Use It or Lose It: Your 2024 Gift Tax Annual Exclusion

Gifts wrapped in brown paper and twine, with sprigs of evergreen and a soft dusting of snow on top of them.

As the year winds down, you may want to combine estate planning with tax savings by taking advantage of the gift tax annual exclusion. It allows you to give cash or property up to a specified amount to an unlimited number of family members and friends each year without gift tax implications.

That specified amount is subject to annual inflation adjustments. For 2024, the amount per recipient is $18,000. Notably, in 2025, this amount will increase to $19,000 per recipient. Why is this significant? The amount was stagnant at $15,000 for several years (2018 to 2021). Beginning in 2022, the amount has increased by $1,000 annually due to inflation.

Each year you need to use your annual exclusion by December 31. The exclusion doesn’t carry over from year to year. For example, if you don’t make an annual exclusion gift to your granddaughter this year, you can’t add the $18,000 unused 2024 exclusion to next year’s $19,000 exclusion to make a $37,000 tax-free gift to her next year. 

For frequently asked questions on gift taxes, visit the IRS website. Contact the office with any additional questions.

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7 Year-End Tax Planning Tips for Individuals

Hand holder a lit sparkler in the dark for a New Year celebration

As the holidays approach, it’s time to consider year-end tax planning moves that will help lower your 2024 taxes, as well as set you up for tax savings in future years. Here are seven year-end tax planning ideas to consider.

1. Strategize on the Standard Deduction vs. Itemizing

This is a tried-and-true year-end tax planning strategy. If your total itemizable deductions for 2024 will be close to your standard deduction, consider making additional expenditures for itemized deduction items between now and year end to surpass your standard deduction. Those extra expenditures will allow you to itemize and reduce your 2024 federal income taxes. The 2024 standard deduction is $29,200 for married couples filing jointly, $29,200 for heads of household and $14,600 for singles and married couples filing separately.

Note: Slightly higher standard deductions are allowed to those who are 65 or older or blind.

The easiest itemizable expense to prepay is your mortgage payment due in January. Accelerating that payment into this year will give you 13 months’ worth of itemized home mortgage interest deductions in 2024. Contact the office to determine whether you’re affected by limits on mortgage interest deductions under current law.

Next, look at state and local income and property taxes that are due early next year. Prepaying those bills between now and year end might lower this year’s federal income tax liability, because your total itemized deductions will be that much higher. However, under current law, the amount you can deduct for all state and local taxes is limited to a maximum of $10,000 ($5,000 if you use married filing separate status).

Also keep in mind that prepaying state and local taxes can be unhelpful if you’ll owe the alternative minimum tax (AMT) for 2024. Under the AMT rules, no deductions are allowed for state and local taxes. So, prepaying these taxes before year end may do little or no tax-saving good for people who are subject to the AMT. While the Tax Cuts and Jobs Act (TCJA) eased the AMT rules so that most people are no longer at risk, take nothing for granted. Contact the office to check on possible exposure.

Other ways to increase your itemized deductions for 2024 include:
  • Making bigger charitable donations to IRS-approved charities this year and smaller donations next year to compensate, and
  • Accelerating elective medical procedures, dental work and expenditures for vision care if you think you can qualify for a medical expense deduction. You can claim an itemized deduction for medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI).

2. Manage Gains and Losses in Your Taxable Investment Accounts

The stock market has experienced plenty of ups and downs this year. You might have already collected some gains and suffered some losses. And you might have some unrecognized gains and losses from stock and mutual funds that you still hold.

Selling Appreciated Securities

If you hold investments in taxable brokerage firm accounts, consider the tax-saving advantage of selling appreciated securities that have been held for over 12 months. The federal income tax rate on net long-term capital gains recognized this year is 15% for most taxpayers, although it can reach the maximum 20% rate at high income levels.

An additional 3.8% net investment income tax (NIIT) can also kick in for higher-income taxpayers. So, the actual federal tax rate on long-term capital gains can be 18.8% (15% plus 3.8%), or 23.8% (20% plus 3.8%) at higher income levels. However, that’s significantly lower than the 40.8% maximum rate that can potentially apply to short-term capital gains (37% plus 3.8%).

Harvest Capital Losses

If you’re holding some investments that are currently worth less than you paid for them, consider harvesting those capital losses between now and year end by selling those investments. Harvested losses can shelter capital gains from the sale of appreciated stocks this year. Sheltering short-term capital gains with harvested losses is an especially tax-smart move because net short-term gains are taxed at higher income tax rates that can reach 37%, plus another 3.8% if the NIIT applies.

