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After years of pandemic recovery, followed by years of high inflation, 2024 saw the return of a quiet economic year. This was also true from a tax standpoint. While the IRS has continued to churn out guidance relating to the Inflation Reduction Act of 2022 and the SECURE 2.0 Act, most other areas of taxation are likely to be stable through the end of the year.
That isn't to say that 2024 was quiet across the board. After a highly contentious election, Americans voted to return Donald Trump to the White House on Novembers. Much of Trump's tax agenda focused on the Tax cuts and Jobs Act of 2017 (TOA), the majority of Which is set to sunset at the end of 2025. HOW the impending sunset is handled Will be a critical issue throughout the next year.
But the sunset of TCJA is a 2025 problem, for the end of the 2024, the best plan is a continued application of tried-and-true year-end tax strategies from years' past. While there are always new strategies to consider, and indeed there are some changes from recent legislation that are in effect for 2024, the simple tactics of deferring income and increasing current deductions are the best bet for the next few weeks.
Through the end of 2024, there is a very IOW likelihood of tax legislation. However, the expectation is that tax legislation Will ramp up in early 2025 With the GOP in control Of the Senate and the House, Trump's agenda Will have a much easier path to legislative approval.
Action on the soon-to-expire TOA is likely to be high on the to-do list for the new Congress. Many leaders in the COP have expressed interest in taking quick action to extend the provisions beyond their pending expiration at the end Of 2025. However, given the fact that TCJA has one more year to go, the issue of extension is not highly relevant to year-end tax planning for 2024.
For more on the tax policies of the incoming administration, see the recent CCH Tax Briefing 2024 Post-Election Tax Policy Update.
Income taxes
The key to any year-end planning strategy is to minimize taxes. This is generally done by either reducing the amount of income received or increasing the amount of deductions. In recent years, the possibility of increased rates on higher incomes due to proposed legislation, or changes in qualification for various stimulus proposals made the decision of deferral or acceleration highly dependent upon individual circumstances. As the end of 2024 approaches, these factors are not really in play anymore. However, it is possible that an extension of TCJA could include some changes that reduce taxes in 2025, depending upon the applicable effective date of the legislation. But, given the proposals from the Trump campaign, the lower taxes would likely apply to things that cannot be easily deferred (tip, Social Security, and overtime income). so, as in prior years, individual considerations are the most significant factor in play.
The impact of inflation usually makes deferral of income a likely winner for almost all individuals. However, during the last year inflation has returned to a more familiar level from the historically high levels of inflation a couple years ago. In October, the IRS released the tax brackets for 2025. As an example of the increase in the brackets, the rates for married taxpayers filing jointly in 2024 compared to 2025 are below:
2024
Married Filing Jointly
If taxable Income Is:
2025
Married Filing Jointly
If taxable Income Is:
Individuals may not necessarily see increases in earnings that keep up With even that lower level of inflation, so if deferral of income from 2024 into 2025 is possible, it would mean that more income would fall into a lower tax bracket in the long run, that would mean a lower aggregate tax burden.
Delaying and reducing gains
Like taxes on ordinary income, taxes on capital gains also apply at different rates depending upon the amount of taxable income. For 2024, the rates are as follows:
For taxpayers Whose income tends to fluctuate from year to year, it would be Wise to examine the impact Of sales of investment items. For taxpayers who think they may have lower income in 2025, it would be smart to hold off on a sale of a capital item if their income is at or near a threshold for a higher capital gains bracket This type of consideration should not be limited to capital gain taxes, but also the net investment income (NII tax. The 38% NII tax kicks in at $200,000 of modified adjusted gross income for single and head-of-household files, $250,000 for joint filers, and $125000 for married taxpayers filing separately.
COMMENT. Since the NII thresholds fall right in the middle of the 15% capital gains bracket, a taxpayer to whom the Nll applies because of a sale of a capital item would likely not be able to reduce the tax to 0%. But a taxpayer who is barely in the 20% bracket could defer a sale and get into the 15% bracket, meaning a sale of a capital item would only be taxed at 18.8% instead of 23.8%.
A potential tax strategy involves selling investments at a loss to offset or reduce capital gains generated in the same tax year. However, the benefits only apply to high-income taxpayers. In addition, taxpayers must be mindful of the wash sale rules that might disallow the loss if they reinvest in a 'substantially similar' asset within 30 days.
