictions apply, such as the “use it or lose it” rule, review this arrangement before making the election to participate as there is a 2025 carryover limit of $660 for certain plans.

54. Reach your retirement goals with a health savings account (IRC Section 223 account). Health savings accounts (HSAs) are another pre-tax medical savings vehicle that are currently highly favored in the marketplace. Taxpayers are allowed to claim a tax deduction for contributions to an HSA even if they cannot itemize medical deductions on Schedule A. HSAs can also work alongside your 401(k) or IRAs to accomplish your retirement goals. Some key HSA elements include: (1) HSA contributions are deductible, subject to annual limits; (2) employer contributions to your HSA are not treated or taxed as income to you; (3) interest or other earnings on your HSA account accrue tax-free, provided there are no excess contributions; and (4) HSA distributions are tax-free if spent on qualified medical expenses. If distributions are not used on qualified medical expenses, they will be subject to a 20 percent penalty if the taxpayer is under the age of 65.

To be eligible for an HSA, you must be covered by a high deductible health plan. You must also meet the following requirements: (1) you must have no other health coverage besides the high deductible health plan; (2) you must not be enrolled in Medicare; and (3) you cannot be claimed as a dependent on someone else’s income tax return in the current tax year. For self-only coverage, the 2024 maximum limit on contributions is $4,150. For family coverage, the 2024 maximum limit on contributions is $8,300. A "catch-up" contribution will increase each of these limits by $1,000 if the HSA owner is 55 or older at the end of the year.

55. Consider tax payments by credit or debit card. The IRS accepts tax payments by credit and debit cards, both online and over the phone. Some taxpayers may choose to make tax payments with a credit card, which could potentially earn rewards like frequent flyer miles, cash‑back bonuses, reward points or other perks. The IRS now allows a taxpayer to select their preferred payment processor from either payUSAtax, Pay1040 or ACI Payments Inc., whose credit card fees ranged from 1.82 percent to 1.98 percent for tax year 2024. Additionally, they offer flat rates for most debit cards, which range from $2.14 to $2.50. The IRS is also accepting digital wallet payments like PayPal, Click to Pay and Venmo. If you are hoping to take advantage of your credit card’s rewards, you must consider the potential fees that come along with your balance due. For example, a $20,000 balance due payment will incur a fee of approximately $400, which is considered a nondeductible personal expense. It might be worth it for some to use their debit card instead, receiving a lower fee of roughly $2.50, but missing out on potential rewards from their credit card.

Of course, if you want to avoid fees on the payment, you can also pay from your bank account using the IRS’ Direct Pay system at irs.gov/payments.

56. Consider accelerating life insurance benefits. Selling all or even just a portion of your life insurance policy allows the policyholder to receive funds in advance while they are still living. This practice is more prevalent with individuals who are chronically or terminally ill, using the funds to help cover medical bills, the cost of treatment or long-term care services, or organ transplants. Additionally, those who are chronically or terminally ill and choose to accelerate their life insurance benefits may exclude these payments from income, subject to certain requirements. When you sell part of your life insurance policy, you are still responsible for making premium payments. An alternative to this is to sell your entire life insurance policy to a viatical settlement provider who regularly engages in the business of purchasing or taking assignments of such policies. Selling your life insurance policy to a viatical settlement provider relinquishes your right to leave the policy’s death benefit to the beneficiary. Payments received from the viatical settlement provider may also be excluded from income.

57. Manage your nanny tax. If you employ household workers, it might be best to try to keep your total payments to each of your household workers under $2,700. If you pay $2,700 or more to a worker in 2024, you are required to withhold Social Security and Medicare taxes from them and pay those withholdings, along with matching employer payroll taxes, on your individual income tax return on Schedule H, Household Employment Taxes. You are not required to withhold Social Security and Medicare taxes from household employees who are your spouse, your child (if they are under age 21), your parent (unless certain conditions are met) and an employee under age 18 (unless the household work is their principal occupation). Wages paid to your parent must have Social Security and Medicate tax withheld if (1) the parent cares for your child who is either under 18 or has a physical or mental condition requiring personal care for at least four continuous weeks in the quarter, and (2) your marital status is divorced, widowed or living with a spouse unable to care for your child due to a physical or mental condition for at least four continuous weeks in the quarter.

In addition to Social Security and Medicare tax for household workers, you may have to pay tax under the Federal Unemployment Tax Act, commonly known as FUTA, if you paid more than $1,000 in total to your household workers in any calendar quarter. You also may be required to file quarterly wage reports with your state department of labor to comply with state unemployment insurance requirements, in addition to annual reporting statements such as Form W-2 and Form W-3.

58. Consider deferring loan modifications and debt cancellations until 2025. Deferring the cancellation of your debt until 2025 could lower your taxable income for 2024. Although most debt forgiveness and cancellations are considered taxable income, there are certain exceptions. If your debt cancellation involves insolvency, bankruptcy, student loans or certain other situations, it may qualify for an exclusion from your cancellation of debt (COD) income. However, even when debt cancellation is excluded from income, it may still affect other tax attributes. For instance, the basis usually needs to be reduced for an asset that has its secured debt cancelled, meaning the COD income exclusion is more of a delay in income recognition rather than a complete exclusion. This is because the cancellation will have ongoing effects that need to be monitored for years after the debt has been cancelled. Moreover, determining whether a taxpayer is insolvent can be challenging and costly, as it requires asset and liability appraisals to establish their fair market value on a specific date.

59. Beware of alternative minimum tax (AMT). For individuals, AMT remains less threatening than it has been in the past. The AMT predominantly applies to high-income individuals, disallowing certain deductions while also including certain exempt income in taxable income. In 2024, the exemption amount for single individuals is $85,700 and $133,300 for joint filers. For tax year 2024, the AMT tax rate of 28 percent applies to excess alternative minimum taxable income of $232,600 for all taxpayers ($116,300 for married couples filing separately).

60. Benefit from home energy credits. The Inflation Reduction Act of 2022 expanded the home energy credits that are available to those who make energy efficient improvements to their qualified residential properties. These credits include:

Credit	Expires	Covers	Maximum credit
Energy efficient home improvement credit	Dec. 31, 2032	Exterior windows and doors Insulation and systems that reduce heat gain or loss Heat pumps, central air conditioners and water heaters. Biomass stoves and boilers Natural gas, propane or oil furnaces or hot water boilers Qualified advanced main air-circulating fans Home energy audits	$1,200 (for 2023 - 2032) for energy property costs and certain energy efficient home improvements $2,000 per year for qualified heat pumps, biomass stoves and boilers
Residential clean energy credit	Dec. 31, 2034	Solar, wind and geothermal power generation Solar water heaters Fuel cells Battery storage technology	30% for 2023 - 2032, 26% for 2033, 22% for 2034
Alternative fuel vehicle refueling equipment credit	Dec. 31, 2032	Equipment to recharge electric vehicle	$100,000 (for business) 30% of the costs, up to $1,000 (for nondepreciable property)
Energy efficient home credit	Dec. 31, 2032	New (and manufactured) homes meeting Energy Star standards Certified zero-energy ready homes	$2,500 for new (and manufactured) $5,000 for zero-energy

61. Purchasing an EV? Consider the impact of clean vehicle tax credits. In addition to the home energy credits detailed above, the Inflation Reduction Act also provided and enhanced numerous credits related to vehicles for 2024.

Clean Vehicle Credit

This credit is allowed for the purchase of new, qualified plug-in EVs or fuel cell electric vehicles through 2032. To qualify, final assembly of the vehicle must be in North America and the vehicle must meet certain critical mineral and battery requirements. While the maximum credit is $7,500, there are income limitations that will prevent many high-earning taxpayers from qualifying.

Used Clean Vehicle Credit

This credit is available for any previously owned clean vehicle purchased and placed into service through 2032 and is limited to the lesser of 30 percent of the vehicle’s sale price or $4,000. The credit will be disallowed if the purchase price paid for the vehicle exceeds $25,000 or the buyer meets certain income thresholds.

Commercial Clean Vehicle Credit

This credit is allowed for any qualifying vehicles acquired and placed in service before December 31, 2032. While the maximum credit is $40,000, the amount is determined by the vehicle’s weight: Vehicles less than 14,000 pounds can receive a maximum credit of $7,500, while heavier vehicles can receive a maximum credit of $40,000. The credit for each vehicle is the lesser of either (1) the “incremental cost” of the vehicle above what the price for a comparable gas- or diesel-powered vehicle would be, or (2) 15 percent of the vehicle’s basis (30 percent for vehicles not powered by gas or diesel).

62. Retroactively remit withholding via a retirement rollover. Once a year, the IRS allows taxpayers to withdraw money from an IRA tax-free, as long as it is rolled over to another IRA within 60 days. Some perceptive individuals even use this provision to take out a short-term, tax-free loan. The one-year waiting period begins on the date you receive the IRA distribution, not on the date you roll the distribution back into the same or another IRA. These IRA withdrawals are able to have (and in some cases require) federal and/or state taxes withheld. Since withholding can be treated as evenly distributed throughout the year, it is possible to make up for missed estimated payments from earlier in the year.

For example, if you determine in the fourth quarter of 2024 that you missed the previous three quarterly federal estimated payments totaling $60,000, you could take out an IRA distribution for $100,000 with 80 percent or $80,000 withheld. The $80,000 would be remitted to the IRS and, within 60 days of the $100,000 distribution, you would pay back the entire $100,000 amount. The $80,000 of federal withholding would be applied evenly throughout 2024, resulting in $20,000 payments for each of the previous three quarters and therefore void the calculated $60,000 underpayment.

63. Withdraw retirement funds penalty-free for new parents who need it. Generally, a distribution from a retirement plan must be included in taxable income. Unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59½ is also subject to a 10 percent early withdrawal penalty on the amount includible in income. The SECURE Act created an exception to the 10 percent penalty for new parents. Now plan distributions (up to $5,000) used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

64. Plan for the net investment income tax and Medicare surtax. High-income taxpayers face two special taxes—a 3.8 percent NIIT and a 0.9 percent additional Medicare tax on wage and self-employment income.

