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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. 

Eric Boughner.jpg
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

Accountants tackle tariff increases after ‘Liberation Day’

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President Trump’s imposition of steep tariffs on countries around the world is likely to drive demand for accounting experts and consultants to help companies adjust and forecast the ever-changing percentages and terms.

On April 2, which Trump dubbed “Liberation Day,” he announced a raft of reciprocal tariffs of varying percentages on trading partners across the globe and signed an executive order to put the import taxes into effect. Finance executives have been gaming out how to respond to the potential tariffs that Trump has been threatening to impose since before he was re-elected, far exceeding those he actually levied during his first term.

“A lot of CFOs are thinking they are going to pass along the tariffs to their customer base, and about another half are thinking we’re going to absorb it and be more creative in other ways we can save money inside our company,” said Tom Hood, executive vice president for business engagement and growth at the AICPA & CIMA. 

The AICPA & CIMA’s most recent quarterly economic outlook survey in early March polled a group of business executives who are also CPAs and found that 85% said tariffs were creating uncertainty in their business plans, while 14% of the business execs saw potential positive impacts for their business from the prospect of tariffs as increased cost of competing products would benefit them, and 59% saw potential negative impacts to their businesses from the prospect of tariffs. This in turn has led to a dimming outlook on the economy among the executives polled.

“CFOs in our community are telling us that, effectively, they’re looking at this a lot like what happened over COVID with a big disruption out of nowhere,” said Hood. “This one, they could see it coming. But the point is they had to immediately pivot into forecasting and projection with basically forward-looking financial analysis to help their companies, CEOs, etc., plan for what could be coming next. This is true for firms who are advising clients. They might be hired to do the planning in an outsourced way, if the company doesn’t have the finance talent inside to do that.”

The tariffs are not set in stone, and other countries are likely to continue to negotiate them with the U.S., as Canada and Mexico have been doing in recent months.

“The one thing that I think we can all count on is a certain amount of uncertainty in this process, at least for the next several months,” said Charles Clevenger, a principal at UHY Consulting who specializes in supply chain and procurement strategy. “It’s hard to tell if it’s going to go beyond that or not, but it certainly feels that way.”

Accountants will need to make sure their companies and clients stay compliant with whatever conditions are imposed by the U.S. and its trading partners. “This is a more complex tariff environment than most companies have experienced in the past, or that seems to be where we’re headed, and so ensuring compliance is really important,” said Clevenger.

Big Four firms are advising caution among their clients.

“Our point of view is we’re advising all of our clients to do a few things right out of the gate,” said Martin Fiore, EY Americas deputy vice chair of tax, during a webinar Thursday. “Model and analyze the trade flows. Look at your supply chain structures. Understand those and execute scenario planning on supply chain structures that could evolve in new environments. That is really important: the ability for companies to address the questions they’re getting from their C-suite, from their stakeholders, is critical. Every company is in a different spot according to the discussions we’ve had. We just are really emphasizing, with all the uncertainty, know your structure, know your position, have modeling put in place, so as we go through the next rounds of discussions over many months, you have an understanding of your structure.”

Scenario planning will be especially important amid all the unpredictability for companies large and small. “They’re going to be looking at all the different countries they might have supply chains in,” said Hood. “And then even the smaller midsized companies that might not be big, giant global companies, they might be supplying things to a big global company, and if they’re in part of that supply chain, they’ll be impacted through this whole cycle as well.”

Accountants will have to factor the extra tariffs and import taxes into their costs and help their clients decide whether to pass on the costs to customers, while also keeping an eye out for pricing among their competitors and suppliers.

“It’s just like accounting for any goods that you’re purchasing,” said Hood. “They often have tariffs and taxes built into them at different levels. I think the difference is these could be bigger and they could be more uncertain, because we’re not even sure they’re going to stick until you see the response by the other countries and the way this is absorbed through the market. I think we’re going through this period of deeper uncertainty. Even though they’re announced, we know that the administration has a tendency to negotiate, so I’m sure we’re going to see this thing evolve, probably in the next 30 days or whatever. The other thing our CFOs are reminding us of is that the stock market is not the economy.”