If harvesting losing stocks would cause your 2024 capital losses to exceed your 2024 capital gains, the result would be a net capital loss for the year. The net capital loss can be used to shelter up to $3,000 of 2024 higher-taxed ordinary income ($1,500 if you’re married and file separately). Ordinary income can include salaries, bonuses, self-employment income, interest income and royalties. Any excess net capital loss is carried forward to next year — and beyond, if you don’t use it up next year.

In fact, having a capital loss carryover to next year and beyond could turn out to be beneficial. The carryover can be used to shelter future capital gains (both short-term and long-term) next year and beyond. That can give you extra investing flexibility in those years because you won’t have to hold appreciated securities for over a year to get a lower tax rate. You’ll pay 0% to the extent you can shelter gains with your loss carryover.

Important: If you sold a home earlier this year for a taxable gain, you may be able to offset some or all of that taxable gain with harvested capital losses from the sale of losing securities.

3. Donate Stock to Charity

If you itemize deductions and want to donate to IRS-approved public charities, you can combine your generosity with an overall revamping of your taxable investment portfolio of stock and/or mutual funds:

Underperforming Stocks

Sell taxable investments that are worth less than they cost and claim the tax-saving capital loss. Then give the sales proceeds to a charity and deduct your donation.

Appreciated Stocks

Donate directly to charity publicly traded securities that are currently worth more than they cost. As long as you’ve owned them for more than one year, you can claim a charitable deduction equal to the market value of the shares at the time of the gift. Plus, you escape any capital gains taxes you’d pay on those shares if you sold them.

4. Give Wisely to Loved Ones

The principles behind donating tax-smart gifts to charities also apply to making gifts to relatives and other loved ones. That is, don’t give underperforming taxable investments directly to your loved ones. Instead sell the stock or mutual fund shares and claim the tax-saving capital losses. Then give the cash proceeds to loved ones.

On the other hand, do give appreciated investments directly to loved ones in lower tax brackets. When they sell the shares, they’ll probably pay a lower tax rate than you would.

Before making gifts, however, be sure to consider any gift tax consequences. Also, if any potential recipients are children or young adults, check whether they’d be subject to the “kiddie tax.”

5. Make Charitable Donations from Your IRA

In 2024, IRA owners and beneficiaries who’ve reached age 70½ are permitted to make cash donations totaling up to $105,000 to IRS-approved public charities directly out of their IRAs. The SECURE 2.0 Act now allows eligible taxpayers to also make a one-time QCD of up to a limit that’s annually indexed for inflation ($53,000 for 2025) through a charitable gift annuity or charitable remainder trust. Additional rules apply to such QCDs.

You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction. The upside is that the tax-free treatment of QCDs means you can enjoy a tax benefit even if you don’t itemize deductions or if your charitable deduction would be reduced because of AGI-based limits. Also, QCDs can count toward your required minimum distribution, if applicable.

If you’re interested in taking advantage of this strategy for 2024, you’ll need to arrange with your IRA trustee or custodian for money to be paid out to one or more qualifying charities before year end.

6. Prepay College Bills

If you paid higher education expenses for yourself, your spouse or a dependent, you may qualify for one of the following tax credits:

The American Opportunity credit.

This credit equals 100% of the first $2,000 of qualified postsecondary education expenses, plus 25% of the next $2,000, for the first four years of postsecondary education in pursuit of a degree or recognized credential. So, the maximum annual credit is $2,500 per qualified student per year.

The Lifetime Learning credit.

This credit equals 20% of up to $10,000 of qualified education expenses. The maximum credit is $2,000 per tax return.

For 2024, both higher education credits are phased out if your modified AGI (MAGI) is between:

  • $80,000 and $90,000 for unmarried taxpayers, or
  • $160,000 and $180,000 for married couples filing jointly.

Numerous rules and restrictions apply. If you’re eligible for either credit and your expenses don’t already exceed the applicable limit, consider prepaying college tuition bills that aren’t due until early 2025. Specifically, you can claim a 2024 credit based on prepaying tuition for academic periods that begin in January through March of next year.

If your credit will be partially or fully phased out because of your MAGI, consider whether there’s anything you could do to reduce your MAGI so you could maximize your 2024 education credit. (Reducing your MAGI could also increase the benefit of certain other tax breaks.) If that’s not possible and your child is the student, see if he or she might qualify to claim the credit.

7. Convert a Traditional IRA into a Roth IRA

If you anticipate being in a higher tax bracket during retirement than you are now and have a traditional IRA, consider a Roth conversion. The downside is that there’s a current tax cost for converting. That’s because a conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth account.

