2024 Year-End Tax Planning Strategies

As we near the end of 2024, there are some year-end tax, estate, and charitable planning strategies you should consider. For specific advice related to your unique planning needs, don’t hesitate to contact your Wealth Advisor.

Making the Most of Your Lifetime Exemption

A key aspect of 2024 planning involves the gift and estate tax exemption, often called the lifetime exemption. The 2024 exemption amount is $13.61 million per person ($27.22 million for married couples).

However, these changes made by the Tax Cuts and Jobs Act of 2017 will not last. Unless Congress takes action to extend it, the 2017 provision will expire at the end of 2025. That means that in 2026, the lifetime exemption will be about one-half of what it was the year before.

You should plan now and consider using exemptions so that you are aware of what could be a rush to take exemptions in 2025. If you wish to reduce your estate for estate tax purposes, consider making gifts that use your lifetime exemption before the lifetime exemption decreases after 2025. This would potentially remove any future appreciation from your estate on the money or property you give away and allow you to take advantage of the current higher exemption.

Gifting Using Trusts

When making gifts that use your lifetime exemption, consider making gifts into an irrevocable trust, either for the benefit of your spouse and descendants or just your descendants. A trust can potentially insulate trust property from the claims of a beneficiary’s creditors (including a spouse or former spouse), and it can potentially keep the trust property out of a beneficiary’s estate for estate tax purposes.

Bunching Charitable Gifts

After the Tax Cuts and Jobs Act of 2017, many individuals do not have sufficient itemized deductions to exceed the standard deduction ($29,200 for married couples and $14,600 for single taxpayers) in 2024.

If you typically make annual charitable gifts but don’t have itemized deductions in excess of the standard deduction, you might consider bunching multiple years of charitable gifts into a single year. You can also contribute the bunched amount to a donor-advised fund so that you can make grants periodically to one or more charities in future years.

Higher Catch-Up Contributions for Certain Older Employees

Beginning in 2025, certain older participants in company retirement plans and SIMPLE IRAs can make higher catch-up contributions. Under current law, employees in 401(k) plans, 403(b) plans, and governmental 457(b) plans who attain age 50 by the end of a year can make salary deferrals above the regular deferral limit.

For example, in 2024, participants aged 50 or over can make an additional $7,500 on top of the regular $23,000 limit – for a total of $30,500. Starting in 2025, employees who turn 60-63 by the end of a year can make even higher catch-up contributions for that year. So, for example, as long as you reach 60 by December 31, 2025, you’re eligible for the extra catch-up for that year, even if you’re only 59 when you make those deferrals.

How much is this special catch-up for 2025? SECURE 2.0 says it’s the greater of $10,000 or 150% of the 2024 regular catch-up limit (150% x $7,500 = $11,250). However, the Congressional summary of SECURE 2.0 suggests that Congress actually intended the 2025 special catch-up to be greater than $10,000 or 150% of the 2025 regular catch-up limit. A draft bill in Congress, which hasn’t yet been introduced, would fix this error and several other SECURE 2.0 glitches. Whatever the special catch-up for 2025 ends up being, it will be indexed for inflation starting in 2026.

For Simple IRAs, the higher catch-up provision will be the greater of $5,000 or 150% of the 2025 regular catch-up limit (150% x $3,500 = $5,250). Keep in mind that plans and SIMPLE IRAs don’t have to offer age 50 or older catch-ups at all. If yours doesn’t, the new special catch-up for ages 60-63 won’t be available.

Trim IRA and Retirement Plan Balances

Taxpayers with the largest IRAs will be in higher tax brackets in the future. Doing nothing now is a bad plan. Tax-deferred traditional IRAs will continue to grow, as will the tax bill that eventually comes due. People with high incomes or ample assets and those likely to be there in the future should stop contributing to pre-tax 401(k)s and IRAs. The tax deductions offered by such accounts are merely loans from the government that will have to be paid back at the worst possible time: retirement. In addition, non-spouse beneficiaries are required under the SECURE Act to liquidate the inherited retirement account within 10 years.

The best approach to this new landscape is to consider: how much can be withdrawn now, and in the near future, at relatively modest tax rates? Tax planning should drive retirement account distributions. Start trimming IRA and other retirement account balances now in order to use today’s historically low tax rates. Please take full advantage of the current 12%, 22%, and 24% brackets while they are available.

Three Ways to Maximize Excess Funds

Assuming the net cash flow is not needed for living expenses, what might be done with the excess funds?

1. Roth Conversions—Roth IRA conversions have no income limits and enormous flexibility in tax planning. For example, tax-free Roth IRA withdrawals might be used to hold down future income to avoid steep Medicare premiums.

2. Life Insurance—Individuals who are age 59 ½ or older may want to use the net proceeds from pre-tax retirement account withdrawals to purchase insurance on their own lives, payable to descendants. The death benefit proceeds are usually income-tax-free to the recipient. Cash values accumulating inside a permanent life insurance policy can grow tax-free if managed by prudent withdrawals and policy loans.

3. Charitable Donations – Taxpayers aged 70 ½ or older should plan on making their charitable contributions directly from their IRAs via qualified charitable distributions (QCDs). These donations count as RMDs but not taxable income, allowing IRA owners to reduce tax-deferred balances without paying tax.

Name a Charitable Remainder Trust as an IRA Beneficiary

Money flowing to charitable beneficiaries won’t be subject to income tax. The value of the Charitable Remainder Trust (CRT) assets expected to pass to charity is excluded from the estate tax, which might be a significant attraction with the estate exemption scheduled to decline. Life insurance may be used to compensate for the IRA funds lost to loved ones because of the CRT bequest.

These innovative tax planning steps can result in more significant legacies with less (or no) tax due. Let long-term tax planning drive distribution planning to control tax rates today, tomorrow, and in the years to come.