Maximizing deductions
For 2024, the inflation-adjusted standard deduction amounts are $29,200 for joint filers, $21,900 for heads of households, and $14,600 for all other filers. With standard deduction amounts so high, coupled with the $10,000 limitation on the deduction of state and local taxes, it is difficult for many taxpayers to claim enough deductions to make itemizing deductions beneficial. Thus, maximizing deductions may not be beneficial for all taxpayers.
One of the best ways to maximize the amount of deductions is to develop a bunching strategy. This involves accumulating charitable contributions, or even medical expenses (see below), from two or more years into one year. For example, a taxpayer may have not made any of their normal charitable contributions in 2023, and then made double the normal amount in 2024 in order to help surpass the standard deduction amount.
The same bunching strategy can be employed for deductible medical expenses where the timing is somewhat flexible, such as for elective procedures (remember that purely cosmetic procedures are not deductible).
COMMENT. Bunching can be a very effective strategy, but it has to be effectively used, and potentially planned out two or three years in advance to maximize the benefit, while also taking into account shifts in tax policies as a result of political change.
Green energy
2023 was the first year that the Energy Efficiency Home Improvement Credit was available. The credit is generally equal to 30% of the taxpayer's qualified expenses, which can include doors, windows, other qualifying energy property, and even a home energy audit. Also available is the Residential Clean Energy Credit, which is also equal to 30% of qualified expenses. This credit is applicable to the installation of certain energy property like solar cells, small wind turbines, or battery storage. Restrictions and limitations do apply to both credits, and there are generally.
The much more broadly applicable credit for the purchase of electric vehicles was eliminated upon the passage of the Inflation Reduction Act of 2022. In its place are two new credits, one $7,500 credit for the purchase of a new clean vehicle (with much more stringent requirements as compared to the old credit) and a $4,000 credit for the purchase of a used clean vehicle.
COMMENT. At the end of 2023, there wasn't much urgency in claiming these credits, but that may not necessarily be the case at the end of 2024. While the Trump campaign did not single out any specific credits, there was a general antipathy of many green energy initiatives. It is entirely possible that some or all of these green energy incentives could be on the chopping block to help pay for tax cuts elsewhere. If any action on this legislation in 2025 is retroactively applicable to the whole year, 2024 could be the last chance to claim the credits.
Retirement savings
Starting in 2023, the age at which required minimum distributions (RMDs) must begin is increased to 73 for individuals who turn 72 after 2022 and age 73 before 2033. Remember that taxpayers who are in their first RMD year have until April 1 of the following year to make that first RMD. So, while action isn't absolutely necessary before the end of the year, affected taxpayers should start to plan for those RMDs. Keep in mind that the RMD for 2025 is required by December 31, 2025. If a taxpayer were to take both RMDs in 2025, it could push them into a higher tax bracket because both distributions would be taxable in one tax year.
Qualified charitable distributions, or QCDs, offer eligible taxpayers aged 70 1/2 or older a great way to easily give to charity before the end of the year. For those who are at least 72 years old, QCDs count toward the IRA owner's RMD for the year. QCDs are tax free if they are paid directly from the IRA to an eligible charitable organization. The annual limit for QCDs increases for the first time in 2024. The annual QCD limit is $105,000 (up from $100,000 in 2023).
SALT deduction
The Tax Cuts and Jobs Act (TCJA) capped the amount of the deduction for state and local taxes (SALT) at $10,000. Many legislators from higher-tax states have been clamoring for years to repeal or increase that limitation. While none of these efforts have proven successful so far, there is a strategy for taxpayers to claim this deduction that seems to have met with approval by the courts. Many states have enacted legislation that enables higher SALT deductions if paid by a passthrough entity. Requirements vary from state to state, so taxpayers looking to take advantage of this new strategy should speak with their tax professionals.
COMMENT. Among the proposals Trump made during the campaign was a potential increase in the limitation on the state and local deduction. If this were to happen effective for the 2025 tax year, this workaround may become less prevalent.
Other year-end strategies for individuals
A number of other traditional year-end strategies may apply. These include:
Corporate Transparency Act
Companies should review and determine their reporting and filing obligations for the beneficial ownership information (BOI) report. BOI reports are due no later than January 1, 2025.
