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A year-end tax checklist and guide for advisors and clients

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Individuals waiting until after the presidential election to begin their year-end tax planning election can wait no longer: The votes have been cast, and Dec. 31 is right around the corner. 

While there’s no sure way to predict what tax policy will entail under the new administration, there are timely strategies wealth holders can leverage now. With 2024 deadlines fast approaching and a tax sunset looming, sitting down with clients before January is more important than ever. 

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Eric Boughner, chairman of BNY Pennsylvania and regional president of BNY Wealth

Jen Barker Worley Photography

Consider the following checklist when having these conversations.

Estate plans and gifting: Use it or potentially lose it

Much can change over a year, including a family’s circumstances or goals, making year-end a critical time to review and update wills, trusts and other estate planning documents. It’s also an opportune time to transfer wealth to heirs, especially under the Tax Cuts and Jobs Act’s current provisions. While the TCJA’s ultimate fate hinges on the actions by the new administration, any law that extends or replaces it would likely not pass until well into 2025, creating a limited window to act on current policies.

READ MORE: The policy changes financial advisors want to see after Election Day

Individuals should consider maximizing the current $13.61 million ($27.22 million for married couples) federal estate, gift and generation-skipping transfer tax exemption to transfer wealth and mitigate some of the estate and/or gift tax burdens. Wealth holders should evaluate allocating an increased generation-skipping tax exemption to trusts that are not fully exempt from the generation-skipping tax. Clients may also capitalize on the increased lifetime federal estate tax exemption by deploying spousal lifetime access trusts (SLATs), dynasty trusts or irrevocable life insurance trusts (ILITs). 

Those wishing to transfer wealth to loved ones should also take advantage of the 2024 annual gift exclusion, which allows for tax-free gifts up to $18,000 per individual, or a combined $36,000 per married couple, without counting toward their lifetime gifting exemption. This includes cash gifts and tax-free transfers on behalf of another individual, such as paying school tuition or medical expenses directly to the provider.

READ MORE: How a life insurance strategy could save some wealthy estates millions

Charitable gifting: Tax-efficient strategies

For clients wishing to pay it forward this giving season, several tax considerations should be factored into their strategies. 

Gifts to donor-advised funds may be used to secure a charitable deduction in 2024, while deferring a distribution to a public charity to a later year. Clients may consider “giving away the gain” — giving appreciated assets held longer than one year — to a public charity in exchange for a fair market value income tax charitable deduction while avoiding income tax on the appreciation and the 3.8% surtax on net investment income, if applicable. They may also combine multiple years of charitable contributions into a single year to exceed the standard deduction threshold required to fully deduct contributions. 

Additionally, those 70½ years or older may consider making a direct transfer from an IRA to a public charity while avoiding paying taxes on the distribution. 

It’s important to ensure any charitable contribution meets the strict substantiation rules. Failure to adhere to these has denied charitable deductions in recent cases.

Income tax: Accelerate income or deductions?

Clients have the option to accelerate income into 2024 to avoid potential tax rate increases in 2025. We recommend individuals defer net investment income or reduce modified adjusted gross income, or MAGI, to minimize or avoid the 3.8% surtax on net investment income. This applies to a MAGI over $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly and $125,000 for married taxpayers filing separately. We also suggest reviewing the breaks in tax brackets for capital gains to determine if an individual or their family members may benefit from a 0% or 15% tax rate on long-term capital gains. 

READ MORE: Ask an advisor: How can I save my investments from taxes?

If a client’s itemized deductions will exceed the standard deduction, consider accelerating itemized deductions into 2024 in the 32%, 35% and 37% tax brackets, as they may be capped at a 28% tax benefit in the future. Similarly, consider deferring deductions if there is an expectation they will provide a greater benefit under the potential of higher tax rates.

Lastly, sit down and review income tax withholding and estimated tax payments. If clients are potentially subject to a penalty for underestimated payments, consider increasing their withholding from wages and bonuses in the fourth quarter.

Retirement plans: Maximize contributions and brush-up on RMDs

Forthcoming legislation may limit the size of retirement accounts, making now an ideal time to maximize contributions to 401(k)s as well as to traditional, Roth, simplified employee pension (SEP) and Simple IRAs. For those 50 years or older, consider making “catch-up” contributions to eligible contributions. 

Traditional IRA holders may also explore converting to a Roth IRA. While this will result in taxable income in 2024, assets will accumulate tax-free in the Roth IRA, allowing for tax-free distributions in the future when income tax rates may be higher.

Ensure clients review retirement account beneficiary designations and are familiar with the latest required minimum distribution rules. If applicable, clients should also take 2024 RMDs from traditional IRAs, SEP and Simple IRAs and most qualified plans.

READ MORE: Final IRS rules to IRA beneficiaries: Get going on those RMDs already

Investment considerations: Time for a portfolio checkup?

Year-end — or early in 2025 if the holiday season proves too hectic — is a good time to revisit investments to ensure they maximize tax efficiencies and are aligned with broader wealth goals. 

