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7 Midyear Tax Planning Tips for Individuals

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Summer is a good time to reflect on tax planning moves that could lower this year's tax bill. It appears there won't be any significant federal tax changes that will take effect next year. If that's an accurate prediction, this year's tax planning environment is straightforward. Here are seven planning ideas to consider implementing between now and year end.

  1. Game the Standard Deduction

When filing your federal income tax return, you'll need to decide whether to itemize or take the standard deduction. The Tax Cuts and Jobs Act (TCJA) significantly increased the standard deduction amounts through 2025 and indexed them annually for inflation.

For 2024, the basic standard deduction amounts are:

  • $14,600 for singles and married couples filing separately,
  • $29,200 for married couples filing jointly, and
  • $21,900 for heads of households.

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

If your total itemizable deductions for this year will be close to your standard deduction allowance, consider making enough additional expenditures for itemized deduction items between now and December 31 to surpass your standard deduction. The extra expenditures will allow you to itemize and reduce your 2024 federal income tax bill. 

Here are some itemizable expenses that you could potentially accelerate before year end to tip the scales:   

Mortgage interest. The easiest itemizable expense to prepay is included in your house payment due on January 1, 2025. Accelerating that payment into this year will give you 13 months of itemized home mortgage interest deductions in 2024. The TCJA put stricter limits on these deductions, so check with your SSB tax advisor to determine whether you're affected.

State and local income and property taxes. Consider prepaying state and local income and property taxes that will be due early next year. Paying those bills before December 31, 2024, can lower this year's federal income tax bill, because your total itemized deductions will be that much higher. However, be aware that the TCJA decreased the maximum amount you can deduct for all state and local taxes combined to $10,000 ($5,000 if you use married filing separately status).

Important: Prepaying state and local taxes can be a bad idea if you'll owe the alternative minimum tax (AMT) for 2024. That's because write-offs for state and local income and property taxes are disallowed under the AMT rules. Thankfully, changes included in the TCJA greatly reduced the odds that most individuals will owe the AMT.

Charitable contributions. Consider making bigger donations before year end to IRS-approved charities. You can compensate by making smaller donations next year, if you wish. Bigger donations this year could cause your total itemizable expenses to exceed your standard deduction and lower this year's federal income tax bill.  

Medical expenses. Consider accelerating into this year elective medical procedures, dental work and vision care. If you itemize this year, you can deduct medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI).  

  1. Manage Gains and Losses in Your Taxable Investment Accounts  

So far, the stock market has surged this year. If you hold investments in taxable brokerage accounts, you've probably already collected some gains and may have some unrealized gains. In addition, you may have incurred some losses and have some unrealized losses. Consider the following tax planning opportunities:

Investment gains. Sell appreciated securities that have been held for over 12 months. Long-term capital gains (LTCGs) are taxed at the federal capital gains tax rates, which can be 0%, 15% or 20%. Most individuals will pay 15%. High-income individuals will owe the maximum 20% rate on the lesser of: 1) their net LTCG for the year, or 2) the excess of their taxable income for the year, including any net LTCG, over the applicable threshold.

For 2024, the income thresholds for the 20% LTCGs rate are:

  • $583,751 for married joint-filing couples,
  • $518,901 for single filers, and
  • $551,351 for heads of households.

Assuming the current tax rules remain in place for 2025, these brackets will be adjusted for inflation. You also might owe state income tax and the 3.8% net investment income tax (NIIT).

Important: If you're in the 20% LTCGs bracket and you're feeling generous, you can gift appreciated investments to family members and friends in the 0% bracket. (See the third tax planning tip below.)

Investment losses. To the extent you have capital losses that were recognized earlier this year or capital loss carryovers from previous years, selling appreciated shares this year won't result in any tax hit. In particular, sheltering net short-term capital gains with capital losses is a tax-smart move, because net short-term gains would otherwise be taxed at higher ordinary-income rates.

If you have some losing investments that you'd like to sell, consider taking the resulting capital losses this year to shelter capital gains, including high-taxed short-term gains, from other sales in 2024.

If selling underperforming investments would cause your capital losses to exceed your capital gains, the result would be a net capital loss for the year. In this situation, your net capital loss could shelter up to $3,000 ($1,500 if you use married filing separately status) of 2024 ordinary income from tax. Ordinary income includes salaries, bonuses, self-employment income, interest and royalties.

Any excess net capital loss from this year is carried forward indefinitely. The carryover can be used to shelter both short-term and long-term gains recognized next year and beyond. This 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. Moreover, the top two federal rates on net short-term capital gains recognized in 2025 are expected to remain at 35% and 37% (plus the 3.8% NIIT, if applicable). So having a capital loss to carry over into next year to shelter short-term gains recognized next year could be advantageous.