Retirement Plans
The SECURE 2.0 Act of 2022 expands provisions for retirement plans to benefit both employers and plan participants. Although some benefits were available in 2023, several of the provisions become effective in 2024 and beyond.
An employer that does not sponsor a retirement plan can offer a starter 401(k) plan (or safe harbor 403(b) plan). A starter 401(k) plan (or safe harbor 403(b) plan) would generally require that all employees be enrolled in the plan at 3% to 15% of compensation deferral rate by default. The limit on annual deferrals would be the same as the IRA contribution limit. This provision is effective for plan years beginning after December 31, 2023.
The SECURE Act 2.0 permits an employer to adopt a new retirement plan by the due date of the employer's tax return for the fiscal year in which the plan is effective. Current law, however, provides that plan amendments to an existing plan must generally be adopted by the last day of the plan year in which the amendment is effective. This precludes an employer from adding plan provisions that may be beneficial to participants. The SECURE Act 2.0 amends these provisions to allow discretionary amendments that increase participants' benefits to be adopted by the due date of the employer's tax return. This provision is effective for plan years beginning after December 31, 2023.
Depreciation and expensing
The TCJA provided very generous depreciation and expensing limitations. Businesses may want to take advantage of 100-percent first-year depreciation on machinery and equipment purchased during the year. Additionally, Code Sec. 179 expensing has an investment limitation of $3,050,000 for 2024, with a dollar limitation of $1,220,000.
Taxpayers may also claim an additional first-year depreciation allowance of 60% for property placed in service in 2024. It may be the best policy to take advantage of this benefit in the current year. The allowance generally decreases by 20% per year and expires Jan. 1, 2027.
COMMENT. Despite the pending drop in the first-year depreciation percentage in 2025, this is one provision that is very likely to see legislative action in 2025, with a possible return of 100% first-year depreciation, so holding off on the acquisition of assets eligible for first-year depreciation may be the better strategy.
Clean commercial vehicles
The Inflation Reduction Act of 2022 provides a new $7,500 credit for the purchase of clean commercial vehicles after 2022. The requirements for this credit are very similar to that available to individuals, so the same considerations made by individuals should be made by businesses thinking about purchasing environmentally friendly vehicles.
COMMENT. The same concerns about green energy credits for individuals being repealed by tax legislation in 2025 could also apply here.
Other year-end strategies for businesses
A number of other traditional year-end
strategies may apply. These include:
Cash is King, but is your Cash as safe as possible?
The FDIC (Federal Deposit Insurance Corporation) provides limited insurance against the loss of funds in bank accounts. The SIPC (Securities Investor Protection Corporation) provides limited insurance against the loss of funds (not market declines in value) in brokerage accounts.
The FDIC insurance limits (up to $250,000) are per bank, not per bank account in the same institution, for corporate depositors. That means up to $250,000 for businesses per bank regardless of the number of different accounts held there. The FDIC doesn’t insure brokerage accounts (even those held by banks or bank affiliates). Some banks use an affiliate, a broker-dealer, (typically SIPC insured) to hold the US Treasury Notes. Although Treasury Notes are arguably “risk-free” from a credit standpoint, the federal government’s “full-faith and credit” does not provide insurance for the risk of loss associated with a broker-dealer’s failure.
A way for businesses to increase FDIC coverage overall would be to have deposits with other banks.
Similarly, to maximizing the SIPC coverage ($500,000 per customer overall with not more than $250,000 for cash in the account), that would either entail moving some of the Treasury Notes to an account at and/or having more than one broker-dealer involved in the cash management function.
The FDIC limits are greater for individuals who can expand coverage by having different account types in the same bank which is also the case for SIPC.
There is an uncommon yet pernicious form of fraud of which homeowners should be aware. Deed Fraud, also known as Title Fraud, involves a criminal stealing the identity of a property owner and creating fictitious documents to transfer property into their own name or that of an accomplice. The thief can then sell the property, use it as collateral for loans, or engage in other financial activity. Meanwhile, it may be months or even years before the lawful property owner, who may now be on the hook for legal fees, is aware of what has happened.
How does it work? Scammers start by targeting a home, often a rental property, vacation home, or vacant house. They then gather information about its owners via the internet, social media, and public records until they have enough information to forge documents, including signatures and notary seals. Quit claim deeds are typically sought because they are the quickest way to remove a name from a title.
