Feeling Charitable? Be Sure You Can Substantiate Your Gifts

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As the end of the year approaches, many people give more thought to supporting charities they favor. To avoid losing valuable charitable deductions if you itemize, you’ll need specific documentation, depending on the type and size of your gift. Here’s a breakdown of the rules:

Cash gifts under $250

A canceled check, bank statement or credit card statement will do. Or ask the charity for a receipt or “other reliable written record” that provides the organization’s name, the date and the amount of the gift.

Cash gifts of $250 or more

You’ll need a contemporaneous written acknowledgment from the charity stating the amount of the gift. That means you received the acknowledgment before the earlier of your tax return due date (including extensions) or the date you file your return. If you make multiple separate gifts to the same charity of less than $250 each (monthly contributions, for example) that total $250 or more for the year, you can still follow the substantiation rules for cash gifts under $250.

Noncash gifts under $250

Get a receipt showing the charity’s name, the date and location of the donation, and a description of the property.

Noncash gifts of $250 or more

Obtain a contemporaneous written acknowledgment from the charity that contains the information required for cash gifts, plus a description of the property.

Noncash gifts of more than $500

In addition to the above, keep records showing the date you acquired the property, how you acquired it and your adjusted basis in it. Also, file Form 8283.

Noncash gifts of more than $5,000 ($10,000 for closely held stock)

In addition to the above, obtain a qualified appraisal and include an appraisal summary, signed by the appraiser and the charity, with your return. (No appraisal is required for publicly traded securities.)

Noncash gifts of more than $500,000 ($20,000 for art)

In addition to the above, include a copy of the signed appraisal, not just a summary, with your return.

Finally, if you received anything in exchange for your donation, such as a book for making an online donation or food and drink at a fundraising event, ask the charity for the fair market value of the item(s). You’ll need to subtract it from your charitable deduction.

Saving taxes isn’t the primary motivator for charitable donations, but it may affect the amount you can afford to give. Substantiate your donations to ensure you receive the deductions you deserve.

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The U.S. Election Outcome Likely to Have Major Impact on Taxes

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Having won control of the White House, the Senate and the House of Representatives, Republicans will have the opportunity to move forward their vision for federal taxes. What might this mean?

First, many provisions in President-Elect Donald Trump’s signature tax legislation from his first time in the White House, the Tax Cuts and Jobs Act (TCJA), are scheduled to expire at the end of 2025. Now, there’s a better chance that most provisions will be extended.

Second, the former and future president has suggested many other tax law changes during his campaign. Here’s a brief overview of some potential tax law changes:

Business Taxes

Numerous tax law changes have been discussed that would affect businesses, including changes affecting:

Corporate income tax rates:

The president-elect has suggested decreasing the current rate of 21% to 20%, and to 15% for corporations that manufacture products in the United States.

Research and development (R&D) expenses:

Proposals include expanding or revising R&D credits and removing mandatory capitalization and amortization of R&D expenditures. The latter would allow immediate R&D deductions in the year expenses are incurred.

Sec. 199A qualified business income (QBI) deduction:

This 20% deduction for certain income of sole proprietors and pass-through entities is set to expire at the end of 2025. There’s a good chance it will be extended or made permanent.

Bonus depreciation:

This deduction is currently at 60% and set to drop to 40% for 2025 and 20% for 2026, then disappear. One proposal would reinstate this to 100%.

Individual Taxes

Potential tax law changes are also on the horizon for individual taxpayers, such as related to the following:

Expiring provisions of the TCJA:

Examples of expiring provisions include lower individual tax rates, an increased standard deduction, and a higher gift and estate tax exemption. The president-elect would like to make the TCJA’s individual and estate tax cuts permanent. He’s also indicated that he’s open to revisiting the TCJA’s $10,000 limit on the state and local tax deduction.