The “nice” list of reasons to rebalance portfolios includes: staying on track with goals whether it be selling overweighted assets; purchasing securities in underweight asset classes or adjusting future investments to compensate. 

Individuals may also offset the tax impact of any realized gains taken in 2024 by harvesting losses in the portfolio or realizing gains to offset losses. Any harvested tax losses not offset by gains in 2024 can offset up to $3,000 of other income with the balance carried forward to future tax years. 

The election outcome will be instrumental in shaping the future of tax and economic policy in 2025, which makes it all the more important to make a well-thought-out plan for your client today. Now is an important time to review these strategies to ensure alignment with clients’ broader financial goals.

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Accounting

Tax Fraud Blotter: Partners in crime

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Captive audience; some disagreement; game of 21; and other highlights of recent tax cases.

Barrington, Illinois: Tax preparer Gary Sandiego has been sentenced to 16 months in prison for preparing and filing false returns for clients. 

He owned and operated the tax prep business G. Sandiego and Associates and for 2014 through 2017 prepared and filed false income tax returns for clients. Instead of relying on information provided by the clients, Sandiego either inflated or entirely fabricated expenses to falsely claim residential energy credits and employment-related expense deductions.

Sandiego, who previously pleaded guilty, caused a tax loss to the IRS of some $4,586,154. 

He was also ordered to serve a year of supervised release and pay $2,910,442 in restitution to the IRS.

Ft. Worth, Texas: A federal district court has entered permanent injunctions against CPA Charles Dombek and The Optimal Financial Group LLC, barring them from promoting any tax plan that involves creating or using sham management companies, deducting personal non-deductible expenses as business expenses or assisting in the creation of “captive” insurance companies.

The injunctions also prohibit Dombek from preparing any federal returns for anyone other than himself and Optimal from preparing certain federal returns reflecting such tax plans. Dombek and Optimal consented to entry of the injunctions.

According to the complaint, Dombek is a licensed CPA and served as Optimal’s manager and president. Allegedly, Dombek and Optimal promoted a scheme throughout the U.S. to illegally reduce clients’ income tax liabilities by using sham management companies to improperly shift income to be taxed at lower tax rates, improperly defer taxable income or improperly claim personal expenses as business deductions. As alleged by the government, Dombek also promoted himself as the “premier dental CPA” in America.

The complaint further alleges that in promoting the schemes, Dombek and Optimal made false statements about the tax benefits of the scheme that they knew or had reason to know were false, then prepared and signed clients’ returns reflecting the sham transactions, expenses and deductions.

The government contended that the total harm to the Treasury could be $10 million or more.

Kansas City, Missouri: Former IRS employee Sandra D. Mondaine, of Grandview, Missouri, has pleaded guilty to preparing returns that illegally claimed more than $200,000 in refunds for clients.

Mondaine previously worked for the IRS as a contact representative before retiring. She admitted that she prepared federal income tax returns for clients that contained false and fraudulent claims; the indictment charged her with helping at least 11 individuals file at least 39 false and fraudulent income tax returns for 2019 through 2021. Mondaine was able to manufacture substantial refunds for her clients that they would not have been entitled to if the returns had been accurately prepared. She charged clients either a fixed dollar amount or a percentage of the refund or both.

The tax loss associated with those false returns is some $237,329, though the parties disagree on the total.

Mondaine must pay restitution to the IRS and consents to a permanent injunction in a separate civil action, under which she will be permanently enjoined from preparing, assisting in, directing or supervising the preparation or filing of federal returns for any person or entity other than herself. She is also subject to up to three years in prison.

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Los Angeles: Long-time lawyer Milton C. Grimes has pleaded guilty to evading more than $4 million in federal taxes over 21 years.

Grimes pleaded guilty to one count of tax evasion relating to his 2014 taxes, admitting that he failed to pay $1,690,922 to the IRS. He did not pay federal income taxes for 23 years — 2002 through 2005, 2007, 2009 through 2011, and 2014 through 2023 — a total of $4,071,215 owed to the IRS. Grimes also admitted he did not file a 2013 federal return.

From at least September 2011, the IRS issued more than 30 levies on his personal bank accounts. From at least May 2014 to April 2020, Grimes evaded payment of the outstanding income tax by not depositing income he earned from his clients into those accounts. Instead, he bought some 238 cashier’s checks totaling $16 million to keep the money out of the reach of the IRS, withdrawing cash from his client trust account, his interest on lawyers’ trust accounts and his law firm’s bank account.

Sentencing is Feb. 11. Grimes faces up to five years in federal prison, though prosecutors have agreed to seek no more than 22 months.

Sacramento, California: Residents Dominic Davis and Sharitia Wright have pleaded guilty to conspiracy to file false claims with the IRS.

Between March 2019 and April 2022, they caused at least nine fraudulent income tax returns to be filed with the IRS claiming more than $2 million in refunds. The returns were filed in the names of Davis, Wright and family members and listed wages that the taxpayers had not earned and often listed the taxpayers’ employer as one of the various LLCs created by Davis, Wright and their family members. Many of the returns also falsely claimed charitable contributions.