Recently in local news, Dayton residents used and LLC to perpetrate quit claim deed fraud on a property of which the owner had recently passed away. (Click here to read more.)
In March 2023, an Arizona man learned that his retirement property, which had been bought 20 years prior, had been sold without his knowledge when a congratulatory letter showed up from a title company. (Click here to read more.)
Fortunately, there are actions homeowners can take to protect themselves. Most counties now offer a property alert system that homeowners can sign up for which will alert them to any activity at the county recorders office involving their name or property. Below are links to these services for several counties in Southwest Ohio.
Warren: https://www.warrencountyrecorder.com/FraudAlert.aspx
Hamilton: https://hrs.iharriscomputer.com/HamiltonRecordsNotification/Subscribe
Clermont: https://recorder.clermontcountyohio.gov/fraudsleuth/
Montgomery: https://riss.mcrecorder.org/mcrecorder.org_redirect.cfm
Ohio Homebuyer Plus Accounts
Ohio has introduced a new program to assist Ohio residents in purchasing a home through tax advantaged savings accounts offering above-market interest rates. The program is called Ohio Homebuyer Plus, and the accounts can be opened at any participating financial institution. Here is a link to the list of participating institutions: https://tos.ohio.gov/homebuyerplus/fis
To qualify for the program, you must be an Ohio resident that is at least eighteen years old. Your primary residence must be in Ohio. The account proceeds may only be used towards the down payment or closing costs of a primary residence in Ohio.
The interest rates paid on Ohio Homebuyer Plus savings accounts vary from institution to institution and is also a function of current yields and interest rates and the balance of the account. As of August 20, 2024, Ohio is paying an additional 2.59% in interest on top of the APY paid by the financial institution. For specific rates, Ohioans should contact their local financial institutions.
The account must maintain a balance of at least $100 and cannot exceed a balance of $100,000. The balance of the account must be used within five years of opening. It is currently unclear what will happen if the balance is not used within that time frame to purchase a home. The Ohio Revised Code leaves that up to the Ohio Tax Commissioner to decide through rulemaking. Nothing has been decided to date.
The interest income earned on these accounts will be taxable at the federal level but deducted on the Ohio tax return. Additionally, the contributions to the account are deductible on the Ohio tax return of the contributor. The deduction limit is $5,000 per year total between the interest income and the contributions. There is a $25,000 lifetime maximum.
A married couple could double the deduction & savings benefits by each having an Ohio Homebuyer Plus account. The limits above are per individual person limits, meaning a married couple could each have their own accounts and enjoy a deduction of up to $10,000 and a lifetime maximum of up to $50,000. An account for each spouse would also allow the accountholders to save twice as much in these high earning accounts, up to $200,000.
This deduction opportunity applies to not only the account holder, but also certain family members of account holders. Specifically, parents, grandparents, siblings, spouses, and stepparents of account holders may contribute to their family member’s savings account and receive an Ohio tax deduction for it. Funding the Homebuyer Plus accounts of another will result in a taxable gift, and you should consult your tax advisor before making transfers to the account of a relative.
This provides an excellent strategy for state tax savings and setting family members up for success in the process of purchasing a home. If a family member would not be able to take advantage of the tax savings provided by funding an account like this, but would still like to contribute, it may be wise to gift the cash outright to the accountholder, who could then contribute it directly to the account. Either way, this would still be a taxable gift (but unlikely in and of itself to result in a reportable gift) but would allow the accountholder to take advantage of the Ohio tax deduction for the related contribution.
There is limited funding available for this program, so it is important to act as quickly as possible. Many Ohioans have already taken advantage of the above market interest offered by the state and the tax savings that follow.
The US Tax Court on October 18, 2023, handed an unfavorable decision to the Estate of James A. Caan, believed to be the famous Hollywood actor who died July 6, 2022. Caan held a non-tradeable partnership interest in his IRA. The IRA custodian, UBS, pursuant to its custodial agreement, required an annual valuation of that interest so that it could meet its reporting requirements to the IRS (Form 5498). When Caan failed to provide such a valuation, UBS distributed the partnership interest to Caan and reported that on a 2015 Form 1099-R. Caan liquidated the partnership interest outside of the IRA and attempted to claim non-taxable rollover treatment by contributing the cash to a new IRA (the new custodian was Merrill Lynch) more than one year later (i.e., not within the 60-day window for rollovers). The IRS denied a favorable private letter ruling (requested by Caan seeking a waiver of the 60-day window), citing that the partnership interest itself was required to be transferred to Merrill for the rollover rule to be applicable. That proved to be a $1.5M income hit for Caan.