Net Investment Income Tax

The 3.8 percent NIIT tax applies, in addition to income tax, to your net investment income. The tax only affects taxpayers whose modified adjusted gross income exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household and $125,000 for married individuals filing separately. These threshold amounts are not indexed for inflation. Thus, over time, inflation will cause more taxpayers to become subject to the 3.8 percent tax. Net investment income that is subject to the 3.8 percent tax generally consists of:

• Interest;
• Dividends;
• Annuities;
• Royalties;
• Rents; and
• Net gains from property sales.

Income from an active trade or business, wage income, unemployment compensation and Social Security benefits are not included in net investment income. However, passive business income is subject to the NIIT. So, while rents from an active trade or business are not subject to the tax, rents from a passive activity are. See item 38 for more information regarding the classification of passive activities. Income from a business of trading financial instruments or commodities is also included in net investment income.

Medicare Surtax

Some high-wage earners pay an extra 0.9 percent Medicare tax on a portion of their Medicare wages in addition to the 1.45 percent Medicare tax that all wage earners pay. The 0.9 percent Medicare tax applies to wages in excess of $250,000 for joint filers, $125,000 for married individuals filing separately and $200,000 for all others.

The additional 0.9 percent Medicare tax also applies to individuals with self-employment income. This 0.9 percent tax is in addition to the regular 2.9 percent Medicare tax on all self-employment income. The $250,000, $125,000 and $200,000 thresholds are reduced by the taxpayer's wage income. While self-employed individuals can claim half of their self-employment tax as an income tax deduction, the extra 0.9 percent tax is not deductible. A self-employment loss is not considered for purposes of the 0.9 percent Medicare tax.

65. Consider selling the stock you received from incentive stock options (ISOs), aka statutory options. Incentive stock options are used by companies to entice employees to buy stock in the company at a discounted price. If you receive ISOs, you are entitled to special treatment for regular tax purposes. This includes:

• No taxation at the time the ISO is granted or exercised
• Deferral of tax on the benefit associated with the ISO until the stock is sold; and
• Taxation of the entire profit on the sale of stock acquired through ISO exercise.

The ISO is taxed at the lower long-term capital gain rates as long as you hold it for more than two years from date of grant and one year from date of exercise. Employment taxes do not apply on the exercise of an ISO. Be aware that the exercise of an ISO may produce alternative minimum tax (AMT), as discussed below.

Statutory Stock Option (ISO)

	Regular tax	AMT
Grant date	Not taxable.	Not taxable.
At exercise date	Not taxable.	Increases AMT income by fair market value of option less exercise price.
Date of sale (holding period met)	• Income subject to capital gains rates. • Basis equals exercise price.	Decreases AMT income by the positive AMT adjustment required at exercise date.
Date of sale (holding period not met)	• Gain on sale: fair market value of the options less the exercise price is treated as taxable W-2 wages; excess gain is capital gain. • Loss on sale: The loss is a capital loss.	• Negative AMT adjustment equal to the positive AMT adjustment required at exercise date. • No adjustment required if stock is exercised and sold in the same year.

 

Statutory Stock Option (ESPP)

	Regular tax	AMT
Grant date	Not taxable.	Not taxable.
At exercise date	Not taxable.	Not taxable.
Date of sale (holding period met)	Compensation income if fair market value of stock is greater than exercise price.	Same as regular tax.
Date of sale (holding period not met)	• The fair market value (at exercise date) of the option minus the exercise price is treated as taxable W-2 wages. • Basis in the stock is increased by the amount included in compensation. Difference between increased basis and the selling price is a capital gain or loss.	Same as regular tax.

 

Nonstatutory Stock Option

	Regular tax	AMT
Grant date	Not taxable unless fair market value is readily determined.	Same
At exercise date	• Substantially vested stock: fair market value of option minus the exercise price is treated as taxable W-2 wages. • Restricted stock: Defer recognition until substantially vested.	Same
Date of sale (holding period met or not met)	• The holding period requirement is not applicable to nonstatutory stock options. • Income is subject to short-term or long-term capital gain or loss treatment. • Basis equals the amount treated as taxable wages plus exercise price. • Typically exercise and sale occur on the same day.	Same

66. Take advantage of deferred compensation contributions to maximize the benefits of deferring income. Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2024, the limit as adjusted for inflation is $345,000. This means that for an executive earning $350,000 a year, deductible contributions to, for instance, a 15 percent profit-sharing plan are limited to 15 percent of $345,000, or $51,700. Nevertheless, there is a way to avoid this limitation that you might want to consider.

It is possible to increase the benefits by using plans that are not subject to qualified plan limitations through nonqualified deferred compensation (NQDC) agreements. These plans have no mandatory contribution limits and it is at the employer’s discretion who participates. These deferred compensation agreements are contracts between an employer and an employee for the payment of compensation in the future―at retirement, on the occurrence of a specific event (such as a corporate takeover) or after a specified number of years―in consideration of the employee’s continued employment with the employer.

Unlike a qualified plan, an NQDC is funded at the discretion of the employer and is subject to the claims of creditors. There are no guarantees that the benefits will be available to the employee in the future. For example, if the employer goes into bankruptcy, you may lose your investment. Essentially, the trust is under the employer’s control and, structured properly, will result in a deferral of income taxes for the employee on the amount of compensation deferred above the traditional limitations. Distributions will be taxed at ordinary income rates and are subject to FICA withholding when either performance has occurred or there is no longer a substantial risk for forfeiture and the compensation has vested.

67. Consider filing an IRC Section 83(b) election with regard to year-end restricted stock grants to preserve potential capital gain treatment, but be careful. Founders, board members, employees and third-party service providers who receive equity subject to vesting in connection with services performed often make Section 83(b) elections to potentially reduce future taxes on such equity receipt. To make an 83(b) election, you must make the election within 30 days of the grant and you will pay tax at ordinary income rates on the spread between the market price (the value of the stock) and the grant price (the amount you paid). The benefit, however, is that you defer taxation on the future appreciation in the value of the restricted stock until it is sold and the post-election increase in value is taxed at the lower capital gain rates, rather than the higher ordinary income rates. The risk with making the election, however, is that the stock price might decline by the vesting date and you will have then prepaid income tax on an unrealized gain. If you eventually sell the stock at a loss, you will be subject to the net capital loss limitation of $3,000. The rules governing restricted stock awards are technically complex and call for careful and timely tax planning strategies.

68. Consider filing an IRC Section 83(i) election with regard to qualified equity grants. Qualified employees at private companies who are granted nonqualified stock options or restricted stock units may elect to defer the income from qualified stock transferred to the employee by the employer for up to five years. This election is an alternative to being taxed in the year in which the property vests under Section 83(a) or in the year in which it is received under Section 83(b). The election to defer income inclusion for qualified stock must be made no later than 30 days after the first date that the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier.

Caution: If the fair market value of the stock decreases within the deferral period, the fair market value on the date the stock is received still must be included in the employee's income. This creates the risk of the employee paying income tax on an amount that is never received.

If a qualified employee elects to defer income inclusion, the employee must include the income at the earliest of the following dates:

• The first date the qualified stock becomes transferable, including transferable back to the employer;
• The date the employee first becomes an excluded employee;
• The first date on which any stock of the employer becomes readily tradable on an established securities market;
• The date five years after the earlier of the first date the employee’s right to the stock is transferable or is not subject to a substantial risk of forfeiture; or
• The date on which the employee revokes his or her inclusion deferral election.

69. Consider taking a lump-sum distribution of employer stock from a retirement plan. Receiving a lump-sum of employer stock could allow you to achieve large tax savings. Employer stock in a lump-sum distribution from a qualified plan is taxed based on the plan’s basis in the stock rather than on its value, unless a taxpayer elects otherwise. Consequently, assuming value exceeds cost, the tax on the unrealized appreciation is deferred until a later date when the stock is sold. This could be many years after receipt. As an added benefit, when the stock is sold at a later date, the gain is subject to tax at the more favorable long-term capital gains rate. Once distributed, the stock must be held for at least a year in order for any additional appreciation after the date of the lump-sum distribution to be given long-term capital gains treatment. Cash or other nonemployer stock distributed as part of the lump-sum distribution will be taxed at ordinary income tax rates.

70. Implement strategies associated with international tax planning. For executives and high-income earning consultants working abroad, it’s worth exploring strategies to minimize your personal tax liabilities. This can include maximizing the provisions for foreign earned income and housing exclusions, as well as deductions and credits for foreign taxes paid. The taxation process in foreign countries often depends on tax treaties and requires a personalized approach to avoid double taxation. Conducting tax equalization calculations can be helpful in breaking down compensation to maximize the tax benefits associated with international assignments. See the discussion later in items 133-137.

71. Reassess your tax planning with a new point of view. Corporate executives should review their current tax situation to determine whether supplemental wealth planning and independent tax compliance and planning assistance can add value and fresh eyes. Engaging a third party to handle your individual tax matters can remove potential conflicts that may arise when the employer’s accountants are also responsible for taking care of the tax services of that company’s employees. TAG has developed a tax program tailored specifically for corporate executives. Our Executive Tax Assistance Program, designed for corporate executives, provides independent, comprehensive, confidential and highly personalized individual and business tax preparation, planning and consulting services at group-discounted rates. TAG uses a strategic approach to provide comprehensive solutions to your needs.

72. Decrease your tax liability on pass-through income by claiming a qualified business income (QBI) deduction. Business income from pass-through entities is currently taxed at the ordinary individual tax rates of the owners or shareholders. Taxpayers who receive qualified business income from a trade or business through a partnership, limited liability company, S corporation and/or sole proprietorship are allowed a 20 percent deduction, subject to taxable income phaseouts and complex calculations, in arriving at taxable income. The deduction is also afforded to taxpayers who receive qualified real estate investment trust dividends, qualified cooperative dividends and qualified publicly traded partnership income. For owners with taxable incomes over $383,900 (joint filers) or $191,950 (all other filers), the deduction is subject to reduction or elimination based on the owner’s pro rata share of W-2 wages paid by the business and/or the business’ basis in qualified property.

In addition, for taxpayers who own a specified service business and whose taxable income exceeds $483,900 for married individuals filing jointly and $241,950 for all other filers, the deduction has been phased out and is no longer available.