Davis prepared and filed the false returns; Wright provided him information and contacted the IRS to check on the status of the refunds claimed.

Davis and Wright agreed to pay restitution. Sentencing is Feb. 3, when each faces up to 10 years in prison and a $250,000 fine.

St. Louis: Tax attorneys Michael Elliott Kohn and Catherine Elizabeth Chollet and insurance agent David Shane Simmons have been sentenced to prison for conspiring to defraud the U.S. and helping clients file false returns based on their promotion and operation of a fraudulent tax shelter.

Kohn was sentenced to seven years in prison and Chollet to four years. Simmons was sentenced to five years in prison.

From 2011 to November 2022, Kohn and Chollet, both of St. Louis, and Simmons, who is based out of Jefferson, North Carolina, promoted, marketed and sold to clients the Gain Elimination Plan, a fraudulent tax scheme. They designed the plan to conceal clients’ income from the IRS by inflating business expenses through fictitious royalties and management fees. These fictitious fees were paid, on paper, to a limited partnership largely owned by a charity. Kohn and Chollet fabricated the fees.

Kohn and Chollet advised clients that the plan’s limited partnership was required to obtain insurance on the life of the clients to cover the income allocated to the charitable organization. The death benefit was directly tied to the anticipated profitability of the clients’ businesses and how much of the clients’ taxable income was intended to be sheltered.

Simmons earned more than $2.3 million in commissions for selling the insurance policies, splitting the commissions with Kohn and Chollet. Kohn and Chollet received more than $1 million from Simmons.

Simmons also filed false personal returns that underreported his business income and inflated his business expenses, resulting in a tax loss of more than $480,000.

In total, the defendants caused a tax loss to the IRS of more than $22 million.

Each was also ordered to serve three years’ supervised release and to pay $22,515,615 in restitution to the United States.

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Accounting

On the move: KSM hired director of IT operations

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Hannis T. Bourgeois celebrates 100 years with charitable initiative; KPMG and Moss Adams release surveys; and more news from across the profession.

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Accounting

AICPA wary of new PCAOB firm metrics standard

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The American Institute of CPAs is still concerned about the Public Company Accounting Oversight Board’s new firm and engagement metrics standard, despite some modifications from the original proposal. 

During a board meeting Thursday, the PCAOB approved two new standards, on firm and engagement metrics, and firm reporting. Both would have significant implications for firms. 

Under the new rules, PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer will be required to publicly report specified metrics relating to such audits and their audit practices. The metrics cover the following eight areas:

  • Partner and manager involvement;
  • Workload;
  • Training hours for audit personnel;
  • Experience of audit personnel;
  • Industry experience;
  • Retention of audit personnel (firm-level only);
  • Allocation of audit hours; and,
  • Restatement history (firm-level only).

The AICPA reacted cautiously to the announcement. “We’re still studying the components of the final firm metrics requirements but, as we stated in our comment letter to the PCAOB this past summer, these rules will place a significant burden on small and midsized audit firms and could lead some to exit public company auditing altogether,” said the AICPA in a statement emailed Friday to Accounting Today. “This is not just conjecture: a majority of respondents (51%) to a recent survey we did of Top 500 firms with audit practices said they would rethink engaging in public company audits if the requirements were approved.”

AICPA building in Durham, N.C.

The PCAOB it made some modifications to the original proposal in  response to the comments had received since April:

  • Reduced the metric areas to eight (from 11);
  • Refined the metrics to simplify and clarify the calculations;
  • Increased the ability to provide optional narrative disclosure (from 500 to 1,000 characters); and,
  • Updated the effective date. (If approved by the SEC, the earliest effective date of the firm-level metrics will be Oct. 1, 2027, with the first reporting as of September 30, 2028, and engagement-level metrics for the audits of companies with fiscal years beginning on or after Oct. 1, 2027.)

The AICPA welcomed those changes but doesn’t think they go far enough. “We’re glad the PCAOB took some comments to heart by extending implementation dates, particularly for smaller firms, and lowering the number of required metrics,” said the AICPA. “But the potential consequences of the remaining requirements — reduced competition and market diversity in the public audit space — are a significant risk. We hope the SEC will give these unintended outcomes the weight they deserve before giving final approval to the requirements.”

The Securities and Exchange Commission would still need to give final approval to the standard, as well as the new firm reporting standard. Last week, the PCAOB decided to pause work on its controversial NOCLAR standard, on noncompliance with laws and regulations, until next year. On Thursday, SEC chairman Gary Gensler announced he would be stepping down in January, which may affect the timing of its approval or disapproval by the SEC. With the incoming Trump administration, the SEC is expected to take a far less aggressive stance on enforcement and regulation. On Friday, the SEC announced that it filed 583 total enforcement actions in fiscal year 2024 while obtaining orders for $8.2 billion in financial remedies, the highest amount in SEC history.

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