In our practice, we have found that abiding by custodial agreements is challenging for clients who choose to hold non-traded financial instruments inside an IRA. The challenges stem from clients not wanting to pay for annual valuation reports, and when required minimum distributions are at issue, there may be insufficient liquidity in the IRA. Sometimes producing the valuation report itself is a challenge insofar as recalcitrant CFOs of these non-public entities who do not want to share financial information with their investors.
On July 4, 2023, Ohio Governor Mike DeWine signed House Bill 33, the state’s biennial budget bill, into law. This law enacts multiple changes to Ohio’s tax structure, including changes to the Commercial Activity Tax (“the CAT”), a reduction in the personal income tax, changes to municipal tax filings, and a resident credit for pass-through entity taxes paid to other states. The changes are generally effective for tax years beginning on or after Jan. 1, 2023.
Prior to House Bill 33 being signed into law, taxpayers with gross receipts less than $150,000 were exempt from filing and registering for the CAT. For tax years beginning in 2024 taxpayers with taxable gross receipts under $3,000,000 will be exempt from the CAT. The exclusion increases from $3,000,000 to $6,000,000 for tax years beginning in 2025. The tax rate of 0.26% continues to apply to Ohio taxable gross receipts above the respective exclusion amounts. Notably, House Bill 33 did not remove the filing and registration requirement for taxpayers with over $150,000 of taxable gross receipts. Therefore, taxpayers with gross receipts in excess of $150,000 and below the exclusion amount will still be required to file $0 returns. We are awaiting guidance from the Ohio Department of Taxation to see if administrative relief will be available for taxpayers in this situation.
House Bill 33 reduced the number of personal income tax brackets from four to two. Taxpayers with Ohio taxable income under $26,050 will pay $0 in tax. For tax year 2023, taxpayers with income over $26,050 will pay $360 on the first $26,050 of income and will be subject to tax at a rate of 2.75% for income between $26,050 and $100,000, a rate of 3.688% on income between $100,000 and $115,300, and a top rate of 3.75% for income over $115,300. For tax years beginning in 2024, the 3.688% bracket is eliminated and the top rate reduced to 3.5% such that taxpayers with income over $100,000 will be subject to tax at a rate of 3.5% on income exceeding $100,000. The tax rate on business income passed through to individuals remains at 3% after the $250,000 exclusion.
H.B. 33 reduces the late filing penalty from $150 to $25 for municipal income tax filings and requires the penalty to be abated or refunded on a taxpayer’s first late filing once the return is filed. The law also extends the extended due date of municipal net profits tax returns from Oct. 15 to Nov. 15. Finally, the law allows a modified apportionment formula to reduce compliance costs of employers with remote or hybrid employees. The taxpayer may elect to apportion any property, payroll, or sales attributable to that employee to a designated location owned or controlled by the taxpayer or the taxpayer’s customer. This change applies only to the net profits tax and does not impact the employer’s withholding requirements.
In an effort to limit double taxation on Ohio resident owners of pass-through entities, H.B. 33 allows for a resident to claim a resident credit for pass-through entity taxes paid to another state while requiring an addback of those taxes deducted on an individual’s federal adjusted gross income. The provision is effective for tax years ending on or after Jan. 1, 2023; but taxpayers are allowed, at their election, to apply these provisions for tax years ending on or after Jan. 1, 2022, through the filing of an originally filed or amended return.
Social media/update webpage/OSCPA magazine
Hanna Hauer has been promoted to Senior Associate effective immediately. Hanna started as an intern with MMB in the summer of 2021 and joined MMB as a full-time associate upon her graduation from Indiana University’s Kelley School of Business in the spring of 2022. Throughout her tenure at MMB, Hanna has provided exceptional client service and has been a thought leader among her peers. She is currently sitting for the Ohio CPA examination.
Beginning on January 1, 2024, many companies in the United States are required to report information about their beneficial owners (i.e., the individuals who own or control the company). Companies must report the information to the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the Treasury Department, through an electronic filing system. Companies should review and determine their reporting entities and filing obligations for the beneficial ownership information (BOI) report. In general, an entity that exists before that date will not be required to file its initial report until January 1, 2025.