A “qualified trade or business” is defined as any trade or business other than a specified service trade or business and other than the trade or business of being an employee. “Specified services” are defined as a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services (investing and investment management, trading, dealing in securities, partnership interests or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees). Notably absent from this list, and specifically excluded from the definition of specified services, are engineering and architectural services, as well as real estate agents and bankers.

Income from a rental property could also qualify for the QBI deduction if separate books and records are maintained, 250 hours or more of service work is performed for the property (this does not necessarily need to be performed by the owner), and contemporaneous records are kept of the services performed. Alternatively, the rental may also qualify for the QBI deduction if there is a profit motive and continuous substantial involvement either by the taxpayer or an agent of the taxpayer.

However, in many situations, residential rental properties are not profitable in the years in which they are held―rather the properties are maintained because the taxpayer anticipates they will be able to sell the properties in the future at a gain. In such a situation, because there is no profit motive, the IRS would most likely determine it is an investment, and not a trade or business, eligible for the QBI deduction. This ends up being a better result for the taxpayer since they would not need to include a loss in the QBI calculation, which would likely reduce the deduction. While the determination of whether a rental activity qualifies for the QBI deduction is made on a year-by-year basis, it must be based on the facts and circumstances of the activity in each specific year. Significant changes could reasonably alter its qualification; however, the determination cannot be adjusted arbitrarily from year to year solely to achieve the most favorable QBI tax outcome. Such inconsistent treatment may lead to scrutiny from the IRS. Any changes in QBI status must be thoroughly documented and retained.

73. Take advantage of historically low corporate income tax rates. Since 2018, C corporations have been subject to a flat 21 percent tax rate. The 21 percent rate also applies to personal service corporations such as accounting firms and law firms. Unlike some of the other provisions of the TCJA, this reduced rate is permanent and does not expire after 2025.

74. Accelerate deductions by prepaying expenses in 2024. As 2024 comes to a close, businesses may have the opportunity to take a current deduction for 2025 expenses which are prepaid in 2024. Rather than capitalizing and amortizing items over the useful life, or the term of the service agreement, you may look to accelerate the full cost to the tax year of 2024 to lower your net income. When accelerating prepaid expenses, you should be aware of the “12-month rule.” This rule only lets you deduct a prepaid future expense in the current year if the expense is for a right or benefit that extends no longer than 12 months.

75. Use net operating losses (NOL) carefully. The option to carry an NOL back to a prior tax year was removed (except for farming losses) for tax years ending after 2020. While NOLs can nevertheless be carried forward indefinitely, they are also subject to an additional annual limitation. This annual limitation is the lesser of the NOL carryforward or 80 percent of current year taxable income. For example, a taxpayer with 2024 taxable income of $4 million and an NOL carryforward of $5 million from a prior year would be able to apply $3.2 million of the NOL carryforward (80 percent of 2024 taxable income) to offset its 2024 taxable income and carry forward the remaining NOL balance of $1.8 million indefinitely.

76. Plan for extended excess business loss limitations. The TCJA effectively limited the amount of business losses that taxpayers were able to use to offset other sources of income for tax years 2018-2025. While the CARES Act reversed the excess business loss (EBL) provisions under TCJA for 2018-2020, the EBL limitations came back into force in 2021―meaning that taxpayers again have to monitor and potentially limit business losses under TCJA. Last year, the Inflation Reduction Act extended the EBL provisions an additional two years, through 2028.

An EBL is defined as the excess of a taxpayer’s aggregate trade or business deductions over the taxpayer’s aggregate gross trade or business income or gain, plus a statutory threshold, indexed for inflation, of $610,000 for joint filers ($305,000 for other filers) for 2024. Net trade or business losses in excess of $610,000 for joint filers ($305,000 for other filers) are carried forward as part of the taxpayer’s net operating loss to subsequent tax years. For 2025, the threshold will increase to $626,000 for joint filers ($313,000 for other filers).

The CARES Act also clarified several gray areas associated with EBL limitations created by TCJA, including:

• The exclusion of taxpayer wages from trade or business income;
• The exclusion of net operating loss carryforwards from determining a taxpayer’s EBL; and
• Specifying that only trade or business capital gains are included in EBL computations, while excluding net capital losses. The taxpayer is to include in EBL limitations the lesser of either capital gain net income from business sources or capital gain net income.

77. Be sure to receive the maximum benefit for business interest. For 2024, the business interest expense deduction is limited to 30 percent of the adjusted taxable income of the business, applicable at the entity level for partnerships, S corporations and C corporations. However, certain smaller businesses (with less than an inflation-indexed $30 million in average annual gross receipts for the three-year tax period ending with the prior tax period) are exempt from this limitation for 2024. For 2025, this inflation-indexed amount will be $31 million. It is important to understand that even if a particular entity’s average gross receipts do not exceed these amounts, if it is part of a controlled group, it may still be subject to the limitation. Whether or not your business is part of a controlled group and is subject to the Section 163(j) limitation is something you should consult with your trusted tax advisor about.

The deduction limit for net business interest expenses for 2023 is limited to 30 percent of an affected business’ adjusted taxable income. Additionally, the formula to determine adjusted taxable income has yet again changed. For 2022 and forward, depreciation and amortization are no longer allowed to be added back to taxable income when determining the business interest limitation. Interest and taxes are still allowed to be added back.

78. Corporate alternative minimum tax continues in 2024. To help pay for the many clean energy tax credits and incentives in the Inflation Reduction Act, the corporate alternative minimum tax (CAMT) was created, starting in 2023 with a 15 percent tax rate. Unlike the pre-2018 corporate alternative minimum tax, which was imposed on taxable income as adjusted, the new corporate alternative minimum tax is imposed on adjusted financial statement income.

Are You Subject to the CAMT?

The CAMT applies only to applicable corporations whose average annual adjusted financial statement income for the three-tax-year period ending with the current tax year exceeds $1 billion. This is $1 billion in profit, not gross sales. However, special rules apply to members of a multinational group with a foreign parent, which cause the CAMT to apply if the average adjusted financial statement income for the corporation equals or exceeds $100 million. In addition, there are a number of aggregation rules, under which related businesses may be aggregated for purposes of the income test, including a rule that includes income of a partnership in which the corporation is a partner.

What Does Adjusted Financial Statement Income Include?

The CAMT starts with the applicable financial statement, which is a certified statement prepared in accordance with general accepted accounting principles. Therefore, the start to the new corporate AMT will generally be Form 10-K filed with the SEC, or for nonregistrants, the latest annual audited financial statements. This financial statement income is then adjusted for the following items as detailed in the Inflation Reduction Act:

• Statements covering different tax years;
• Related entities―consolidated financial statements, consolidated returns and partnerships;
• Certain items of foreign income;
• Effectively connected income;
• Certain taxes;
• Disregarded entities;
• Cooperatives;
• Alaska native corporations;
• Payment of certain tax credits;
• Mortgage-servicing income;
• Defined benefit plans;
• Tax-exempt entities;
• Depreciation;
• Qualified wireless spectrum;
• Financial statement net operating loss; and
• Other items that the Treasury secretary may prescribe.

79. Evaluate your sales tax exposure. In light of the Supreme Court’s South Dakota v. Wayfair, Inc. decision, businesses should periodically review their operations to determine if they have additional sales and use tax exposure. Businesses that have large retail or e-commerce sales may be subject to sales or use taxes, even if they do not have a physical presence in the state or local jurisdiction.

Recently, however, a Pennsylvania court ruled in favor of a taxpayer, stating that an out-of-state business selling products through Amazon’s Pennsylvania warehouse was not subject to sales and income tax in the state.

In a more aggressive interpretation, the Multistate Tax Commission (MTC), which is a conglomeration of state tax agencies seeking to define a uniform set of rules for determining sales and income tax nexus, issued guidance indicating that the following activities are sufficient to create nexus for an out-of-state business:

• Providing post-sale customer support via website chat or email link;
• The acceptance of job applications for nonsales positions on a website;
• Placing cookies on the computers of customers who browse a website for the purpose of adjusting production or identifying/developing new products to sell.

So far, California and New York have announced the adoption of the MTC’s provisions, with many more states expected to follow suit.

Accordingly, now is the time to perform an assessment of your business activities and make plans to become compliant (if warranted) in early 2025.

80. Evaluate your state tax exposure in light of increased telecommuting. In a post-COVID, remote work environment, virtually every state has taken the position that having an employee present within a state creates nexus and will potentially subject the employer to business registrations, employee withholding, registered agent requirements and/or business tax filings.

As such, each state where you have an employee working remotely must be closely examined, as every state has different methods for apportioning taxable income, sourcing revenue, minimum factor presence standards and other registration requirements. We have conducted many such assessments and would be pleased to assist our clients with future needs.

81. Be careful where you operate―avoid an unintentional income tax nexus. The concept of corporations paying their fair share of taxes ebbs and flows in worldwide media, but it has received renewed attention this past year as candidates for public office proposed new tax policy.

Many states and even local tax jurisdictions have looked to broaden their tax collection base through the assertion of nexus in a variety of different ways. For tax purposes, nexus is a minimum connection between a taxpayer and a tax jurisdiction that must take place before a taxing jurisdiction can impose a tax obligation on a taxpayer.

Although it has been widely established through case law that physical presence in a taxing jurisdiction is not required in order to create income tax nexus, the concept of economic nexus is becoming more and more prevalent. Economic nexus looks to the quantity of transactions and/or the dollar amount of transactions a taxpayer realizes in a given tax year within a taxing jurisdiction. Through recent court cases, states have become more empowered to expand upon the concept of economic nexus and apply more broadly across essentially any type of activity in which the taxpayer is engaged.

Additionally, there has been a consistent shift of states updating legislation in order to source revenue through the “market-based” approach. Market-based sourcing requires the taxpayer to allocate revenue based on where the ultimate receipt of their services is derived. If a taxpayer has its operations and employees solely in State X, but sells services to customers in States A, B and C, the taxpayer would be required to allocate a portion of their revenue to States A, B and C, and file income tax returns accordingly. Certain states have minimum revenue thresholds (economic nexus thresholds) that have to be met in order to create a reporting requirement, while other states require reporting if there is even $1 of revenue sourced under a market-based approach. As of the current tax year, roughly 80 percent of states require a market-based approach when sourcing revenue.