Individual taxable income:

The president-elect has proposed eliminating income and payroll taxes on tips for restaurant and hospitality workers, and excluding overtime pay and Social Security benefits from taxation.

Child tax incentives:

President-Elect Trump has voiced support for increasing the current cap on the Child Tax Credit ($2,000 per qualifying child), but no formal policy proposal has been made.

Electric-Vehicle Credit:

The president-elect has said informally that he would consider eliminating the electric-vehicle credit. If you’re thinking about purchasing an electric vehicle, you may want to do so by the end of 2024 just in case the credit is eliminated for 2025.

Housing incentives:

President-Elect Trump has alluded to possible tax incentives for first-time homebuyers but no specific proposals relating to tax incentives for housing. The Republican platform calls for reducing mortgage rates by slashing inflation, cutting regulations, opening parts of federal lands to new home construction. It also proposes tax incentives for first-time homebuyers.

Tariffs

The president-elect has called for higher tariffs on imports, suggesting a baseline tariff of 10% to 20% on most imported goods, a 60% tariff on imports from China and a 100% tariff on vehicles imported from Mexico.

How Will You Be Affected?

Which extensions and proposals become law will depend on a variety of factors. For example, Congress has to pass tax bills before the president can sign them into law. Republicans don’t have wide margins in the Senate or House, which could make it challenging to get certain tax law changes passed that aren’t universally popular with Republicans. If you have questions about how you might be affected by potential tax law changes, please contact the office.

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Unlocking Tax Savings: The Benefits of a Cost Segregation Study

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A cost segregation study allows a business property owner to accelerate depreciation deductions. That, in turn, enables the owner to reduce current taxable income and increase cash flow.

A cost segregation study combines accounting and engineering techniques to identify building costs that are properly allocable to tangible personal property rather than real property. It then allows the personal property to be reclassified for tax purposes and deducted over a much shorter depreciation period. This strategy has been consistently upheld in the courts.

Fundamentals of Depreciation

Business buildings generally have a 39-year depreciation period. Typically, companies depreciate a building’s structural components (such as walls, windows, HVAC systems, plumbing and wiring) along with the building. Personal property (such as equipment, machinery, furniture and fixtures) is eligible for accelerated depreciation, usually over five or seven years.

Often, businesses allocate all, or most, of their buildings’ acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be “part of a building” may, in fact, be personal property. Examples include removable wall and floor coverings, removable partitions, awnings, canopies, window treatments and signs.

Shine a Light on Outdoor Savings

Rules for outdoor lighting, parking lots, landscaping and fencing are tricky but can still lead to current tax deductions in certain situations. These expenditures are generally treated as capital improvements, subject to the 15-year depreciation rule. For instance, if you replace your business lighting to upgrade it or provide greater security at night, it qualifies as a deductible capital improvement. Similarly, landscaping projects designed to boost your curb appeal or provide environmental benefits are considered capital improvements.

On the other hand, routine maintenance (such as the costs of mowing and watering the lawn surrounding your business building) typically fall into the category of deductible business expenses, just like minor repairs.

Worth Checking Out

Although the relative costs and benefits of a cost segregation study will depend on your particular facts and circumstances, it can be a valuable investment.

And, under the Tax Cuts and Jobs Act, the potential benefits of a cost segregation study may be even greater than they were years ago because of enhancements to certain depreciation-related tax breaks.

Contact the office for further details.

408-252-1800

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Don’t Miss This Important Deadline: Required Minimum Distributions

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If you’re subject to required minimum distributions (RMDs), you must take your 2024 RMD by Dec. 31 to avoid penalties. RMDs are mandatory withdrawals from retirement plans such as 401(k)s, IRAs, SIMPLE IRAs and SEPs. Roth accounts aren’t subject to RMDs during the owners’ lifetimes. RMDs are taxable income subject to ordinary-income tax (not long-term capital gains) rates.