Generally, any corporation, limited liability company, or any other entity that is created by filing a document with a secretary of state or similar office under state or tribal laws, or is formed under foreign law and registered to do business in the United States by filing a document with a secretary of state or similar office under state or tribal laws, is a reporting company that must disclose information regarding its beneficial owners and its company applicants to FinCEN under the Corporate Transparency Act.
The U.S. District Court for the Southern District of Texas has issued a nationwide injunction, temporarily halting enforcement of the Corporate Transparency Act (CTA) and its associated Beneficial Ownership Information (BOI) Reporting Rule. This decision, handed down on December 3, 2024, suspends the compliance deadline previously set for January 1, 2025, pending further court action. FinCEN, issued a statement clarifying that reporting companies are not currently required to file beneficial ownership information and are not subject to liability if they fail to do so while the injunction remains in force. It is nonetheless prudent for business entities to determine whether their company, corporation, or other entity is a “reporting entity” as defined in the CTA, and to determine their beneficial owners for reporting purposes, as the outcome of the nationwide injunction and pending appeal remain uncertain.
In addition to these year-end planning issues unique to 2024, the usual year-end planning strategies also still apply, such as managing gains and losses from taxable investments and considering postponing income and accelerating deductions. There is no one size fits all for tax planning and any strategy may have unintended consequences if the taxpayer’s situation is not evaluated holistically considering the changing landscape. Please call our office to discuss all your options.
The SECURE 2.0 Act of 2022 expands provisions for retirement plans to benefit both employers and plan participants. Although some benefits were available in 2023, several of the provisions became effective in 2024 and beyond.
Credit for startup costs. In 2023, the credit to start a retirement plan for employees was increased to 100% of startup costs for employers with 50 or fewer employees, and an additional credit for contributions is added for the first five years of a plan’s existence.
Starter 401(k) plans for employers with no retirement plan. An employer that does not sponsor a retirement plan can offer a starter 401(k) plan (or safe harbor 403(b) plan). A starter 401(k) plan (or safe harbor 403(b) plan) would generally require that all employees be enrolled in the plan at 3% to 15% of compensation deferral rate by default. The maximum contribution to the plan per employee is $6,000 (for 2024) and $7,000 for employees aged 50 and older, as adjusted for inflation. This provision is effective for plan years beginning after December 31, 2023.
Amendments to increase benefit accruals under plan for previous plan year allowed until employer tax return due date. The SECURE Act 2.0 allows an employer to adopt a new retirement plan by the due date of the employer’s tax return for the fiscal year in which the plan is effective. Current law, however, provides that plan amendments to an existing plan must generally be adopted by the last day of the plan year in which the amendment is effective. This precludes an employer from adding plan provisions that may be beneficial to participants. The SECURE Act 2.0 amends these provisions to allow discretionary amendments that increase participants’ benefits to be adopted by the due date of the employer’s tax return. This provision is effective for plan years beginning after December 31, 2023.
Expanding automatic enrollment in retirement plans. In plan years beginning after 2024, 401(k) and 403(b) sponsors must automatically enroll employees in plans once they become eligible to participate in the plan. Under the requirement, the amount at which employees are automatically enrolled cannot be any less than 3% of salary, and no more than 10%. The amount of employee contributions is increased by 1% every year after automatic enrollment, until it reaches at least 10%, up to a maximum contribution of 15%.
Employees can opt out of the automatic enrollment if they choose. Exceptions to the automatic enrollment requirement are available for businesses with ten or fewer employees, businesses that have been in existence for less than 3-years, church plans, and government plans.
Improving coverage for part-time workers. The SECURE Act 2.0 requires employers to allow long-term, part-time workers to participate in their 401(k) plans. The SECURE Act 2.0 provision provides that except in the case of collectively bargained plans, employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either a 1-year of service requirement (with the 1,000 hour rule) or 3 consecutive years of service where the employee completes at least 500 hours of service. The SECURE Act 2.0 reduces the 3-year rule to 2-years, effective for plan years beginning after December 31, 2024. This provision also extends the long-term part-time coverage rules to 403(b) plans that are subject to ERISA.
The TCJA provided very generous depreciation and expensing limitations. Code Sec. 179 expensing has an investment limitation of $3,050,000 for 2024, with a dollar limitation of $ 1,220,000.