Now is the opportune time for taxpayers to assess the nature of their activities, locations (including remote work) of employees and locations of customers, as virtually any type of business, no matter how trivial, may trigger nexus. Mostly all states offer some form of voluntary disclosure program where a taxpayer can voluntarily come forward, file several years of back tax returns and pay any tax due. In return the state will waive penalties, and in some instances even a portion of the interest on back taxes, depending on the details of each state’s respective program.

82. Elect into state pass-through taxes to save owners federal tax. Currently, 36 states and New York City have enacted pass-through entity (PTE) tax filing elections. Nine states have no personal income tax, which means only a select few have not enacted a PTE tax (Maine, Pennsylvania, District of Colombia, Delaware, North Dakota and Vermont).

As a quick refresher, the TCJA put a cap of $10,000 on the state and local income tax deduction for taxpayers itemizing their deductions on Schedule A. In response, several high-tax states enacted legislation allowing pass-through entities (partnerships, LLCs and S corporations) to elect to pay the state income tax at the entity level and pass out a state income tax credit to the partners/shareholders. The PTE tax election allowed the state income tax liability to be deducted at the entity level, for federal purposes, effectively bypassing the $10,000 limitation imposed by the TCJA.

In the beginning stages, PTE tax elections were more stringent; however, many states have relaxed the requirements governing which entities are allowed to participate, as well as how income is apportioned for purposes of determining the PTE tax liability.

A pass-through entity operating in several different states with owners residing in several different states must carefully examine the PTE regulations in each state where tax filings are required. Each state has different rules for the timing of making the election, when estimated tax payments are required, whether or not certain partners/shareholders can opt out of the PTE election, income apportionment and PTE tax rates.

PTE elections can be particularly beneficial in years a pass-through entity experiences unusually high taxable income or anticipates entering into an agreement to sell all or a portion of the business. PTE elections will continue to offer substantial tax savings for those who can participate through at least 2025. Once the $10,000 limitation imposed by the TCJA expires, PTE advantages may become obsolete or evolve even further, depending on how Congress acts. The political fight over the SALT limitation will be at the top of Congress’ mind in 2025, so please consult your tax advisor on how best to plan your PTE credits for 2025 and beyond.

83. Review your plans to entertain clients. The deduction for meals is currently limited to 50 percent for most meals, though there are still instances where a 100 percent deduction is available to taxpayers. Types of meals eligible for a full deduction include: meals with employees/contractors if a majority (generally greater than 50 percent) of staff are present, food and beverages for company holiday parties/retreats, and food and beverages given free to the public.

Since 2018, businesses have been unable to write off expenses associated with entertaining clients for business purposes. However, business meals paid concurrently with entertainment expenses are still 50 percent deductible, provided these expenses are separately paid for or separately stated on the invoice.

84. If you are looking to utilize bonus depreciation, plan your purchase of business property by year-end. For 2024, businesses can expense, under IRC Section 179, up to $1.22 million of qualified business property purchased during the year. This $1.22 million deduction is phased out, dollar for dollar, by the amount that the qualified property purchased exceeds $3.05 million.

Generally, qualified business property for purposes of Section 179 includes tangible personal property used in a trade or business, as well as nonresidential qualified improvement property, including, but not limited to, roofs, HVAC systems, fire protection and alarm systems and security systems. The qualified improvement property must also be placed in service after the date of the real property in order to qualify for accelerated depreciation under Section 179.

Additionally, bonus depreciation can be claimed on 60 percent of qualified new or used property placed in service during the year, and the first-year bonus depreciation on passenger automobiles (vehicles with gross vehicle weight less than or equal to 6,000 pounds) is currently $8,000. Bonus depreciation of 60 percent under the TCJA is available for property placed in service during the 2024 tax year. The definition of “qualified property” for purposes of bonus depreciation has been expanded to include the purchase of used property, so long as the taxpayer has not previously used the property (such as in a sale-leaseback transaction).

Beginning January 1, 2025, bonus depreciation drops further to 40 percent of qualified new or used property, and under current legislation will continue to be phased down by 20 percent each year until completely phased out in 2027.

Qualified business property for purposes of bonus depreciation includes, but is not limited to, equipment and tangible personal property used in business, business vehicles, computers, office furniture and land improvements to a business, as long as the recovery period of the property is less than or equal to 20 years.

85. Select the appropriate business automobile. For business passenger cars first placed in service in 2024, the ceiling for depreciation deductions is $12,400. Higher deductible amounts apply for certain trucks and vans (passenger autos built on a truck chassis, including SUVs and vans). Vehicles such as SUVs and vans with gross vehicle weight ratings of between 6,000 pounds and 14,000 pounds are restricted to a first-year deduction of $12,400, in addition to the $30,500 that is permitted to be expensed under IRC Section 179. Automobiles that are used 50 percent or more for business are also eligible for bonus depreciation of up to $8,000. For vehicles placed in service in 2024, the depreciation limitation for passenger automobiles is $12,400 for the year the automobile is placed in service, $19,800 for the second year, $11,900 for the third year and $7,160 for the fourth and later years in the recovery period.

New Vehicle Depreciation in 2024

	2024
	Passenger automobiles	SUVs, vans, trucks
Maximum Section 179 allowed	$0	$30,500
Maximum bonus depreciation allowed	$8,000	60%
Year 1*	$12,400	$12,400
Year 2*	$19,800	$19,800
Year 3*	$11,900	$11,900
Year 4* and later	$7,160	$7,160

 

* Maximum amount of depreciation if electing out of or not qualifying for bonus depreciation and/or Section 179.

86. Capitalize research and development expenses rather than deduct them. The TCJA made significant changes to research and development (R&D) expenses, which traditionally have been eligible for a write-off in the year incurred. Beginning in 2022, instead of deducting R&D costs when incurred, businesses must now capitalize and amortize over a five-year period for U.S.-based research and a 15-year period for research conducted abroad. These rules also apply to software development costs; however, real estate development and mining industries are exempt and are covered under different code provisions. It is also important to note that, even if the R&D project is abandoned or disposed of, no immediate deduction is available.

87. Defer taxes by accelerating depreciation deductions with cost segregation. Cost segregation is a tax strategy that allows real estate owners to utilize accelerated depreciation deductions to increase cash flow and reduce the federal and state income taxes they pay on their rental income. Property placed in service after September 27, 2017, with a class life of up to 20 years will generally qualify for bonus depreciation or the Section 179 deduction. The bonus depreciation rate decreases to 60 percent for 2024 and will continue to phase out in 20 percent increments through 2027, while the 179 deduction allows a 100 percent deduction for property placed in service up to a limit of $1.22 million for 2024 per entity. Real estate that is nonresidential property is generally classified as 39-year property and is not eligible for bonus depreciation or the 179 deduction. While it may seem as though utilizing the Section 179 deduction is better, it is also subject to limitations both at the entity return level and at the personal return level as well, so that also needs to be taken into consideration.

A cost segregation study allows for the appropriate allocation of costs amongst various class lives and may permit owners to take advantage of greater depreciation deductions (including bonus depreciation and the 179 deduction). Further, by frontloading allowable depreciation deductions to the early years of the property’s life, reclassification can result in significantly shorter tax lives and greater tax deferrals. If rather than financing the property, the property is purchased with cash, a cost segregation study might be necessary for cash-flow purposes. When property is purchased with cash, a significant amount of money gets tied up without receiving an immediate tax deduction, creating a situation where effectively income is recognized without the cash to cover the tax. A cost segregation study helps resolve this by aligning the tax benefit with the investment. Conversely, if a property is financed with a mortgage, the gradual depreciation deduction aligns more closely with the cash outflows of the mortgage payments, making the standard depreciation expense a natural fit. In such a situation, a cost segregation study may not be needed for cash flow purposes, as the timing of deductions and expenses is already in line.

While the immediate tax savings might seem appealing, depending on the size of the property and the level of complexity that is involved, cost segregation studies can be quite expensive. It is also worth noting that while a cost segregation study accelerates deductions, it does not increase the total deductions over the property’s life, it simply shifts the deductions to earlier years. So, while it might improve short-term cash flow, there is no guarantee that it will provide a long-term benefit. Furthermore, if down the road the property is sold, accelerated depreciation from a cost segregation can create a recapture trap in which shorter-lived assets are taxed at higher depreciation recapture rates, instead of the lower 25 percent recapture rate applied to real property, i.e. buildings.

88. Consider simplifying accounting methods. If average gross receipts for the three prior years exceed $30 million in 2024, taxpayers are not permitted to use the simpler cash method of accounting, which could create an additional accounting expense. Similarly, businesses with average gross receipts of over $30 million are not able to account for inventories of materials and supplies, and taxpayers are forced to use the more complex uniform capitalization rules. Under the TCJA, the thresholds for both the cash method of accounting and the uniform capitalization rules were indexed for inflation and have increased from $29 million in 2023. Keep in mind that if your business is considered a tax shelter, you are required to use the accrual method of accounting.

89. Determine the merits of switching from the accrual method to the cash method of accounting. The cash method allows businesses to deduct expenses when paid, whereas the accrual method deducts expenses when either economic performance has occurred or all events have been met. The accrual method of accounting is generally used by businesses that sell merchandise to account for revenue and inventory related to the merchandise. While this may provide a more complete picture of the financial status of a business, from a tax perspective it provides much less flexibility in terms of planning options and is more difficult to use than the cash method of accounting. The good news is that for 2024, businesses with average gross receipts over the last three years of $30 million or less that would otherwise be required to use the accrual method of accounting can elect to use the cash method. A C corporation that is a qualified personal service corporation is also allowed to use the cash method, as long as it does not maintain inventories for tax purposes, regardless of annual gross receipts. While there are some caveats to obtaining this relief, it is a tax-saving strategy worth considering if your business can meet the average gross receipts test and is currently using the accrual method of accounting.