Important: If you sold a home earlier this year for a taxable gain, you can offset some or all of that taxable gain with harvested capital losses from selling underperforming securities.  

  1. If Possible, Take Advantage of 0% Tax Rate on Investment Income

Certain individuals may be eligible for a 0% federal income tax rate on LTCGs and qualified dividends from securities held in taxable brokerage firm accounts. While your income may be too high to benefit from the 0% rate, you may have loved ones in that bracket. If so, consider giving them some appreciated stock or mutual fund shares, which they can then sell and pay no federal income tax on the resulting long-term gains.

For 2024, individuals with income below the following thresholds qualify for the 0% rate:

  • $94,051 for married joint-filing couples,
  • $47,026 for single filers, and
  • $63,001 for heads of households.

Assuming the current tax rules remain in place for 2025, these brackets will be adjusted for inflation. Gains will be LTCGs if your ownership period plus the gift recipient's ownership period (before the recipient sells) equals at least a year and a day.

Giving away stocks that pay dividends is another tax-smart idea. If the dividends fall within the gift recipient's 0% rate bracket, they'll be federal-income-tax-free.

Important: If you give securities to someone who is under age 24, the kiddie tax rules could potentially cause some of their capital gains and dividends to be taxed at the parent's higher marginal federal income tax rate. Contact your tax advisor for more information. In addition, if you give more than the annual gift exclusion, there may be tax implications.

  1. Convert a Traditional IRA to a Roth IRA

The best scenario for converting a traditional IRA into a Roth account is when you expect to be in the same or a higher tax bracket during your retirement years. Given the enormous federal debt, federal income tax rates might have to be increased to address the issue.

While doing a Roth conversion can be a smart tax planning move, 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. But if you put off converting until some future year, the tax cost could be higher if tax rates increase.   

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

  • You have had at least one Roth account open for more than five years, and
  • You are age 59½ or you become disabled or die.

With qualified withdrawals, you (or your heirs if you pass on) avoid having to pay higher tax rates that might otherwise apply in future years.

  1. Donate to Charities

If you itemize and want to make gifts to your favorite charities before year end, you can make them while also adjusting your taxable account investment portfolio. Consider making charitable contributions with these tax-smart principles:

Donate appreciated investments instead of giving away cash. For itemizers, donations of publicly traded shares owned over a year result in charitable deductions equal to the full current market value of the shares at the time of the gift. Plus, if you donate shares that are worth more than you paid for them, you escape capital gains taxes that would result from a sale.

Sell investments that are worth less than you paid for them and collect the resulting tax-saving capital losses. Then you can give the sale proceeds to favored charities and, if you itemize, you can claim the resulting tax-saving charitable contribution deductions.

  1. Make Gifts to Loved Ones

For gifts to loved ones, follow the same tax-smart strategies that apply to gifts to charities. That is, give away investments with accumulated gains directly to your loved one. If you give away investments with LTCGs, the gift recipient will likely pay a lower tax rate than you would have paid if you sold the shares. Sell underperforming investments, collect the resulting tax-saving capital losses and give the sales proceeds to your loved one.

  1. Make Charitable Gifts from Your IRA

IRA owners or beneficiaries who are age 70½ or older can make cash donations of up to $100,000 to IRS-approved public charities directly out of their IRAs. These qualified charitable distributions (QCDs) are federal-income-tax-free to you. Although you can't claim itemized charitable write-offs on your federal income tax return, the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction. So, you won't have to worry about restrictions that can delay itemized charitable write-offs.

QCDs have other tax advantages, too. Contact your tax advisor if you're interested in taking advantage of the QCD 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.

Why Estate Planning is Still Important

The unified federal estate and gift tax exemption for 2024 is $13.61 million (effectively $27.22 million for a married couple). These generous exemptions probably mean you aren't currently exposed to the federal estate tax, but your estate plan may need updating to reflect the current tax rules.

Important: In 2026, the unified federal estate and gift tax exemption is scheduled to revert to the 2017 level with a cumulative inflation adjustment, unless Congress acts to extend the higher amount. Depending on inflation through 2025, that might put it in the $7 million to $8 million range.

Estate planning can be a moving target, sometimes for reasons that have nothing to do with taxes, such as marriage, divorce and other changes to your family situation. Contact your SSB tax advisor for more information about updating your estate plan.

Don't Delay

Assuming the current federal income tax rules will remain in place for next year, the 2024 tax planning picture is clear. But the situation could potentially change next year, depending on the outcome of the November elections.

These are just some ideas to lower your tax obligation for this year. There may be other opportunities that could apply to your situation, including education-related breaks, tax-favored treatment for health savings accounts, and credits for energy-efficient home improvements and vehicles. Contact your SSB tax advisor this summer to implement the right strategies for your circumstances.

©  2024

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