Taxpayers may also claim an additional first-year depreciation allowance of 60% for property placed in service in 2024. It may be the best policy to take advantage of this benefit in the current year. The allowance generally decreases by 20% per year and expires January 1, 2027.
Taxpayers may qualify for a credit if they buy a new, qualified plug-in electric vehicle or fuel cell electric vehicle. Businesses and tax-exempt organizations that buy a qualified commercial clean vehicle may qualify for a clean vehicle tax credit of up to $40,000. The credit equals the lesser of:
Several provisions of the TCJA expire or revert to their pre-TCJA limits at the end of 2025. They include:
Although 2024 (as of now) has not seen any major legislation, we might expect tax law changes following the election. In addition, taxpayers should be alert to the impending expiration of numerous Tax Cuts and Jobs Act (TCJA) of 2017 provisions at the end of 2025. A new administration and the sunset of tax relief for many individuals will put pressure toward significant tax reform in 2025. These factors create challenges and instability in developing a tax plan when there are multiple strategies to consider. However, the usual tactics of deferring income and increasing current deductions still apply for 2024. Each individual taxpayer should consider the unique challenges and opportunities that this year presents.
The key to any year-end planning strategy is to minimize taxes. This is generally done by either reducing the amount of income received or increasing the amount of deductions.
Delaying and reducing gains
Like taxes on ordinary income, taxes on capital gains apply at different rates depending upon the amount of taxable income. For 2024, the thresholds have adjusted upward from 2023 by about 5 - 6% as follows:
For taxpayers whose income tends to fluctuate from year to year, it would be wise to examine the impact of sales of investment items. For taxpayers who think they may have lower income in 2024, it would be smart to hold off on a sale of a capital item if their income is at or near a threshold for a higher capital gains bracket.
This type of consideration should not be limited to capital gain taxes, but also the net investment income (NII) tax. The 3.8% NII tax kicks in at $200,000 of modified adjusted gross income for single and head-of-household filers, $250,000 for joint filers, and $125,000 for married taxpayers filing separately.
Since the NII thresholds fall right in the middle of the 15% capital gains bracket, a taxpayer to whom the NII applies because of a sale of a capital item would likely not be able to reduce the tax to 0%. But a taxpayer who is barely in the 20% bracket could defer a sale and move into the 15% bracket, meaning a sale of a capital item would only be taxed at 18.8% instead of 23.8%.
Harvesting tax losses. A potential tax strategy involves selling investments at a loss to offset or reduce capital gains generated in the same tax year. However, the benefits only apply to high-income taxpayers. In addition, taxpayers must be mindful of the wash-sale rules that might disallow the loss if they reinvest in a ‘substantially similar’ asset within 30 days.
Maximizing deductions
For 2024, the inflation-adjusted standard deduction amounts are $29,200 for joint filers and surviving spouse, $21,900 for heads of households, and $14,600 for all other filers. With standard deduction amounts so high, coupled with the $10,000 limitation on the deduction of state and local taxes, it is difficult for many taxpayers to claim enough deductions to make itemizing beneficial. Thus, maximizing deductions may not be beneficial for all taxpayers.
One of the best ways to maximize the amount of deductions is to develop a bunching strategy. This involves accumulating charitable contributions, or even medical expenses, from two or more years into one year. For example, a taxpayer may not make any of their normal charitable contributions in 2024, and then make double the normal amount in 2025 in order to help surpass the standard deduction amount. The same strategy can be employed for deductible medical expenses where the timing is somewhat flexible, such as for elective procedures (remember that purely cosmetic procedures are not deductible).
Even with bunching, it might be difficult to achieve itemized deductions high enough in 2024 to surpass the standard deduction. Bunching can be a very effective strategy, but it must be effectively used, and potentially planned out two or three years in advance to maximize the benefit, while also considering shifts in tax policies as a result of political change.
Home Energy Credits. The Energy Efficiency Home Improvement Credit became available in 2023. The credit is generally equal to 30% of the taxpayer’s qualified expenses up to annual maximum of $1,200 (which can include doors, windows, other qualifying energy property, and even a home energy audit). Also available is the Residential Clean Energy Credit, which is also equal to 30% of qualified expenses but with no annual maximum or lifetime limit. This credit is applicable to the installation of certain energy property like solar cells, small wind turbines, or battery storage. Restrictions and limitations do apply to both credits.
