Deadline: 5 Tax Tactics to Embrace Before 2025
From: rethinking65.com
Implementing these five tax-planning strategies by year end can better equip clients for the coming 2025 tax season.
With the end of 2024 less than two months away, it is time to set your clients up for a successful Tax Day 2025 by offering opportunities to take advantage of any tax savings available.
The following strategies can make an impact on tax planning goals with time to spare, so encourage your clients to utilize these five before 2025:
#1. Making Annual Exclusion Gifts
In 2024, individuals may gift up to $18,000 to any number of individuals or qualifying trusts without incurring a gift tax or using their lifetime exemption. Married couples can currently gift up to $36,000 per donee, gift-tax-free.
For any clients considering making gifts to friends and family, these final months are a great chance to put those gifts to work. Next year offers even greater opportunities for tax-free gifting, as the exclusion per donee will be increasing to $19,000 for individuals and $38,000 for married couples. For this reason, clients should consider taking advantage of making their annual exclusion gifts earlier next year. Making these gifts are a tax efficient way to reduce the donor’s taxable estate.
#2. Maximizing Retirement Contributions
Clients should strive to max-out their retirement contributions before year-end. This year, the contribution limit for employees under 50 who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is $23,000. In addition, individuals age 50 and over can make a catch-up contribution of $7,500. The contribution limit for 2025 is set to increase to $23,500 with catch-up contributions for those age 50 and over to remain at $7,500. However, under SECURE 2.0, employees ages 60 to 63 will have the ability to make a higher catch-up contribution of $11,250 instead of $7,500 in 2025.
The 2024 limit on annual contributions to traditional and Roth IRAs is $7,000 for those under age 50, and $8,000 for those 50 and older. Contributions to Roth IRAs and the deductibility of contributions to traditional IRAs are subject to income phase-out.
#3. Withdrawing RMDs
Retirement-plan-account owners must generally take their first annual required minimum distributions (RMDs) by April 1 of the year after they turn age 73. (The age was 72 if they turned that age on or before Dec. 31, 2022.) After the first withdrawal, owners must take annual RMDs by Dec. 31 of each year. However, an account owner can choose to take their initial RMD in the year they turn 73 instead of waiting until April 1 of the following year. That choice enables owners to take their first and second RMDs in separate tax years, which could reduce their overall tax liability for the two-year period.
RMDs are not required to be taken from Roth IRAs until after the death of the account owner. And starting this year, RMDs are also no longer required to be taken during the account owner’s lifetime from designated Roth accounts in a 401(k) or 403(b) plan.
If an owner does not withdraw their RMDs annually, they may face penalties. Fortunately, Secure Act 2.0 reduced that once-steep 50% penalty to 25% of the RMD amount not taken, — or to as low as 10% if the account owner corrects that mistake within two years.
With inherited accounts, the timing for taking RMDs varies depending on the date of death of the account owner and the characteristics of the beneficiary.
If the account owner died on or after Jan. 1, 2020, distributions to most non-spouse beneficiaries must be distributed within 10 years after the owner’s death. Whether the beneficiary will be required to take RMDs during the 10-year period will depend on whether the account owner had already begun taking RMDs. In addition to surviving spouses, other beneficiaries not subject to the 10-year rule, including a child who has not reached the age of majority, a disabled or chronically ill individual, and a person who is less than 10 years younger than the account owner. These beneficiaries may be able to take RMDs over their life expectancy. After a minor child reaches the age of majority, they must follow the 10-year rule.
#4. Combining Charitable Contributions
Many taxpayers will have deductible expenses that are less than the 2024 standard deduction of $29,200. However, for those with a consistent charitable-giving plan, the charitable deduction could provide a planning opportunity.
Let’s assume that a married couple annually gives $35,000 to charitable causes and has no other deductible expenses. In 2024, they would itemize their deductions because their total deductions ($35,000) exceed the standard deduction of $29,200 by $5,800. Assuming their charitable giving remains the same for four years and the standard deduction remains below $35,000, their total deductions during the four-year period would be $140,000 ($35,000 x 4).
Instead, let’s suppose that over the same four-year period the couple combines their charitable deductions by giving $70,000 to charitable causes in years one and three. Their total deductions for each of those two years is $70,000. But in years two and four, the couple doesn’t make charitable contributions so they take the $29,200 standard deduction. At the end of the four-year period, the couple will now have utilized $198,400 of deductions. (The IRS recently announced an $800 increase in the standard deduction for married couples in 2025, to $30,000, which would give additional advantages for using the standard deduction next year.)
As a result of combining their charitable deductions instead of continuing to give the same amount each year, the couple will likely reduce their overall tax liability for the four-year period. An alternative strategy would be for the couple to instead front-load a donor-advised fund (DAF) but still gift annually to the charitable organizations from the DAF.
#5. Using FSA Funds
Unless your client’s employer allows for a grace period, employees with a flexible spending account (FSA) might consider spending those funds by year-end. Keep in mind that some employers may offer employees the ability to roll over up to $640 into 2025.
It’s important for employees who will be retiring to plan accordingly. The retiring employee may be reimbursed from the FSA only for eligible expenses incurred before the date of their retirement unless COBRA coverage is elected. Any funds remaining in the account following the date of retirement or when COBRA coverage ends will be forfeited back to the employer.
Now is the time to evaluate these various tax planning opportunities for your clients to help reduce their tax bill before year end. By implementing these five strategies before 2025, your clients can confidently wrap up this year knowing they maximized their savings.
