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.
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.
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.
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.
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.
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.
The Internal Revenue Service may be facing steep cuts in its budget with the win on Tuesday night of President-elect Donald Trump.
Funding for the IRS has become a political issue, with Republicans successfully pushing to cut the extra $80 billion funding from the Inflation Reduction Act of 2022 already during battles over the debt limit.
“I think IRS funding is at significant risk right now, both the annual appropriation funding as well as the remaining IRA funding,” said Washington National Tax Office principal Rochelle Hodes at the Top 25 Firm Crowe LLP.
So far, Republicans have mainly called for cuts in the IRS’s enforcement budget. The increase in enforcement is supposed to be used to pay for the cost of the IRA, but the funding increase is also supposed to be used for taxpayer service and technology improvements.
“The only question for me on funding is, will any portion of the funding remain available for taxpayer service-related improvements at the IRS?” said Hodes.
“I don’t think that will be in the sight line, but the IRA money is part of what’s being used for that,” said Hodes. “As we’ve seen in appropriations bills, there could be language directed at that, that no money can be spent on that initiative.”
A more important priority will be the extension of the expiring provisions of the Tax Cuts and Jobs Act of 2017. “Getting TCJA resolved is going to be the first priority,” said Hodes. “The second question is, how will the cost of that endeavor be determined. If the view that is held by several Senate Republicans wins the day, then the cost of extending the expiring provisions will not be counted under those particular budget rules that are created dealing with extending current policy. If, however, that view is not adopted, then there is a high cost just to TCJA, and so any other provisions with cost will sort of stretch the boundaries of what many in Congress would be comfortable with. I think it will be necessary to see how the scoring goes for extending TCJA provisions.”
Trump has also called for exempting various forms of income, such as tip income, Social Security income and overtime from taxes.
“I also am not sure which of the ideas that were put forward on the campaign trail, other than extending TCJA, are provisions that have true champions who will want to pursue those,” said Hodes.
That may depend on who ends up in Congress, with several important races in the House yet to be decided.
“Although the House remains undecided, the Republicans’ control of the Senate makes it much more likely that Republicans will be able to implement many of Trump’s proposed tax policies, such as making parts of the expiring 2017 TCJA provisions permanent,” said John Gimigliano, principal in charge of the Federal Legislative & Regulatory Services group within KPMG’s Washington National Tax practice, in a statement. “The pressing question now is how the Administration and Congress will fund such an ambitious agenda and what additional measures they might introduce, such as eliminating taxes on tips and overtime. These items will only add to the hefty $4+ trillion price tag they face. Until then, taxpayers should continue to stay apprised of developments and scenario plan for the different outcomes to get ahead.”
Over half of accounting and tax firms plan to increase fees across all services in 2025, according to a new survey.
The survey, released Wednesday by practice management technology company Ignition, found that the majority (around 58%) cited rising business costs as the main motivator for their fee increases, while only 5% are raising prices to increase revenue. Most of the nearly 350 firms surveyed intend to increase fees across services by 5% or 10%.
Some 57% of the respondents plan to increase fees across all services. With regard to tax preparation specifically, 90% of the survey respondents plan to increase fees for individual tax returns, and 87% plan to increase fees for business tax returns. In addition, 70% plan to increase fees for tax planning and advisory services;. 85% plan to increase fees for bookkeeping and accounting services; and 76% plan to increase fees for CFO and controller services.
“While accounting firm owners are embracing price increases in 2025, the report shows that the majority (around 58%) cite rising business costs as the main motivator,” said Ignition global president Greg Strickland in a statement. “Only 5% are raising prices to increase revenue, which indicates an opportunity for firms to leverage pricing as a strategic tool to unlock revenue growth.”
The report found a shift from hourly billing to fixed-fee and value-based pricing, with 79% of the survey respondents indicating they use fixed-fee or value-based pricing for bookkeeping and accounting services. Over half (54%) use fixed-fee or value-based pricing for tax preparation services, 67% use fixed-fee or value-based pricing for tax planning and advisory services, and 75% use fixed-fee or value-based pricing for CFO and controller services.
The report benchmarked current fees for tax, accounting and advisory services, which varied based on firms’ annual revenue range. The biggest variation in pricing was for tax planning and advisory services in particular. For firms with revenue of as much as $250,000, approximately 23% said they charge less than $500 for these services, while a nearly equal number (around 21%) indicated they charge more than $2000.
Illinois voters approved a nonbinding proposal to add an extra 3% levy on annual incomes of more than $1 million, which could fuel a new effort to raise taxes on the state’s highest earners.
The ballot measure – which was an advisory question – won 60% of support, according to the Associated Press. About 90% of the votes have been counted.
“The vote is a gigantic step in the right direction,” said former Governor Pat Quinn, a supporter of the measure.
While the proposal has no legal effect, the vote opens the door to a new debate over ramping up taxes on the rich even as Illinois and Chicago, its biggest city, contend with population declines and a string of departures by major companies and wealthy residents. In 2020, voters rejected a separate measure backed by Governor JB Pritzker to replace the state’s flat tax on incomes with a graduated system that would raise rates on higher-earners.
The Pritzker plan drew staunch opposition from billionaire financier Ken Griffin, who donated about $50 million to help torpedo the initiative. Griffin then left Chicago for Miami in 2022, moving the headquarters of his Citadel empire there as well. Companies from Caterpillar Inc. to Boeing Co. have also departed amid rising concerns over public safety, regulation and taxes.
This year’s referendum asked voters if the Illinois Constitution should be amended to create the additional tax on income over $1 million. It called for using the proceeds to ease the state’s notoriously high property levies.