Amid the market fluctuations, companies and their accountants will need to watch closely as the rules and tariff rates fluctuate and ensure they are complying with the trading rules. “Do we have country of origin specified properly?” said Clevenger. “Are we completing the right paperwork? When there are questions, are we being responsive? Are we close to our broker? Are we monitoring our customs entries and all the basic things that we need to do? That’s more important now than it has been in the past because of this increase in complexity.”

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Accounting

How to use opportunity zone tax credits in the ‘Heartland’

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A tax credit for investments in low-income areas could spur long-term job creation in overlooked parts of the country — with the right changes to its rules, according to a new book.

The capital gains deferral and exclusions available through the “opportunity zones” credit represent one of the few areas of the Tax Cuts and Jobs Act of 2017 that drew support from both Republicans and Democrats. The impact of the credit, though, has proven murky in terms of boosting jobs and economic growth in the roughly 7,800 Census tracts qualifying based on their rates of poverty or median family incomes. 

Altering the criteria to focus the investments on “less traditional real estate and more innovation infrastructure” and ensuring they reach more places outside of New York and California could “refine the where and the what” of the credit, said Nicholas Lalla, the author of “Reinventing the Heartland: How One City’s Inclusive Approach to Innovation and Growth Can Revive the American Dream” (Harper Horizon). A senior fellow at an economic think tank called Heartland Forward and the founder of Tulsa Innovation Labs, Lalla launched the book last month. For financial advisors and their clients, the key takeaway from the book stems from “taking a civic minded view of investment” in untapped markets across the country, he said in an interview.

“I don’t want to sound naive. I know that investors leveraging opportunity zones want to make money and reduce their tax liability, but I would encourage them to do a few additional things,” Lalla said. “There are communities that need investment, that need regional and national partners to support them, and their participation can pay dividends.”

READ MORE: Unlock opportunities for tax incentives in opportunity zones

A call to action

In the book, Lalla writes about how the Innovation Labs received $200 million in fundraising through public and private investments for projects like a startup unmanned aerial vehicle testing site in the Osage Nation called the Skyway36 Droneport and Technology Innovation Center. Such collaborations carry special relevance in an area like Tulsa, Oklahoma, which has a history marked by the wealth ramifications of the Tulsa Race Massacre of 1921 and the government’s forced relocation of Native American tribes in the Trail of Tears, Lalla notes.

“This book is a call to action for the United States to address one of society’s defining challenges: expanding opportunity by harnessing the tech industry and ensuring gains spread across demographics and geographies,” he writes. “The middle matters, the center must hold, and Heartland cities need to reinvent themselves to thrive in the innovation age. That enormous project starts at the local level, through place-based economic development, which can make an impact far faster than changing the patterns of financial markets or corporate behavior. And inclusive growth in tech must start with the reinvention of Heartland cities. That requires cities — civic ecosystems, not merely municipal governments — to undertake two changes in parallel. The first is transitioning their legacy economies to tech-based ones, and the second is shifting from a growth mindset to an inclusive-growth mindset. To accomplish both admittedly ambitious endeavors, cities must challenge local economic development orthodoxy and readjust their entire civic ecosystems for this generational project.”

READ MORE: Relief granted to opportunity zone investors

Researching the shortcomings

And that’s where an “opportunity zones 2.0” program could play an important role in supporting local tech startups, turning midsized cities into innovation engines and collaborating with philanthropic organizations or the federal, state and local governments, according to Lalla. 

In the first three years of the credit alone, investors poured $48 billion in assets into the “qualified opportunity funds” that get the deferral and exclusions for certain capital gains, according to a 2023 study by the Treasury Department. However, those assets flowed disproportionately to large metropolitan areas: Almost 86% of the designated Census tracts were in cities, and 95% of the ones receiving investments were in a sizable metropolis. 

Other research suggested that opportunity-zone investments in metropolitan areas generated a 3% to 4.5% jump in employment, compared to a flat rate in rural places, according to an analysis by the nonpartisan, nonprofit Tax Foundation.

“It creates a strong incentive for taxpayers to make investments that will appreciate greatly in market value,” Tax Foundation President Emeritus Scott Hodge wrote in the analysis, “Opportunity Zones ‘Make a Good Return Greater,’ but Not for Poor Residents” shortly after the Treasury study. 

