2024 Year-End Tax Planning

Seasoned business owners understand that tax planning is an ongoing activity, and reviewing your tax plan periodically throughout the year is paramount to taking advantage of legal opportunities to minimize your tax bill. The rules surrounding these opportunities can be complex and require a deep understanding and careful planning. 

In this article, tax planning topics will be addressed but not explored in depth. The goal of these topics is to give you ideas of what questions to ask regarding your unique financial position. 

Recent Legislation: Corporate Transparency Act (CTA)

Have you filed your BOI report yet? 

If you have not yet filed your Beneficial Ownership Information (BOI) report with FinCEN, and your business was created before January 1, 2024, you have until December 31, 2024 to complete this requirement. We did a detailed blog post on this last month! 

Penalties for non-compliance are severe, so be sure to complete this as soon as possible. Most small business owners can easily handle this report themselves, and there is no filing fee. Here is the BOI e-filing portal. 

Other Tax Legislation Updates

In early 2024, the Tax Relief for American Families and Workers Act of 2024 passed in the House. The biggest changes proposed included increases to the Child Tax Credit and extending 100% bonus depreciation. 

With considerations such as potential impacts on the federal deficit and the presidential election, the bill was killed in the Senate. Nothing is certain yet, but the bill may be a preview of what we will see in upcoming legislation. 

While 2024 was relatively uneventful for tax legislation, congress is all but certain to consider major tax legislation in 2025, since a majority of provisions from the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. 

Cost of Living Adjustments

Standard & Itemized Deduction

The standard deduction for 2024 has been raised to $29,200 for married couples filing jointly, and $14,600 for single filers. 

Retirement Planning

Contributions to 401(k) plans were increased to $23,000 for 2024, and $23,500 for 2025. IRA contributions were increased to $7,000 for 2024 and 2025. Individuals who are age 50 and over at the end of the calendar year can make annual catch-up contributions of $7,500 for a 401(k), and $1,000 for an IRA.

Under a change made in SECURE 2.0, a higher 401(k) catch-up contribution limit of $11,250 applies for employees aged 60, 61, 62 and 63.

For those contributing to a Roth IRA, be sure to estimate your total income for the year before contributing. For a married couple filing jointly and earning more than $230,000 (or $146,000 for single filers), you may be ineligible to contribute or subject to a reduced contribution limit. These income limits have been increased for 2025 to $236,000 and $150,000 respectively.

Health Savings Accounts (HSAs)

For those covered under a high deductible health plan (HDHP), you can contribute to a Health Savings Account (HSA) in the amount of $4,150 for self-only coverage and $8,300 for family coverage in 2024. The contribution to an HSA has been increased to $4,300 for self-only coverage and $8,550 for family coverage. If you are 55 or older at the end of the year, you can put in an extra $1,000 in catch up contributions for both 2023 and 2024.

Gift Tax Exemption

The annual gift tax exclusion was increased to $18,000 for 2024, and will be $19,000 for 2025.

Lifetime Estate & Gift Tax Exemption

The lifetime federal estate and gift tax exemption amount is $13.61 million ($27.22 for married couples) in 2024.

In 2025, the amount will be increased to $13.99 million and $27.98 million, respectively. The lifetime exemption is set to be reduced dramatically in 2026 due to the sunset of the Tax Cuts and Jobs Act (TCJA 2017).

Estate Planning in 2025

Estate planning in 2025 is unique because it marks the final year to leverage the historically high federal estate and gift tax exemption amounts before they are scheduled to decrease. Under the Tax Cuts and Jobs Act of 2017, these exemption amounts were significantly increased but are set to revert to lower levels on January 1, 2026. This presents a limited window for individuals and families to implement estate planning strategies to maximize tax advantages and potentially reduce future estate tax liabilities.

Now would be a good time to review your estate plan with a gift & estate planning attorney. 

Maximize Your Business Deductions (for Independent Contract Workers Too!)

When a business owner or independent contractor has a profit motive, they are allowed deductions against their business income that are “ordinary and necessary.” This is a big advantage over employees who have limited ways of reducing their taxable income. 