While the current tax cost from a Roth conversion is unwelcome, it could turn out to be a relatively small price to pay to hedge against higher future tax rates. If you delay converting your account until a future year and you end up being subject to a higher tax rate — whether because tax rates increase or you move into a higher tax bracket — the tax cost will be larger.

After the Roth conversion, all qualified withdrawals from the account will be federal-income-tax-free. In general, qualified withdrawals are those taken after:

  • You’ve had at least one Roth account open for more than five years, and
  • You’ve reached age 59½, become disabled or died (i.e., distributions made to a beneficiary).

A Roth conversion makes it possible to avoid potentially higher future tax rates, because you’ve already paid the tax.

For More Ideas

Federal tax law may be uncertain for the next year or so because many of the TCJA provisions are scheduled to expire at the end of 2025 but could be extended. There also could be other tax law changes as a result of the election. Contact the office to discuss these and other federal (and state) tax planning moves that may apply to your current situation.

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Want to Find Out What IRS Auditors Know About Your Industry?

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To prepare for a business audit, an IRS examiner generally researches the specific industry and issues on the taxpayer’s return. Examiners may use IRS Audit Techniques Guides (ATGs). A little-known secret is that these guides are available to the public on the IRS website. In other words, your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries or businesses, such as construction, aerospace, art galleries, architecture and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

Unique Issues

IRS auditors examine different types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand the industry and its typical issues, the accounting methods commonly used, how income is received, and areas where taxpayers might not be in compliance.

By using a specific ATG, an auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s typical for the industry. The auditor also might identify anomalies within the geographic area in which the business is located.

Although ATGs were created to help IRS examiners uncover common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags.

Updates and Revisions

Some guides were written several years ago and others are relatively new. There isn’t a guide for every industry. Here are some of the guides that have been revised or added recently:

  • Child Care Provider (January 2022),
  • Construction Industry (April 2021),
  • Entertainment (March 2023) and,
  • Equity (Stock)-Based Compensation (June 2024).

For a complete list of ATGs, visit the IRS website here: https://www.irs.gov/businesses/small-businesses-self-employed/audit-techniques-guides-atgs

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Recovering Lost Documents and Receiving Tax Relief After a Natural Disaster

A moody photo showing raindrops on a car window, creating a soft focus effect on the blurred traffic outside. The overcast sky and wet conditions add a sense of melancholy and reflection, capturing a quiet moment in the hustle of everyday life.

It’s common for individual and business taxpayers to lose financial records during a natural disaster. Unfortunately, you usually need such records to document losses for your insurance company and to qualify for federal assistance, so it’s important to think about recovering lost documents if this ever happens to you.

If you visit the IRS website (https://www.irs.gov/individuals/get-transcript), you can view or obtain copies of your historical tax returns, wage and income statements, and other tax account information.

Requesting online access to your records is the fastest method, but even physical transcripts can be expected to arrive in the mail within 10 calendar days. Call your bank, credit card issuers and other financial service providers for copies of other needed documents.

If you were the victim of a natural disaster this year, you also may be eligible for filing extensions and other tax relief. Visit the IRS website for more information: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

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Seniors: A Tax-Wise Alternative to Selling Your Appreciated Home

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In recent years, the residential real estate market has surged in many areas. That means many homes have greatly appreciated, and the $250,000 home sale gain exclusion ($500,000 for joint filers) isn’t always sufficient to protect a home sale from federal income taxes. If you’re a senior thinking about selling your highly appreciated home, the transaction may bring a painful tax bill. One alternative to consider is aging in place.

If you remain in your home until your death, the tax basis generally will be adjusted to your home’s fair market value as of your date of death. When your heirs sell the home, they’ll owe federal capital gains tax only on appreciation that occurs after this date. The rules are a little more complicated for married couples, but ample tax savings can still be reaped from aging in place.

Tax planning usually calls for action. But this is one situation where it might make sense to hang tight. Contact the office to determine if this strategy is right for you and your family.

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How to Sign Up for an IP PIN

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by Ryan Niederer

We want to ensure your financial security and protect you from the growing threat of identity theft. One effective way to do this is by obtaining your Identity Protection Personal Identification Number (IP PIN). The IRS is encouraging taxpayers to sign up for an IP PIN before November 23, 2024. The IP PIN system will undergo maintenance after this date and be unavailable until early January 2025.

What is an IP PIN?

An IP PIN is a unique six -digit number that prevents someone else from filing a federal tax return using a taxpayer’s Social Security number. The IP PIN, known only to an individual and the IRS, confirms their identity when they file their tax return, making it much more difficult for thieves to use their information fraudulently.