Previous tax law required RMDs to begin at age 72 and imposed a penalty of 50% on missed withdrawals. The SECURE 2.0 Act raised the age to 73 and lowered the penalty to 25% (or 10% if corrected within two years). Younger taxpayers can be subject to RMDs if they inherited a retirement account. Contact the office as soon as possible for help calculating the correct amount for your RMDs.

Here’s more from the IRS: IRS reminds those aged 73 and older to make required withdrawals from IRAs and retirement plans by Dec. 31; notes changes in the law for 2023 | Internal Revenue Service

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2025 Depreciation and Pension Credits: Year-End Tax Planning

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by Natalie Nguyen

As the holiday season kicks into full swing, it’s easy to get caught up in the festivities and put taxes on the back burner. But this is the perfect time to start thinking about how upcoming changes might affect your tax strategy in the new year. It’s essential to stay informed about the latest changes in tax laws, especially if you are a business owner. In this post, we’ll show you a couple of changes that are important to review as we approach 2025 relating to depreciation and pension plan credits. 

Depreciation Changes

The 2017 Tax Cuts and Jobs Act (TCJA) introduced significant changes to depreciation rules, including enhanced bonus depreciation. While these provisions have provided substantial tax benefits for businesses since its inception, the bonus depreciation has been phasing out gradually for a few years and is currently scheduled to completely phase-out by December 31, 2026.

Key Changes for 2025:

  • Bonus Depreciation Phase-Out: The bonus depreciation percentage, which allows businesses to deduct a significant portion of the cost of qualifying assets upfront, will decrease to 40% for eligible assets placed in service after December 31, 2024. 
  • Section 179 Deduction: Another method to recover all or part of the costs of certain property, up to a limit, is the Section 179 Deduction. The maximum Section 179 expense deduction is $1,250,000, and this expense is reduced by the amount of section 179 property is placed in service during the tax year that exceeds $3,130,000. For 2025, the maximum Section 179 expense deduction for sport utility vehicles over 6,000 pounds is $31,300.

Pension Plan Credits

While there are no significant changes to pension plan credits for 2025 compared to 2024, it’s crucial for businesses to stay informed about ongoing regulations and potential legislative updates.

Eligible employers may be able to claim a tax credit of up to $5,000, for three years, on ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (ex. 401(k) plan). 

You qualify for this credit if:

  • You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
  • You must have at least one plan participant who was a non-highly compensated employee (NHCE); and
  • In the three tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

Amount of Credit

  • Employers with 50 or fewer employees: If you have 50 or fewer employees who received at least $5,000, the credit it 100% of eligible startup costs, up to the greater of:
    • $500; or
    • The lesser of:
      • $250 multiplied by the number of NHCEs who are eligible to participate in the plan,
      • or $5,000.
  • Employers with 51-100 employees: if you have 51-100 employees who received at least $5,000, the credit is 50% of your eligible startup costs, up to the greater of:
    • $500; or
    • The lesser of:
      • $250 multiplied by the number of NHCEs who are eligible to participate in the plan,
      • or $5,000

Eligible Startup Costs

You may claim the credit for ordinary and necessary costs to:

  • Set up and administer the plan
  • Educate your employees about the plan

Tax Credit for Plan Contributions

Small employers (less than 100 employees) may claim a tax credit for plan contributions made to a defined contribution plan, SEP or Simple IRA plan. The tax credit is not available for contributions to employees earning more than $100,000. (Maybe adjusted for inflation in the following years).

  • For employers with 1-50 employees, the tax credit available for each participant is:
    • First plan year: 100% of contribution, up to $1,000
    • Second plan year: 100% of contribution, up to $1,000
    • Third plan year: 75% of contribution, up to $1,000
    • Fourth plan year: 50% of contribution, up to $1,000
    • Fifth plan year: 25% of contribution, up to $1,000
  • For employers with 51-100 employees, the tax credit available for each participant is:
    • First plan year: 100% minus 2% for each employee exceeding 50 limit
    • Second plan year: 100% minus 2% for each employee exceeding 50 limit
    • Third plan year: 75% minus 2% for each employee exceeding 50 limit
    • Fourth plan year: 50% minus 2% for each employee exceeding 50 limit
    • Fifth plan year: 25% minus 2% for each employee exceeding 50 limit

Note that you cannot both deduct the startup costs and claim the tax credit for the same expenses. You are also not required to claim the allowable credit.