90. Select the most tax-efficient inventory method. If your business tracks inventory, you may be able to realize up-front income tax savings based on your selected inventory method. In inflationary periods like we are currently in, using the last in, first out (LIFO) method can produce up-front income tax savings since it assumes that the higher priced inventory units purchased last were the first ones sold. Conversely, in a period of falling prices, which is very rare and almost unimaginable currently, the first in, first out (FIFO) method would provide larger tax savings since it assumes that higher priced inventory units purchased first are the first ones sold.

It is important to understand that utilizing either the FIFO or specific identification inventory valuation methods does not require as much work in tracking inventory as the LIFO method. If a company elects to use the LIFO inventory valuation method, they are required to keep track of their “LIFO reserve,” which is the difference between the ending inventory balance using LIFO and what the ending inventory balance would be using a different valuation method. It is also important to keep in mind that if the LIFO method is used for tax purposes, any applicable full-year financial statements provided to external parties of the company are required to use the LIFO method as well, which could result in a company’s financial position appearing significantly weaker. Further, while LIFO almost always provides an up-front benefit during inflationary periods, this is merely a tax deferral strategy. In fact, some events can trigger LIFO reserve recapture, resulting in “phantom income,” where income is reported without actually receiving cash. Thus, the up-front benefits of LIFO need to be weighed against the additional work required to keep track of the inventory, the effect it will have on financial statements and the inevitable tax bill looming in the future.

The IRS requires you to select an inventory method the first year your business is in operation. If you decide to make a change, you must alert the IRS and gain approval for the first tax year that you adopt the new method. Professional assistance may be needed.

91. Establish a tax-efficient business structure. The structure of your business can impact your personal liabilities as well as your tax liabilities. Businesses may operate under various structures, including general partnership, limited liability company, limited liability partnership, S corporation, C corporation and sole proprietorship. In particular, the C corporation has a structure that can cause double taxation, especially upon the sale of a business. While the primary factors that distinguish one structure from another are often owner liability and income taxation, it is prudent to consider other characteristics as well. Some of the more pertinent considerations are summarized in the chart below. The entity selection decision should be carefully evaluated by you and your team of legal and tax advisors as it is one of the first and most important decisions made when setting up a business.

Considerations When Choosing Business Entity

	C corporation	S corporation	Sole proprietor	Partnership	Limited liability company
Limit on number of owners	No limit	100	One	Two or more	No limit
Type of owners	No limitation	Certain individuals, estates, charities and S corporations	Individual	No limitation	No limitation
Tax year	Any year permitted	Calendar year	Calendar year	Calendar year	Calendar year
How is income taxed	Corporate level	Owner level	Individual level	Owner level	Owner level, unless treated as an C corporation
Character of income	No flow through to shareholders	Flow through to shareholders	Taxed at individual level	Flow through to partners	Flow through to members
Net operating losses	No flow through to shareholders	Flow through to shareholders	Taxed at individual level	Flow through to partners	Flow through to members
Payroll taxes	Shareholder/officers subject to payroll taxes only on compensation	Shareholder/officers subject to payroll taxes only on compensation	Active owner subject to self-employment taxes on all income; no unemployment tax	Active general partner subject to self-employment taxes on all income; no unemployment tax	Active member subject to self employment taxes on all income; no unemployment tax
Distributions of cash	Dividends to extent of earnings and profits	Typically not taxable until accumulated adjustment account is fully recovered	No effect	No effect except for calculation of basis	No effect except for calculation of basis
Distribution of property	Dividend treatment, gain recognition to entity	Gain recognition to entity	No effect	No gain or loss to entity	No gain or loss to entity

 

92. Ensure your S corporation is paying reasonable compensation. The tax law requires an S corporation pay their shareholder/employees a reasonable compensation for their services to the S corporation. The compensation paid is treated as wages subject to employment taxes. If the S corporation does not pay a reasonable compensation for shareholder/employee services, the IRS may treat a portion of the S corporation's distributions to the shareholder as wages and impose Social Security and Medicare taxes on the adjusted wages.

With the recent infusion of cash into enforcement procedures, reasonable compensation examinations are projected to increase in the coming years. This makes it a great time to check or double check that your S corporation is paying reasonable compensation.

93. Consider the benefits of establishing a home office. With more people now working from home than ever before, taxpayers may wonder if they qualify for the home office deduction. Those taxpayers who own small businesses or are self-employed and work out of their home may very well have the ability to take advantage of the home office deduction if they heed the rules below. Currently, W-2 employees do not qualify to take the home office deduction.

Expenses related to your home office are deductible as long as the portion of your home that qualifies as a home office is used exclusively and on a regular basis as a principal place of business. This can be broken down into a few factors:

1. You must use part of the home or apartment on a continuous, ongoing or recurring basis. Generally, this means a few hours a week, every week. A few days a month, every month, may do the trick. But occasional, “once in a while” business use won't do.
2. To qualify under the exclusive use test, you must use a specific area of your home or apartment only for your trade or business. The area used for business can be a room or, preferably, a separately identifiable space. It cannot be the kitchen table, family room, den or playroom where clearly other nonbusiness activities occur.
3. The area must be a place where you meet or deal with clients in the normal course of your trade or business, and the use of your home is substantial and integral to the conduct of your business. Incidental or occasional business use is not regular use, but this test may be met even if you also carry on business at another location.

A simplified home office deduction ($5 per square foot, up to 300 square feet for a maximum of $1,500) is also available to taxpayers, which minimizes expense tracking while providing a flat rate deduction per square foot of office space. In addition to claiming a deduction for home office expenses, the ability to qualify as a home office may enable you to deduct the cost of traveling between your home and other locations where you conduct business.

94. Take a closer look at your independent contractors and employees to ensure correct classification. While hiring workers for your business seems simple enough, the question of whether a worker is an independent contractor or employee for federal income and employment tax purposes is a complex one. It is intensely factual, and the consequences of misclassifying a worker can be serious. In general, there are three categories with which to consider whether a worker is an independent contractor or employee: financial, control and relationship. The financial aspect involves the right to direct or control the business part of work. Independent contractors often realize a profit or loss. Additionally, they may have significant investment in their work. The person (or entity) who controls how a job is performed is the employer. There are many factors requiring assessment to properly determine degree of control, as discussed below. Therefore, if the worker has control, the worker is self-employed and an independent contractor subject to self-employment taxes. On the other hand, if a worker is an employee, the company must withhold federal income and payroll taxes, pay the employer’s share of Federal Insurance Contributions Act taxes on the wages plus Federal Unemployment Tax Act tax, and often provide the worker with fringe benefits that are made available to other employees, which illustrates the relationship category. There may be state tax obligations as well. Since these employer obligations do not apply for a worker who is an independent contractor, the savings can be substantial.

95. Maximize business deductions and minimize employee taxable income by establishing an accountable expense reimbursement plan. An accountable plan reimburses employees for work-related expenses by utilizing specific reporting, substantiation of business expenses and return of any excess cash advances. Employers are allowed to deduct, and employees allowed to exclude from gross income, employer expense reimbursements if paid under an accountable plan. Since both the employer and employee benefit from establishing an accountable plan, the need to specifically track expenses is usually worth the minimal extra effort over a nonaccountable plan.

96. Employ your child or grandchild to increase tax savings. Employing your children or grandchildren can allow you to shift income to their typically lower tax bracket and may actually avoid tax entirely (due to the child’s standard deduction). Since this is earned income and not investment income, it is not subject to the kiddie tax. There may also be payroll tax savings, as wages paid by sole proprietors to their children age 17 and younger are exempt from both Social Security and Medicare taxes, while payments for the services of a child under the age of 21 are not subject to Federal Unemployment Tax. Please note: Payments to children by a corporation or partnership are not exempt from these payroll taxes. In addition to the potential tax savings, employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. (See item 41.)

97. Avoid letting your business tax credits go unused. Credits directly reduce tax dollar-for-dollar and prove to be more effective than deductions, which only reduce taxable income. The work opportunity tax credit, set to expire in 2025, is currently available to employers who hire individuals from certain targeted groups. Eligible employers can also claim the retirement plan tax credit for startup costs related to a qualified plan. Other tax credits are available for paid family and medical leave if an employer has written policies in place. Employers can also receive tax credits for other employee-provided services such as providing health insurance coverage to employees, child care facilities/services and making improvements so businesses are accessible to persons with disabilities.

98. Conduct a research and development study to maximize your R&D tax credit. The R&D credit may be claimed by taxpaying businesses that develop, design or improve products, processes, formulas or software. Many states also have an R&D credit. More industries and activities now qualify for the R&D tax credit than ever before. The credit is even available for professional firms that develop or improve software for use in their business. Businesses of all sizes should consider a formal R&D study, especially in light of the five-year amortization requirement, to ensure property tax compliance as well as maximization of R&D credit potential.

99. Generate payroll tax credits with the R&D tax credit. While it is generally known that the R&D tax credit can be applied to income taxes and the AMT (as long as certain requirements are met), qualified small businesses can also use the R&D tax credit against the employer portion of Social Security and Medicare payroll taxes. To qualify for this credit, a small business must: (a) have gross receipts of under $5 million for the current tax year; (b) have had gross receipts for five years or less, including the current year; (c) have qualifying research activities and expenditures; (d) have R&D credits it can use in that year; and (e) incur payroll tax liabilities. Businesses can generate up to $500,000 in payroll tax credits per year for five years, and any unused portion can be carried forward for up to 20 years. The payroll tax offset is available on a quarterly basis beginning in the first calendar quarter that begins after a taxpayer files their federal income tax return. The payroll tax credit election may especially benefit eligible startup businesses having little or no income tax liability. Contact us or your qualified tax professional for assistance in determining activities eligible for these incentives and the assessment of the appropriate documentation required to support your claim.

100. Perform a compensation study. Businesses can maintain deductibility, yet avoid payroll taxes, on compensation moved from salary to fringe benefits. Employees will enjoy the tax savings resulting from lower taxable compensation. Benefits typically shifted include medical insurance and employee discounts. This may be a positive way to attract and retain employees. It is important to note, however, that transportation fringe benefits are not deductible by the employer unless included in the employee’s W-2 wages.