“This may be the fatal flaw in opportunity zones,” he wrote. “It explains why most of the investments have been in real estate — which tends to appreciate faster than other investments — and in Census tracts that were already improving before being designated as opportunity zones.”

So far, three other research studies have concluded that the investments made little to no impact on commercial development, no clear marks on housing prices, employment and business formation and a notable boost in multifamily and other residential property, according to a presentation last September at a Brookings Institution event by Naomi Feldman, an associate professor of economics at the Hebrew University of Jerusalem who has studied opportunity zones. 

The credit “deviates a lot from previous policies” that were much more prescriptive, Feldman said.

“It didn’t want the government to have a lot of oversay over what was going on, where the investment was going, the type of investments and things like that,” she said. “It offered uncapped tax incentives for private individual investors to invest unrealized capital gains. So this was the big innovation of OZs. It was taking the stock of unrealized capital gains that wealthy individuals, or even less wealthy individuals, had sitting, and they could roll it over into these funds that could then be invested in these opportunity zones. And there were a lot of tax breaks that came with that.”

READ MORE: 3 oil and gas investments that bring big tax savings

A ‘place-based’ strategy

The shifts that Lalla is calling for in the policy “could either be narrowing criteria for what qualifies as an opportunity zone or creating force multipliers that further incentivize investments in more places,” he said. In other words, investors may consider ideas for, say, semiconductor plants, workforce training facilities or data centers across the Midwest and in rural areas throughout the country rather than trying to build more luxury residential properties in New York and Los Angeles.

While President Donald Trump has certainly favored that type of economic development over his career in real estate, entertainment and politics, those properties could tap into other tax incentives. And a refreshed approach to opportunity zones could speak to the “real innovation and talent potential in midsized cities throughout the Heartland,” enabling a policy that experts like Lalla describe as “place-based,” he said. With any policies that mention the words “diversity, equity and inclusion” in the slightest under threat during the second Trump administration, that location-based lens to inclusion remains an area of bipartisan agreement, according to Lalla.

“We can’t have cities across the country isolated from tech and innovation,” he said. “When you take a geographic lens to economic inclusion, to economic mobility, to economic prosperity, you are including communities like Tulsa, Oklahoma. You’re including communities throughout Appalachia, throughout the Midwest that have been isolated over the past 20 years.”

READ MORE: Can ESG come back from the dead?

Hope for the future?

In the book, Lalla compares the similar goals of opportunity zones to those of earlier policies under President Joe Biden’s administration like the Inflation Reduction Act, the CHIPS and Science Act, the American Rescue Plan and the Infrastructure Investment and Jobs Act.

“Together, these bills provided hundreds of millions of dollars in grant money for a more diverse group of cities and regions to invest in innovation infrastructure and ecosystems,” Lalla writes. “Although it will take years for these investments to bear fruit, they mark an encouraging change in federal economic development policy. I am cautiously optimistic that the incoming Trump administration will continue this trend, which has disproportionately helped the Heartland. For example, Trump’s opportunity zone program in his first term, which offered tax incentives to invest in distressed parts of the country, should be adapted and scaled to support innovation ecosystems in the Heartland. For the first time in generations, the government is taking a place-based approach to economic development, intentionally seeking to fund projects in communities historically disconnected from the nation’s innovation system and in essential industries. They’re doing so through a decidedly regional approach.”

Advisors and clients thinking together about aligning investment portfolios to their principles and local economies can get involved with those efforts — regardless of their political views, Lalla said.

“This really is a bipartisan issue. Opportunity zones won wide bipartisan approval,” he said. “Heartland cities can flourish and can do so in a complicated political environment.”

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Accounting

Ramp releases tool to detect fraudulent AI-generated receipts

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Ramp, a spend management solutions provider, released a new solution within 24 hours in direct response to recent advances in AI image generation that make it easy to create extremely convincing fake receipts that could be used for financial fraud. 

Dave Wieseneck, an “expert in residence” at Ramp who administers the company’s own instance of Ramp, noted that faking receipts is not a new practice. What’s changed is that, with the recent image generation update from OpenAI, it has now become much easier, making what may have once been a painstaking effort into a casual thing done in minutes.

“So while it’s always been possible to create fake receipts, AI has made it super duper easy, especially OpenAI with their latest model. So I think it’s just super easy now and anybody can do it, as opposed to experts that are in the know,” he said in an interview. 