You do not need a legal entity to take business deductions on your tax return. If you are operating as an independent contractor under your personal name, or as a sole proprietorship, you are allowed to take deductions to offset business income from that activity. 

Business Miles

Business miles are deductible at 67 cents per mile for 2024 (the 2025 rate is TBD). Commuting miles between your home and office building are not considered business miles. 

Home Office Deduction

If your primary place of business is a home office for one of your business activities, you may qualify for the home office deduction. 

The second requirement is that the space in your home that you use as your home office must be used exclusively for business. Lastly, you may take the home office deduction even if you are a renter. 

The deduction can be calculated as the business portion of actual expenses (make sure to have documentation) or the simplified method, which is $5 per square foot up to $1,500 (300 square feet). If you choose to use actual expenses, the transactions eligible for the deduction include mortgage interest, property tax, HOA fees, homeowners insurance, utilities, phone service, internet, maintenance, repairs, home improvement costs, and security. Keep in mind, when you take a home office deduction using the actual expense method for mortgage interest and property taxes, this reduces the amount reported as itemized deductions.

It is also important to know that the home office deduction can decrease your taxable income from that business activity, but it cannot create a larger loss. If your business lost money this year, you will have to carry forward your home office deduction until your business shows a taxable profit.

Opportunities to Reduce Capital Gains Taxes

Taxpayers should consider whether they can minimize their tax bill on capital gain income by considering the timing of their gain. Short-term capital gains (assets held for less than 1 year) are taxed as ordinary income, while long-term capital gains are taxed at preferential rates. Ideally, gains should be received in the year with the lower marginal tax rate, or when they can be offset by losses. Actions to consider that may result in a reduction or deferral in taxes include: 

1. Delaying the sale of an asset until you have held it for at least one year to trigger preferential tax rates on your gain. 

2. Delaying the sale of an asset to a year where you will be subject to the 0% long-term capital gains rate (2024: income less than $47,025 for single filers, and less than $94,050 for those filing jointly). 

3. Structuring the sale of an asset as an installment sale to defer capital gains tax (a good strategy if you will be subject to 0% capital gains tax in the future and you do not have current needs for the proceeds).

4. Considering whether to trigger capital losses before the end of the year to offset gains.

Taxpayers who expect to be in a higher tax bracket in 2025 may want to consider potential ways to move capital gains into 2024, such that the taxable income is taxed at a lower rate.

State Pass-Through Entity Tax Deduction

A majority of states have enacted state Pass-Through Entity Taxes (PTET) in an effort to eliminate the negative impact of the $10,000 state and local tax (SALT) deduction cap put in place by the Tax Cuts and Jobs Act (TCJA 2017). 

These rules allow a pass-through entity such as a partnership LLC or S Corporation to opt to pay state income tax at the entity level, rather than the individual level. This allows the partners, members, or shareholders to lower their federal taxable income and receive a credit for the taxes paid on their state tax return. 

The IRS has blessed this process however, the decision to pay PTET does not make sense in every scenario. It is important to consider this opportunity with the help of a tax professional. 

The “Augusta” Rule

The Augusta Rule, or Section 280A(g) of the IRS tax code, allows homeowners to rent out their residence for up to 14 days per year, tax-free. To utilize this rule, a business owner can rent their home to their business for events like meetings or client gatherings. The business pays fair market value for rents to the homeowner (you), and the business can deduct the rental expense.

To comply, document the purpose of each rental day, calculate a fair rental rate using local comps, and keep records of payment from the business to you to support the deduction. 

Backdoor Roth Conversion

A Backdoor Roth IRA is a savvy strategy for high-income earners to enjoy the tax benefits of a Roth IRA, even if their income exceeds the eligibility limits. This method involves making a nondeductible contribution to a traditional IRA and then converting those funds to a Roth IRA. Consulting with a tax professional or financial advisor can help ensure compliance and maximize the benefits of a Backdoor Roth IRA.

Wrapping It Up

Your tax advisor should be a part of your financial team by timely communicating updates and questions you have with them. Most taxpayers are surprised to see how much organized records, good bookkeeping, and timely communication can save them on taxes!

“Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your attorney, CPA, and/or other advisors regarding your specific situation.”