101. Enhance employee health by establishing health savings accounts (HSAs) and other cafeteria plans (i.e., Section 125 plans or flexible spending accounts (FSAs). A Section 125 plan, also known as a cafeteria plan, is a written plan maintained by an employer allowing eligible employees to access certain benefits. These plans provide an IRS-approved way to lower taxes for both employers and employees, since they enable employees to make pre-tax contributions from their paychecks for adoption expenses, certain employer-sponsored insurance premium contributions, dependent care costs and unreimbursed medical expenses. Furthermore, Section 125 plans are permitted to offer salary-reduction HSA contributions for eligible employees as part of the menu of plan choices. Thus, employers can sponsor the HSAs and employer contributions are not subject to income or employment taxes.

Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes, with the notable exceptions of California and New Jersey (at maximum rates as high as 11 percent), resulting in a tax savings of as much as 55.65 percent. As a result, the employer also pays less in Social Security matching tax. Like an accountable expense reimbursement plan, it can assist an organization in achieving its strategic goals by enhancing its ability to attract and retain talented, experienced people. Since many restrictions apply, you should carefully review this arrangement before instituting a plan.

102. Ensure succession readiness with a succession plan. Having a plan ready in the event of the owner’s death, disability or retirement is critically important for all business owners. Having a strategy in place is crucial to ensure a smooth transition of ownership. Failure to properly plan for an ownership transition could result in the collapse a successful business and/or create a greater tax burden on the owner or heirs. It is important to identify candidates for leadership and applicable ownership roles, while also considering potential gift and estate tax consequences. In connection with your CPA, lawyer and financial advisors, you can transfer control as planned, create a buy-sell agreement, develop an employee stock ownership plan and conduct the succession of your business in an organized manner.

103. Deduct your business bad debts. If your business uses the accrual method of accounting it is prudent to examine your receivables before year-end, as business bad debts are treated as ordinary losses and can be deducted when either partially or wholly worthless. Not being paid for services or merchandise is bad enough; do not pour salt into the wound by paying income tax on income you will never realize.

104. Do not become trapped by the hobby loss rules. If your business will realize a loss this year, you need to consider the so‑called hobby loss rules to ensure the business is treated like a business, not a hobby, so the loss remains deductible. If an activity generated a profit in three out of the last five years, it is generally presumed to be a for-profit venture rather than a hobby. Even if the activity is considered not for profit, any income must still be included on your tax return, though in this case, the income may only be subject to income tax and not self-employment taxes.

105. Sell your company’s stock, rather than its assets. If you are considering selling your business, you may wish to structure the transaction as a sale of the company’s stock rather than a sale of the company’s assets. A sale of your company’s stock will be treated as the sale of a capital asset and the preferential long-term capital gain rates will apply. A sale of the company’s assets, on the other hand, will typically result in at least some of the gain being taxed at the much higher ordinary income tax rates. However, since the buyer will generally want to structure the transaction as a purchase of the company’s assets in order to increase his or her depreciation deductions, some negotiating by both parties should be expected. The sale of a business is a complex transaction and you should consult your legal and tax professionals when considering a sale.

While the potential taxes from selling your business can be daunting, deferring the gain or spreading income over a few years through an installment sale could prove useful and benefit both parties involved.

106. Consider installment sale treatment for sales of property at a gain. When property is sold, gain is generally recognized in the year of sale. The installment sale provisions can delay the tax impact of the sale until the funds are collected. The installment method is required for cases where there is a sale of property and the seller receives at least one payment after the year in which the sale occurs. This method typically defers a substantial part of the tax on the sale to later years. Under the installment method, gain is recognized ratably over multiple years on the sale to the extent that payments are made on the installment note, subject to a gross profit computation. This allows the gain to be recognized only to the extent of payments actually received and is a valuable method to defer income.

This also applies in situations in which a taxpayer sells a property and takes back paper (seller-finance mortgage), meaning they receive a formal note receivable from the purchaser with an agreed upon interest rate and a predetermined payment/amortization schedule. Usually, the seller takes back a promissory note when the purchaser cannot secure third-party financing, effectively providing seller financing for the transaction. As the payments are received, the interest portion is recognized as interest income, and the principal portion is partially taxable as gain based on the gross profit percentage with the remainder being a nontaxable return of basis.

If cash proceeds are received over multiple years and you prefer not to use the installment sales method to report the income, an election is available to “elect out” of the installment sale treatment and pay the entire amount of tax due in the year of sale. You have until the due date of your return (including extensions) to elect out of installment reporting. In addition, not all states allow this type of gain treatment, so state tax effects also need to be considered.

107. Carefully consider setting up a captive insurance company to realize insurance cost savings. For certain groups, setting up a small “captive” insurance company, which is owned and controlled by the insureds, may result in insurance savings, particularly when there is a high loss ratio anticipated from claims. In addition, small captives qualifying under IRC Section 831(b) (known as “microcaptives”) pay income tax only on investment income, not underwriting income, and have dividends taxed as qualified dividends. Note that Section 831(b) does contain some restrictions; for example, the insurance company must have net written premiums (or, if greater, direct written premiums) for the taxable year that do not exceed $2.8 million. Generally, these captives are set up among related companies, companies within the same industry or companies affiliated with some association. Microcaptive insurance companies continue to come under increased IRS scrutiny, so it is imperative that you consult with professionals before setting one up.

108. Lease modifications may generate unintended tax consequences. With the fluctuating real estate market of the past few years, many businesses have entered into lease modification negotiations with their landlords. However, businesses should look at potential tax impacts. IRC Section 467 was originally enacted as an anti-abuse provision to prevent tax shelters that took advantage of certain timing differences. Leases can be governed under Section 467 in the event of modification and can result in the inclusion of income if lease terms are substantially modified by:

• Increasing/decreasing the lease payments;
• Shortening/extending the lease term; and/or
• Deferring/accelerating lease payments due.

Opportunities for lease modifications are available without triggering Section 467. These safe harbors include a rent holiday of three months or less and certain contingent payments.

Moving forward, lease modifications will remain a very complicated issue. It is important to remember that regardless of what the modifications are, leases must be reported on an accrual basis. Comprehensive contract analysis and Section 467 testing will be required on a case-by-case basis as lessors and lessees continue to modify leases to get the best deal.

109. Fly solo with a one-participant 401(k). A solo 401(k) is a retirement plan designed for one participant and can cover the businesses owner or owner plus spouse. For the most part, these plans have the same rules and requirements as any other 401(k) plan. The business owner is both employee and employer in a 401(k) plan, so contributions can be made to the plan in both capacities allowing for employer contributions, elective deferrals and catch-up contributions. For 2024, the solo 401(k) total contribution limit is $69,000, or $76,500 if you are age 50 or older. The owner can contribute both:

• Elective deferrals up to 100 percent of compensation (earned income in the case of a self-employed individual) up to the annual contribution limit ($23,000 for 2024, plus $7,500 if age 50 or older); and
• Employer nonelective contributions up to 25 percent of compensation as defined by the plan (for self-employed individuals the amount is determined by using an IRS worksheet and in effect limits the deduction to 20 percent of earned income).

110. Document your business expenses. You should be ready to substantiate (and may be required to do so under audit) every item you report on a tax return to the IRS, state or even local tax authority. This is particularly important for certain expenses like travel, meals, transportation expenses, gifts, entertainment (if applying to state or wages of employee) and those expenses associated with listed property (e.g., vehicles) as they are subject to more specific and demanding rules regarding substantiation and documentary evidence. Deductions in these categories can be disallowed, even if valid, if contemporaneous evidence is not properly maintained for the expense that includes:

1. The amount of the expense;
2. The time and place of travel;
3. The business purpose;
4. For gifts, the date and a description of the item given and the business relationship to the taxpayer of the person receiving the gift; and
5. The business relationship to the taxpayer of the person receiving the benefit.

111. Claim a small businesses credit for starting a retirement plan. Retaining good employees in the current environment is critical for business survival. Congress has assisted businesses in this regard by allowing a credit equal to 50 percent of certain costs incurred when setting up a retirement plan for employees. The credit is generally limited to $250 per employee per year, but the limit is no less than $500 and no more than $5,000. So, if you spend $12,000 this year in establishing a plan and $11,000 in the next two years on administration and employee education, you would be eligible for a $500 credit against your taxes in each of those three years if you have one employee, a $1,250 credit if you have five employees, and a $5,000 credit if you have 25 employees. (Before 2020, the limit was $500 a year and did not increase based on the number of employees.)

To qualify for this credit, taxpayers must:

• Have no more than 100 employees who received at least $5,000 of compensation in the year before starting the plan;
• Have at least one employee participate in the plan who meets the definition of a “nonhighly compensated employee”; and
• Not have had a retirement plan during the three tax years right before the year in which the plan starts.

112. Reward past employee education with an excluded tax benefit. Do you want to help ease the minds of your employees while retaining their talent and recognizing the costs incurred for them to obtain that talent? Ask your tax advisor about a 127 plan!

A 127 plan is a tool available to any employer for offering tax-exempt tuition benefits to their employees. Currently scheduled to expire for payments made after December 31, 2025, this plan allows employers to exclude from an employee's gross income any payments made by an employer of principal or interest, up to $5,250, on any qualified education loan incurred by the employee. To qualify, the employer is required to inform all eligible individuals, ensuring that there is no discrimination in favor of highly compensated employees or the restricted ownership class. Qualified student loan payments must be aggregated with any other educational assistance received by the employee when applying the statutory maximum of $5,250.

113. Utilize a private foundation to accomplish charitable goals. While donor-advised funds are increasingly popular among philanthropic individuals, private foundations may offer certain advantages to families looking to create a multigenerational plan for charitable giving. Since private foundations can exist in perpetuity, they are an excellent vehicle to carry on a founder’s family name. Generally, donor-advised funds are not legally separate from the 501(c)(3) sponsoring organization and may have time limits. Further, while donor-advised funds usually follow a donor’s direction in gift giving, they are not legally required to follow those wishes. Private foundations may provide donors with greater flexibility in gift giving.