Generated by ChatGPT

AI generated receipt

Rather than try to assess the image itself, the software looks at the file’s metadata for markers particular to generative AI systems. Once those markers are present, the software flags the receipt as a probable fake. 

“When we see that these markers are present, we have really high confidence of high accuracy to identify them as potentially AI generated receipts,” said Wieseneck. “I was the first person to test it out as the person that owns our internal instance of Ramp and dog foods the heck out of our product.” 

While the speed at which they produced this solution may be remarkable, he said it is part of the company culture. The team, especially small pods within it, will observe a problem and stop what they’re doing to focus on a specific need. They get a group together on a Slack channel, work through the problem, code it late at night and push it out in the morning. 

Wieseneck conceded it is not a total solution but rather a first line of defense to deter the casual fraudster. He compared it to locking your door before going out. If the front door is unlocked, a person can just stroll in and steal everything, but will likely give up if it is locked. A professional criminal with tons of breaking and entering experience, however, is unlikely to be deterred by a lock alone, versus a lock plus an alarm system plus an actual security guard. 

“But that doesn’t mean that you don’t lock your door and you don’t add pieces of defense to make it harder for people to either rob your house or, in this case, defraud your company,” he said.

This isn’t to say there’s no plans to bolster this solution further. After all, the feature is only days old. He said the company is already looking into things like pixel analysis and textual analysis of the document itself to further enhance its AI detection capabilities, though he stressed that they want to be very confident it works before pushing it out to customers. 

“We’re focused on giving finance teams confidence that legitimate receipts won’t be falsely flagged. So we want to tread carefully. We have lots of ideas. We’re going to work through them and kind of solve them in the same process we’ve always done here at Ramp,” he said. 

This is likely only the beginning of AI image generators being used to fake documentation. For instance, it has recently been found that bots are also very good at forging passports.

AI fraud ascendant

This speaks to an overall trend of AI being used in financial crimes which was highlighted in a recent report from financial and risk advisory solutions provider Kroll, which surveyed about 600 CEOs, chief compliance officers, general counsel, chief risk officers and other financial crime compliance professionals. What they found was that experts in this area are growing alarmed at the rising use of AI by cybercriminals and other bad actors, and few are confident their own programs are ready to meet this challenge. 

The poll found that 61% of respondents say use of AI by cybercriminals is a leading catalyst for risk exposure, such as through the generation of deep fakes and, likely, AI-generated financial documents. While 57% think AI will help against financial crime, 49% think it will hinder (Kroll said they are likely both right). 

“The rapid-fire adoption of AI tools can be a blessing and a curse when it comes to financial crime, providing new and more efficient ways to combat it while also creating new techniques to exploit the broadening attack surface — be it via AI-powered phishing attacks, deepfakes, or real-time mimicry of expected security configurations,” said the report. 

Yet, many professionals do not feel their current programs are up to the task. The rise in AI-guided fraud is part of an overall projected 71% increase in financial crime risks in 2025. Meanwhile, only 23% rate their compliance programs as “very effective” with lack of technology and investment named as prime reasons. Many also lack confidence in the governance infrastructure overseeing financial crime, with just 29% describing it as “robust.” 

They’re also not entirely convinced that more AI is the solution. The poll found that confidence in AI technology has dropped dramatically over the past two years: those who say AI tools have had a positive impact on financial crime compliance have gone from 39% in 2023 to only 20% today. Despite this, there remains heavy investment in AI. The poll found 25% already say AI is an established part of their financial crime compliance program, and 30% say they are in the early stages of adoption. Meanwhile, in the year ahead, 49% expect their organization will invest in AI solutions to tackle financial crime, and 47% say the same about their cybersecurity budgets. 

To help combat AI-enabled financial crime, Kroll recommended companies form cross-functional teams that go beyond IT and cybersecurity and involve those in AML, compliance, legal, product and senior management. Further, Kroll said there has to be focused, hands-on training with new AI tools that are updated and repeated as the organization implements new AI capabilities and the regulatory and risk landscape changes. Finally, to combat AI-related fraud, Kroll recommended companies maintain a “back to the basics” approach. Focus on fundamental human intervention and confirmation procedures — regardless of how convincing or time-sensitive circumstances appear.

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