Signing up for an IP PIN now will ensure your identity is protected when the filing season begins. The PIN number is valid for one calendar year.

How to Obtain Your IP PIN:

  1. The best way to sign up for an IP PIN is through IRS Online Account. The process requires identity verification, and spouses and dependents can also obtain an IP PIN if they complete the required verification steps. Once an IP PIN is issued, it must be on both electronic and paper returns.  To get an IP PIN, taxpayers should create or log into their online account at IRS.gov and follow the steps for identity verification. Once verified, taxpayers need to click on the profile tab to request their IP PIN. IP PIN users must use this number when filing their federal tax returns for the current calendar year and any previous years filed during that same period.
  2. For those unable to create an Online Account, alternative methods are available, such as in-person authentication at a Taxpayer Assistance Center. More information is available on how to sign up at Get an identity protection Pin (IP PIN).

We strongly encourage you to take the time to obtain your IP PIN. It’s a simple step that can help protect you against tax-related identity theft.

If you have any questions or need further assistance, please don’t hesitate to contact our office.

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Tax Implications of Depreciation: A Comprehensive Guide

by Natalie Nguyen

Depreciation is a key concept in accounting and finance, reflecting how an asset loses value over time due to factors like wear and tear, aging, or obsolescence. But did you know that depreciation also has significant tax implications? In this blog post, we’ll explore these tax aspects and their impact on businesses.

What is Depreciation?

Depreciation is the process of allocating the cost of a tangible asset over its useful life. It shows how companies account for the gradual loss of value in their assets.

Tax Deductions and Depreciation

For businesses, depreciation is considered an expense. Even though it’s a non-cash expense, it helps reduce taxable income. The IRS allows businesses to deduct this calculated depreciation from their corporate income taxes, which can significantly lower their tax liability and boost after-tax profits.

Bonus Depreciation

Bonus depreciation is a tax incentive that lets businesses accelerate deductions on “qualified property” in addition to regular depreciation when these assets are first put into use. This incentive encourages businesses to invest in new equipment.

Initially introduced through the Job Creation and Worker Assistance Act in 2002, this provision allowed businesses to deduct an extra 30% of the cost of eligible assets beyond the standard depreciation expense. In 2017, the Tax Cuts and Jobs Act increased the bonus depreciation rate to 100%. This rate started phasing out at the end of 2022, decreasing by 20% each year (80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026), with the provision set to expire by the end of 2026.

Eligible property for bonus depreciation includes depreciable assets with a useful life of 20 years or less, such as vehicles, furniture, manufacturing equipment, and heavy machinery. “Qualified improvement property” is also eligible for bonus depreciation.

Unfortunately, California does not conform to the federal bonus depreciation provision. While businesses can realize significant initial year tax savings at the federal level, they may find more tax savings at the state level in later years due to this lack of conformity.

Section 179 Deduction

As bonus depreciation phases out, small businesses can still leverage initial-year expensing through Section 179 of the Internal Revenue Code. Under Section 179, businesses can deduct the full purchase price of qualifying equipment bought or financed within the tax year, subject to certain limits and phase-outs. For the 2024 tax year, the federal deduction limit under Section 179 is set at $1,220,000, with a phase-out threshold starting at $3,050,000. For example, if a company purchases $1,000,000 in qualifying equipment before the end of 2024, it can deduct the entire amount from its gross income. However, if the purchase price reaches $1,500,000, it becomes subject to phase-out. Purchases exceeding $3,050,000 do not qualify for additional deductions and are handled using the standard depreciation method.

In California, the state conforms to Section 179 but caps the maximum deduction at $25,000 per year, phasing out completely when the total purchase price for the year exceeds $200,000.

Impact on Net Income

Since depreciation reduces taxable income, it also reduces the taxes a company owes, leading to a higher net income. However, it’s important to note that because depreciation is a non-cash expense, it doesn’t impact the company’s cash flow.

Understanding the tax implications of depreciation is crucial for businesses, as it can lead to significant tax savings and influence decisions regarding asset acquisition and disposal.

Photo Attribution:

MobiusDaXter, CC BY-SA 3.0, https://creativecommons.org/licenses/by-sa/3.0, via Wikimedia Commons

Boost Morale and Save Taxes with Achievement Awards

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Some small businesses struggle with employee morale for a variety of reasons, one of which may be economic uncertainty. If you want to boost employees’ spirits without a big financial outlay, an achievement awards program is a relatively low-cost fringe benefit that may be a win-win addition.