Donors can realize immediate tax benefits through an income tax deduction when contributing cash amounts to a private foundation. This deduction can be up to 30 percent of adjusted gross income (AGI). For noncash contributions, the deduction is capped at 20 percent of AGI in most instances. However, in certain cases, a conduit (pass-through) foundation can be used, which would allow charitable deductions of up to 60 percent of AGI.

114. Confirm that your private foundation meets the minimum distribution requirements. All private foundations are required to distribute approximately 5 percent of the average fair market value of their assets each year. Qualifying distributions meeting this requirement include grants, administrative expenses related to the charitable activity and other specified operating expenses. The foundation has 12 months after the close of the tax year to make their qualified distribution. If the distribution requirement is not met within that timeframe, an excise tax of 30 percent will be imposed.

115. Beware of the recapture of tax benefits on property not used for an exempt purpose. When a donor makes a charitable contribution of tangible personal property that is not used for exempt purposes and the donor originally claimed a deduction for the fair market value of the property, the donor’s tax benefit may need to be adjusted.

If a donee organization disposes of applicable property within three years of the contribution of the property, the donor claimed a deduction of more than $5,000, and the organization does not certify that the property was substantially used for the organization’s exempt purpose or the intended use became impossible to implement, the donor is subject to a tax benefit adjustment.

If the donation is significant, the donor may consider formalizing the donee organization’s strategy regarding the property or ask the donee organization to indemnify the donor.

A $10,000 penalty applies if a person fraudulently misidentifies property as having a use that is related to either a purpose or function of the organization. Such a situation may require the donor to recapture a portion of the deduction and include in income the difference between the amount previously claimed as a deduction less the donor’s basis in the property when the contribution was made (the built-in gain).

116. Ensure your public charity meets the public support test. Unlike private foundations, funding for public charities is expected to come from a diverse set of donors who are not closely tied to the 501(c)(3) organization. As such, public charities have a separate set of tests that are required to be met in order to retain their “public” status. Each of the following tests measures public support over a five-year period:

• Charity receives at least one-third of its support from contributions from the general public or meet 10 percent facts and circumstances test (normally receives a substantial part of its support from governmental units or general public) (509(a)(1)); or
• Charity receives at least one-third of its support from contributions from the general public and/or from gross receipts from activities related to tax-exempt purposes. It can receive no more than one-third of its support from gross investment income and unrelated business taxable income (509(a)(2)).

If the public charity fails to meet one of the two public support tests, the organization runs the risk having its public status revoked and becoming a private foundation, subject to the excise tax. Newly formed public charities will have six years to meet the public support test.

117. Review your estate planning documents well before the TCJA is scheduled to expire at the end of 2025. At year-end, individuals are presented with a strategic opportunity to evaluate their wealth and estate planning strategies. Considering the potential expiration of key provisions in the TCJA, estate plans should be crafted with maximum flexibility. Formula bequests need scrutiny to ensure their relevance under current and expected future laws. Additionally, contemplating the granting of limited powers of appointment to trust beneficiaries can offer post-mortem tax planning flexibility.

There has been a lot of speculation regarding potential legislation and significant reductions to the federal estate, gift and generation-skipping transfer unified credit that was previously doubled by the TCJA. The increased exemptions are still scheduled to sunset in just over two short years. In anticipation of the future changes, if you have not examined your estate plan within the last few years, you should consider doing so immediately. Without intervention, the favorable changes enacted by the TCJA will lapse back to their pre-2018 amounts at the end of 2025 (the unified credit will be reduced by over $6 million after considering inflation).

While addressing your will, also consider the benefits of a living will, medical power of attorney, healthcare directives, durable power of attorney and the appropriateness of your beneficiary designations on your retirement accounts and life insurance policies.

118. Take advantage of high exclusions. As discussed above, in 2024, individuals now have the option to give up to $18,000 per year to another individual without impacting their lifetime exemption ($36,000 for married couples). This limit will rise to $19,000 ($38,000 for couples) in 2025. Such gifts can be transferred directly to the donee or directed into trusts, custodial accounts or 529 college savings plans. Notably, the latter choice permits the frontloading of up to five years' worth of annual exclusions. The estate and gift tax unified credit amounts are also subject to inflation adjustments and will rise from $13.61 million in 2024 to $13.99 million in 2025. For both simple and complex trusts, grantors should consider funding in 2024 or 2025 to take advantage of this credit, since it is scheduled to sunset on January 1, 2026.

119. Consider gifting income-producing or appreciated property. By gifting income-generating or appreciated property in lieu of cash, the donor can accomplish three important benefits. First and most importantly, the gift will serve the purpose of assisting the donee. Second, if the donee is in a lower tax bracket than the donor or exempt from the NIIT, the donor and donee will likely experience some collective tax savings by shifting the income to a lower bracket. Third, the value of the gift is also removed from the transferor’s estate. This is an easy, effective way to pass on wealth.

120. Consider making payments for tuition or medical expenses. Medical and education expenses paid directly to the providing institution are not subject to gift tax and generation-skipping transfer tax rules. Also, any such payments do not count toward the taxpayer’s annual gift tax exclusion. In addition, contributions to Section 529 plans may also qualify for special gift tax exclusion treatment. For example, should a grandparent make tuition payments and utilize up to $18,000 in gift exclusions to a grandchild, the yearly tax savings could be significant. Notably, these payments can be on behalf of anyone and are not restricted to immediate family members.

121. Utilize a spousal lifetime access trust (SLAT) to take advantage of currently high unified credits. As we mentioned previously, it is likely that the unified credit is near its historical peak, with the current credit scheduled to sunset in 2026 and revert to approximately $7 million. In order to take advantage of the current heightened credit, married persons can each gift the amount of the credit to a SLAT, utilizing the credit on the gift and paying no gift tax. In a SLAT, after the donor spouse gifts to the trust, the donee spouse can request distributions of income or principal from the trust, thus preserving access for the couple to the trust assets, should the need arise. However, if principal is distributed, the SLAT assets distributed will be brought back into the estate, defeating the original intent of forming the SLAT―so exercise caution when taking distributions. Upon the donor spouse’s death, the assets in the trust (and subsequent appreciation) are not subject to the estate tax.

122. Tread carefully when considering the use of a grantor retained annuity trust (GRAT) for inter vivos wealth transfer. In a GRAT, a grantor contributes assets to a trust while retaining annuity payments for a defined period of time, with the remainder payable to beneficiaries. Depending on the structure of the GRAT, one can achieve maximum wealth transfer with little to no gift tax effect or use of the lifetime exclusion. However, should the grantor pass away prior to the completion of the annuity payments under the GRAT, at least a portion and possibly all of the GRAT assets are includible in the grantor’s estate. Thus, by terminating the annuity and trust before December 31, 2025, when the new higher federal estate tax threshold is set to expire, one can reap all of the benefits of a GRAT with minimal risk, while retaining the use of the grantor’s applicable exclusion amount.

123. Retain access to your home while passing it down to the next generation by utilizing a qualified personal residence trust (QPRT). By transferring a house to a QPRT, the grantor can continue to use the residence as his or her own for a specified period, after which the residence passes to the beneficiaries. At this point, and depending on the terms of the trust, the grantors may pay rent to remain in the home. The initial transfer to the QPRT is a taxable gift of the remainder interest in the home, using a rate published by the IRS. A QPRT allows the grantor to gift the home to the trust for a discounted value, using less of the exclusion, and shields future appreciation of the home from the estate tax. This is a particularly effective strategy in a high-interest rate environment because the higher the rate, the higher the present value of the grantor’s right to use the residence―and the lower the value of the gift of the future remainder interest.

124. Gift or sell assets to an intentionally defective grantor trust (IDGT). By gifting assets to an IDGT, donors can effect a completed gift during their lifetime for purposes of the estate and gift tax, which would use up some of their gift tax exemption but shield appreciation in the assets from the estate and gift taxes. However, the gift is incomplete for income tax purposes, meaning that donor must report income from the gifted assets on their personal income tax return during their lifetime, further reducing the donor’s estate. Because of this, this strategy is best employed by gifting assets that are expected to increase the most in value.

125. Utilize a charitable remainder trust (CRT) or a charitable lead trust (CLT) to transfer wealth and benefit charity. As you would expect, both trusts involve the donation of a portion of the assets transferred into the trust to charity, but the timing and functions of both are very different. Both a CRT and CLT permit the donor to remove the asset from their estate. The differences arise in the areas of recipients of the annuity payments and the distribution of the remaining funds.

A CRT is created to ensure the donor’s financial future. Under a CRT, appreciating assets such as stocks are contributed to the trust and the donor receives an annuity for a term of years, even though the asset is no longer considered as part of the donor’s estate. Upon the donor’s death, a charitable organization receives the remaining assets.

A CLT is predominantly focused on the tax-efficient distribution of the donor’s wealth to beneficiaries. First, the donor makes a taxable gift equal to the present value of the amount that will be distributed to the remainder beneficiaries. In a CLT, the charities “lead” and receive the annual annuity payments. The amount remaining at the completion of the term is then distributed to the beneficiaries. The benefit of this type of trust is threefold: It allows for the reduction in the value of the settlor’s estate, while also providing for charities as well as non-charitable beneficiaries.

126. Review trust residency qualifications often. The most difficult aspect of trust residency is that each state has different rules and qualifications for determining whether a trust is resident or nonresident. For example, most trusts created by a will of a decedent or funded while the donor was considered a resident of Pennsylvania are considered resident trusts. However, a state like Kansas only considers a trust as resident if it is administered in the state. Each state and situation differs for trust taxation and laws are constantly changing. There is a myriad of other factors that may impact the nexus of a trust, such as beneficiary and/or trustee residence. We recommend contacting your tax advisor on any questions regarding trust residency.

127. Set up new intra-family loans while refinancing existing loans. Intra-family loans can still be beneficial for both the borrower/donee and the lender/donor. In this situation, the lender would be required to charge the minimum applicable federal rate. As of December 2024, that rate ranged between 4.10 percent and 4.53 percent, depending on the term. With volatility in the markets and high interest rates, it is not likely that borrowers would choose to invest proceeds and try to “beat” the intra-family loan rate at this time. However, if a donor chose to loan a beneficiary money to buy a home, with average mortgage rates currently anywhere between 6 percent and 6.9 percent, there is room to make an arrangement beneficial for both parties. For the donee, if the loan is secured and properly recorded, it could be deductible on their tax return, while likely paying significantly less than what would be charged by a typical lending institution. For the donor in a volatile stock market, the mortgage could very well generate a better rate of return than a standard investment could, all while secured by real property.