Auto-enrollment Tax Credit

An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a 3-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature. This tax credit is available for new or existing plans that adopt an eligible auto-enrollment plan.

Do You Need Assistance?

Navigating tax law changes can feel overwhelming, especially with everything else on your plate during the holidays. But you don’t have to feel alone. If you have questions about how the new tax laws will impact you and your business, we’re here to provide the guidance you need. Our team is ready to help you understand these changes and create a tax strategy that works best for your unique situation. Reach out to us today, and let’s ensure that you’re fully prepared for a successful 2025 tax year.

408-252-1800

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Tax-Saving Moves Businesses Should Consider Before Year End

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Now is a good time to consider year-end moves that can help reduce your business’s 2024 taxes. The effectiveness of a particular action depends on the circumstances of your business. Here are several possibilities.

Time Income and Deductions

A tried-and-true tactic for minimizing your tax bill is to defer income to next year and accelerate deductible expenses into this year. For example, if your business uses the cash method of accounting, consider deferring income by postponing invoices until late in the year or accelerating deductions by paying certain expenses before year end.

If your business uses the accrual method of accounting, you have less flexibility to control the timing of income and expenses, but there are still some things you can do. For example, you may be able to deduct year-end bonuses accrued this year even if they aren’t paid until next year (if they’re paid by March 15, 2025).

Accrual-basis businesses may also be able to defer income from certain advance payments (such as licensing fees, subscriptions, membership dues, and payments under guaranty or warranty contracts) until next year. These payments may be deferred to the extent they’re recorded as deferred revenue on an “applicable financial statement” of the business, for example, an audited financial statement or a financial statement filed with the Securities and Exchange Commission.

Deferring income and accelerating deductions isn’t right for every business. In some cases, it may be advantageous to do the opposite, that is, to accelerate income and defer deductions. This may be the case if, for example, you believe your business will be in a higher tax bracket next year.

Buy Equipment and Other Fixed Assets

One of the most effective ways to generate tax deductions is to buy equipment, machinery and other fixed assets and place them in service by Dec. 31. Ordinarily these assets are capitalized and depreciated over several years, but there are a few options for deducting some or all of these expenses immediately, including:

Section 179 expensing.

This break allows you to deduct up to $1.22 million in expenses for qualifying tangible property and certain computer software placed in service in 2024. It’s phased out on a dollar-for-dollar basis to the extent Sec. 179 expenditures exceed $3.05 million for 2024.

Bonus depreciation.

This year, you can deduct up to 60% of the cost of eligible tangible property, which includes most equipment and machinery, as well as off-the-shelf computer software and certain improvements to nonresidential building interiors. Now’s the time to take advantage of bonus depreciation, since the deduction limit is scheduled to drop to 40% next year and 20% in 2026 and to be eliminated after that, unless Congress passes new legislation.

De minimis safe harbor.

This provision allows you to expense certain low-cost items used in your business, even if they’d ordinarily be treated as fixed assets that are capitalized and depreciated. If your business has applicable financial statements, you can deduct up to $5,000 per purchase or invoice for these items to the extent that you deduct them for accounting purposes. If you don’t have applicable financial statements, then the limit is $2,500.

Despite the term “de minimis,” the safe harbor makes it possible to immediately deduct a significant amount of property. For example, if you buy 10 computers for your business for $2,500 each, you can deduct as much as $25,000 up front.

Each of these options has advantages and disadvantages and is subject to various rules and limitations. Contact the office for help choosing the most effective strategies for your business.