Under such an initiative, you can hand out awards at an appointed time, such as a year-end ceremony or holiday party. And, as long as you follow the rules, the awards will be tax-deductible for your company and tax-free for recipient employees.

Fulfilling the requirements

To qualify for favorable tax treatment, achievement awards must be granted to employees for either promoting safety in the workplace or length of service. The award can’t be disguised compensation or a payoff for closing a big deal. In addition, they must be tangible items, ranging from a gold watch or a smartphone to a plaque or a trophy. Examples of awards that would violate the rules are gift certificates, vacations, or tickets to sporting events or concerts.

Additional requirements apply to each type of award:

1. Safety awards. These can’t go to managers, administrators, clerical workers or other professional employees. Also, safety awards won’t qualify for favorable tax treatment if the company grants them to more than 10% of eligible employees in the same year.

2. Length-of-service awards. To receive such an award, an employee must have worked for the business for at least five years. In addition, the employee can’t have received a length-of-service award within the last five years.

Also keep in mind that the award must be part of a “meaningful presentation.” That doesn’t mean you have to host a gala awards dinner at the Ritz, but the award should be marked by a ceremony befitting the occasion.

Nonqualified vs. qualified

There are limits on an award’s value depending on whether the achievement awards program is nonqualified or qualified. For a nonqualified program, the annual maximum award is $400. For a qualified program the maximum is $1,600 (including nonqualified awards). Any excess above these amounts is nondeductible for the employer and taxable to the employee. If an employee receives multiple awards in one year, these figures apply to the total, not to each individual award.

To establish a qualified program, and therefore benefit from the higher limit, you must meet two additional requirements. First, awards must be granted under a written plan and the plan must be open to all eligible employees without favoritism. Second, the program must not discriminate in favor of highly compensated employees as to eligibility or benefits. For 2024, the salary threshold for a highly compensated employee is $155,000.

Awards of nominal value are generally not taxable. These are small, infrequent gifts such as a coffee mug, a t-shirt or an occasional meal.

Explore the idea

If an achievement awards program makes sense for your company, be sure that these requirements are met. Otherwise, you and your employees could suffer negative tax consequences. Contact the office for guidance in setting up a program that checks all the boxes.

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When is Employer-Paid Life Insurance Taxable?

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If the fringe benefits of your job include employer-paid group term life insurance, a portion of the premiums for the coverage may be taxable. And that could result in undesirable income tax consequences for you.

The cost of the first $50,000 of group term life insurance paid by your employer is excluded from taxable income. But the employer-paid cost of coverage over $50,000 is taxable to you and included in the taxable wages reported on your Form W-2, even if you never actually receive any benefits from it. That’s called “phantom income.”

Have you reviewed your W-2?

If you’re receiving employer-paid group term life insurance coverage in excess of $50,000, check your W-2 to see the impact on your taxable wages. If there’s a dollar amount in Box 12 (with code “C”), that’s the amount your employer paid to provide you with group term life insurance over $50,000, minus any amount that you paid for the coverage. You’re responsible for any taxes due on the amount in Box 12, including employment tax.

The amount in Box 12 is already included as part of your total “Wages, tips and other compensation” in Box 1 of the W-2. It’s the amount in Box 1 that’s reported on your tax return.

What are your options?

If the tax cost seems too high for the benefit you’re getting, ask your employer if they have a “carve-out” plan, which allows certain employees to opt out of the group coverage. If there’s no such option, ask your employer if they’d be willing to create one.

Carve-out plans vary, but one option is for your employer to continue to provide $50,000 of group-term coverage at no cost to you. Your employer could then provide you with an individual permanent policy for the balance of the coverage. Or it could pay you a cash bonus representing the amount it would have spent for the excess coverage, and you could use that money to pay premiums for an individual policy. There would still be tax consequences, but the tax liability might be smaller and the coverage might better meet your needs.

We can help

You may have other tax questions about life insurance. Feel free to contact the office for answers.

408-252-1800

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Factoring the QBI Deduction into Tax Planning for Your Business

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Thanks to the Tax Cuts and Jobs Act, sole proprietors and owners of pass-through entities, such as partnerships, S corporations and, generally, limited liability companies, may be able to claim tax deductions based on their qualified business income (QBI deduction) and certain other income.

This deduction can be up to 20% of your QBI, subject to limits that apply at higher income levels. However, some tax planning strategies can increase or decrease your allowable QBI deduction for 2024. So if you’re eligible for this deduction, it’s important to consider the impact other year-end strategies will have on it before executing them. Also keep in mind that this deduction is scheduled to expire at the end of 2025 unless Congress acts to extend it.

Contact the office for help optimizing your overall tax results.

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