128. Consider the benefits of a revocable trust. Generally, wills are drafted to specify how an individual’s assets should be distributed upon their death. However, a revocable trust can provide numerous advantages over a will. One significant benefit is the avoidance of the probate process, which is the process of the legal administration of a person’s estate in accordance with that person’s will or their state of domicile’s law if there is no will in place. Having a revocable trust that holds all of your assets eliminates any uncertainties that may arise within the probate process. Additional benefits of revocable trusts include the addition of privacy to the estate plan and protections against incapacity.

129. Utilize life insurance properly. Whether intended to pay estate taxes, protect the family of a deceased “breadwinner” or fund ongoing business structures, there are many reasons why taxpayers should obtain life insurance. Typically there are two different types of life insurance policies taxpayers may select: term life insurance, which provides coverage over a specific period of time (the most popular option being “premium level”), and permanent life insurance, which provides coverage until the taxpayer dies or cancels the policy. A few examples of permanent life insurance include whole, universal and variable.

While life insurance may not be for everyone, it is worth looking into to see if your situation would benefit from it. For instance, business owners may want to guarantee they will be able to continue functioning after the loss of an important employee, or ensure survivor income for the deceased’s family. In addition, the business may want to provide inheritance for family members who are not directly involved with the business. In terms of estate taxes, high-net-worth individuals may still be plagued with a financial burden after the death of a taxpayer. Those electing to use insurance proceeds in order to provide cash for the estate tax payment may soften the blow of having to resort to using other tactics, such as liquidating assets.

A taxpayer may also choose to establish an irrevocable life insurance trust, whereby the policy is considered an asset of the trust and ownership is effectively transferred to another person. Then, upon death, the benefits are not included in the decedent’s estate. Otherwise, the life insurance may be taxed in the deceased’s estate based upon the value of the death benefit, even for term insurance.

The advantages of acquiring life insurance within an irrevocable trust can be amplified when a married couple opts for the trustee to purchase a second-to-die life insurance policy. Typically, the cost of such a policy is lower than that of two individual single-life policies. Consequently, with the same premium, it becomes possible to secure a larger amount of coverage. This approach not only provides potential cost savings but also aligns with estate planning strategies, as the death benefit is triggered upon the passing of the second spouse, offering protection for heirs and assets within the trust.

When deciding who should fund the life insurance premiums, keep in mind that if a business owner is funding the premiums, there could be various related income tax issues. In addition, gift tax issues could arise if a life insurance trust is already set in place. For those reasons, it is imperative that taxpayers consult with a trusted tax advisor in order to determine what structure would work best for their specific situation.

130. Minimize the income taxes applicable to estates and trusts. The income tax rates that apply to estates and trusts continue to be significantly compressed. Estate and trust taxable income (exclusive of long‑term capital gain and qualified dividend income) of more than $15,200 for 2024 is taxed at a marginal tax rate of 37 percent. Therefore, it may be beneficial to distribute income from an estate or trust to its beneficiaries for the purpose of shifting the income to a lower tax rate. Additionally, trusts and estates can minimize income taxes by utilizing many of the tax planning strategies that are applicable to individuals, including the “bunching” of deductions and deferral of income strategies noted above in items 13 and 21.

131. Consider an election under the 65-day rule. Considering the compressed brackets with extraordinarily high tax rates on income held within a trust or estate, it is advantageous in many scenarios to lessen the total income tax hit for the trust by distributing income to be taxed at the beneficiary level instead of the entity level.

With an election under Section 663(b), complex trust and estate distributions made within the first 65 days after the end of the calendar or fiscal year may be treated as paid and deductible by the trust or estate in 2024. The election of the 65-day rule is an invaluable asset, giving the trustee the flexibility to distribute income after the end of the year, once the total taxable income of the trust or estate can be more accurately determined.

132. Consider private placement life insurance as a hedge fund alternative. Investors with significant income and wealth should consider private placement life insurance (PPLI). A PPLI is a type of life insurance that combines the benefits of traditional life insurance with the flexibility of private investments. This is an unregistered security that typically utilizes strategies associated with alternative investment funds; however such funds are generally subject to high tax rates as many investments are made on shorter time horizons. A PPLI can help reduce the tax cost associated with investment in these funds, as assets can grow in the life insurance policy tax-free. PPLIs may be a particularly attractive alternative for those in states with higher taxes, like New York and California. PPLIs typically require funding of $3 million to $5 million in premiums per year.

133. U.S. citizen residents of a foreign country should consider the foreign earned income exclusion. U.S. citizens and resident aliens who spend a significant amount of time out of the country and meet either the physical presence test or bona fide residence test can exclude up to $126,500 of income and some additional housing costs by using the foreign earned income exclusion. Employees and self-employed individuals can both potentially take advantage of this approach. There are several strategies to avoid double taxation for citizens and resident aliens with foreign income, and this approach is ideal for many of those at an income near the exclusion maximum. Your tax advisor can help you determine if you qualify and if this is the best personalized strategy to utilize.

134. Review your foreign bank account balance during 2024 for FBAR preparation. If you have a financial interest in (whether direct or as owner of record) or signature authority over foreign financial accounts with aggregate balances over $10,000 at any time during 2024, you are required to file FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Willful failure to report these accounts can result in penalties of up to $161,166 or 50 percent of the account value, whichever is greater, on a per account basis.

Recently, in Bittner v. United States, the Supreme Court held that a nonwillful reporting violation constitutes a single violation, regardless of the number of unreported or incorrectly reported accounts, and not a per account violation, and the penalty for such nonwillful violations can be up to $16,117 per form. The applicable sections of the Internal Revenue Manual, which delineates IRS procedures,  have not been updated yet, but a memorandum (SBSE-04-0723-0034) has been issued advising of the new limitation per form as well as eliminating the FBAR penalty mitigation guidelines for nonwillful violations.

While the reporting of virtual currency was not previously required, the Treasury Department has signaled its intention to amend the disclosure requirements of virtual currency accounts held overseas. FinCen Notice 2020-2 stated that while the current regulations do not define a foreign account holding solely virtual currency as a type of reportable account for FBAR purposes, if the account that holds the virtual currency is an otherwise reportable account, the total holdings must be reported.

135. Maximize your foreign tax credit. For many taxpayers, the most exposure to international tax is paying foreign taxes on investment and other income earned abroad. While in many cases the calculation of a foreign tax credit is a straightforward affair, recent and proposed regulations have made modifications to the source-based requirements for certain taxes, as well as calculation of the net income subject to tax, and consequently, the availability of the credit for many taxpayers. An experienced tax preparer can assist to ensure you and your business receive maximum credit for the foreign taxes you pay.

136. Avoid unintentional foreign trusts. Typically, a trust is viewed as a domestic entity for tax purposes if a U.S. court primarily oversees its administration and one or more U.S. individuals have the power to make all significant decisions. Therefore, it is crucial to think about not just the location of the trust’s formation, but also who will be in charge of the trust. If a nonresident alien successor trustee takes over, or even a U.S. citizen if the assets are under foreign court jurisdiction, a U.S. trust could transform into a foreign trust when the original trustee passes away or steps down from their role. This change in classification could lead to significant alterations in U.S. and foreign reporting obligations, and may also have potential implications at the state level.

137. Plan for the expatriation “exit” tax if you are permanently leaving the country. For anyone residing in the U.S. considering renouncing their U.S. citizenship or terminating their resident status, the IRS will want one final bite of the apple, taxwise. The expatriation tax, first introduced in 2008, is typically based on the fair market value of property on the day of expatriation. The tax is calculated as if the taxpayer had liquidated all of their assets on the date of expatriation and any unrealized gains are subject to tax. A “covered expatriate” is subject to the expatriation tax if the taxpayer’s net worth is over $2 million, their average annual income tax for the preceding five years is over a specified amount adjusted annually for inflation ($190,000 for 2023), or if they fail to certify that you complied with all federal tax obligations for the preceding five years. The IRS has recently issued a new practice unit focusing on covered expatriates and their filing requirements in an attempt to enforce these rules more rigorously than they have in the past.

The Tax Cuts and Jobs Act of 2017 was the largest tax reform legislation in over 30 years. With a large portion of this act set to expire after December 31, 2025, the incoming Congress has a great deal of motivation to extend the provisions and avoid effective tax increases on their constituencies. The return of President-elect Trump to the White House and to a Republican-controlled Congress sets the stage for sweeping changes to U.S. tax policy. The incoming administration has made it abundantly clear that they are committed to stimulating economic growth, and one of the main ways they plan to accomplish that is through tax policy reform. While these tax policy ideas have sparked many discussions, it may be premature to start planning for any of these changes expected to come. Any proposed legislation will face scrutiny, negotiation and opposition before being ratified into law. The evolving political and economic landscape will determine how these proposals will take shape, leaving businesses and taxpayers in a period of uncertainty about what to expect.

As it is unlikely for any new tax cuts proposals to be immediately effective in 2025, we do have a good deal of tax certainty as to the 2025 tax year. Taxpayers should utilize this clarity in designing a tax plan for 2024 and 2025, planning for multiple contingencies in 2026 and beyond. As first and second quarter 2025 tax debates develop, caution should be exercised and flexibility kept front of mind. It is important to stay informed, stay engaged, stay agile and stay in touch with us as legislation advances. Eventually, individuals, estates, trusts and businesses should model any new provisions to better understand the potential tax implications and to discuss tax planning strategies.

Under present law, many of the 2024 tax savings opportunities will disappear after December 31, 2024. With careful consideration and by investing a little time in tax planning before year-end, you can both improve your 2024 tax situation and establish future tax savings. Without action, however, you may only discover tax saving opportunities when your tax return is being prepared—at which time it may be too late. Should you panic? No. Predict? Maybe. Plan? Absolutely.