Fund a Retirement Plan

If you don’t have a retirement plan, establishing one can be a great way to generate tax benefits. It can also improve employee recruitment and retention efforts. Certain employers are entitled to tax credits for starting a new plan.

Whether you start a new plan now or already had one in place, depending on the type of plan, you may be able to take 2024 deductions for contributions you make after year end. Some plans, including simplified employee pensions (SEPs), can be adopted and funded after year end and still create deductions for this year.

Be Prepared to Write Off Bad Debts

Year end is a good time to review your receivables and determine whether any business debts have become worthless or uncollectible. If they have, you may be able to reduce 2024 taxes by claiming a bad debt deduction.

To qualify for the deduction, you’ll need documentation or other evidence that the debt is bona fide. You’ll also need evidence that there’s no reasonable expectation of payment (such as the debtor’s insolvency or bankruptcy) or documentation that you’ve taken reasonable steps to collect the debt. You should also have documentation that the debt was charged off this year, which is required for partially worthless debts and a best practice for totally worthless debts.

Finally, to deduct a bad debt you must have previously included the receivable in your taxable income. Thus, an accrual-basis business can deduct an otherwise eligible bad debt if it’s already accrued the receivable, but a cash-basis business can’t.

Find the Optimal Combination

Whichever year-end tax strategies you explore, it’s critical to understand how they interact with other provisions of the tax code. For example, if you have a pass-through business, claiming significant amounts of bonus depreciation can reduce your Section 199A deduction for qualified business income (QBI). That’s because first-year depreciation deductions reduce your taxable income and your QBI. Contact the office for help selecting the optimal combination of year-end planning strategies for your business.

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7 Year-End Tax Planning Tips for Individuals

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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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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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The “Nanny Tax” Must Be Paid for Nannies and Other Household Employees

If you employ a household worker who isn’t an independent contractor, you may be required to pay employment taxes on the worker’s cash wages. This is commonly referred to as the “nanny tax.”

In 2024, when a household employee’s cash wages reach at least $2,700, you must pay the employer share of Social Security (6.2%) and Medicare (1.45%) taxes and withhold the employee share of these taxes (also 6.2% and 1.45%, respectively). You aren’t required to withhold federal income tax, but you must pay federal unemployment tax on wages of $1,000 or more. This tax is assessed only on the first $7,000 of wages paid.

To pay these obligations, increase your quarterly estimated tax payments or increase withholding from your wages. Additional requirements will apply when you file your tax return for the year. Contact the office with questions.

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To Get an “Early” Refund, Adjust Your Withholding

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If you received a large refund this year, you may want to adjust your withholding. Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.

Fortunately, there’s a way to begin collecting your 2024 refund now: You can review the amounts you’re having withheld — and any estimated tax payments you’re making — and adjust them to keep more money in your pocket during the year.

Choosing to Adjust

It’s particularly important to check your withholding and/or estimated tax payments if you have:

  • Received an especially large 2023 refund,
  • Gotten married, divorced or added a dependent,
  • Bought a home, or
  • Started or lost a job.

Withholding or estimated tax payment changes might also be warranted if your investment income has changed significantly.

Making a Change

You can modify your withholding at any time during the year, or even more than once a year. To do so, simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can adjust each time quarterly payments are due.

While reducing your withholding or estimated tax payments will put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax throughout the year on a timely basis, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the deadline in April 2025.

Getting Help

One reason to consider adjusting your withholding is the passage of any new tax legislation. For example, several years ago when the Tax Cuts and Jobs Act was enacted, the IRS needed to revise withholding tables to account for the increased standard deductions, suspension of personal exemptions, and changes in tax rates and brackets. If you’d like help determining your withholding or estimated tax payments for the rest of the year, please contact the office.

408-252-1800

 

Photo by Artsy_Crafty from Freerange Stock.