Vehicle Credits. Eligible new clean vehicles may qualify for a tax credit of up to $7,500. The amount of the credit depends on when the eligible new clean vehicle is placed in service and whether the vehicle meets certain requirements for a full or partial credit.
A credit is available up to $4,000 for the purchase of an eligible previously owned clean vehicle with a sale price of $25,000 or less that is placed in service during a tax year by a qualified buyer. To claim the credit, a qualified buyer must meet certain income requirements, and must be the vehicle’s first qualified sale since August 16, 2022, other than to the original owner.
The amount of either the new or previously owned clean vehicle credit that is more than the income tax liability for the year cannot be refunded, for either personal or business use. However, eligible taxpayers who purchase an eligible vehicle after December 31, 2023, for personal use may transfer the entirety of the allowable credit to an eligible entity (a registered dealer) in exchange for a financial benefit and file a federal income tax return reporting the transfer of the credit. The entire amount of allowable credit may be transferred even if the credit amount is more than the taxpayer’s income tax liability.
Starting in 2023, the age at which required minimum distributions (RMDs) must begin is increased to 73 for individuals who turn 72 after 2022 and age 73 before 2033.
Remember that taxpayers who are in their first RMD year have until April 1 of the following year to make that first RMD. So, while action isn’t absolutely necessary before the end of the year, affected taxpayers should start to plan for those RMDs. Keep in mind that the RMD for 2025 is required by December 31, 2025. If a taxpayer were to take both RMDs in 2025, it could push them into a higher tax bracket because both distributions would be taxable in one tax year.
Qualified charitable distributions, or QCDs, offer eligible taxpayers aged 70 ½ or older a great way to easily give to charity before the end of the year. For those who are at least 72 years old, QCDs count toward the IRA owner's RMD for the year. QCDs are tax free if they are paid directly from the IRA to an eligible charitable organization. The annual limit for QCDs increases for the first time in 2024. The annual QCD limit is $105,000 (up from $100,000 in 2023).
A number of other traditional year-end strategies may apply. These include:
Prepare for a possible sunset of TCJA individual income tax provisions at the end of 2025. These include:
Bill Hesch is founder of William E. Hesch CPAs.
A Cincinnati accounting firm that has been around for more than three decades is merging into a larger local firm.
William E. Hesch CPAs, based in Oakley, signed a letter of intent at the end of August to merge into Blue Ash-based MMB CPAs and Advisors. The deal is slated for completion Nov.1.
Bill Hesch, founder and owner of his namesake firm, sold it to create a clear succession plan for the company, he told me. Hesch had been looking for 10 years for a successor.
“I’m trying to provide continuity for my clients and wanted to find a good fit,” he said. “I have a small firm with a personal touch, and that’s what I loved about MMB. They have a good firm and have the big-firm experience, which I have.”
Hesch and MMB connected because he had interviewed a job candidate who instead joined MMB earlier this year, returning to where he had previously worked. That candidate, Kevin Krieg, told the people at MMB that Hesch was seeking a merger to create a succession plan. They contacted Hesch, and both sides found a good fit.
“We had very good organic growth and were looking to take the next step through a strategic acquisition,” Adam Hines, an MMB member-owner, told me.
Adam Hines is a member-owner at MMB CPAs & Advisors.
They also found alignment in the way they served clients.
Hesch, 72, founded his firm in May 1993, working out of his apartment. His two employees, Carrie Carroll and Cathy Henry, have worked with him virtually from the beginning and will join him in making the move to MMB. The firm focuses on tax preparation, tax consulting and business consulting.
Hesch said he has no plans to retire yet. He also still runs a law firm that provides estate planning and related services. He has four attorneys and three clerks.
Hesch has been in the accounting business since 1980, when he joined then-Big Eight accounting firm Touche Ross. He became a partner there and managed the tax department in the Cincinnati office. But the firm merged in 1989 with Deloitte Haskins & Sells, which had a much larger tax department. Hesch decided a couple of years later to become CFO for one of his clients, Squeri Food Service.
He stayed there two years before launching his own firm.
His firm grew over the years and reached $1 million a year in revenue within 10 years, Hesch said. It’s maintained that level.
Hesch becomes a member and part-owner of MMB as part of the merger, he said.
The deal furthers MMB’s growth track, Hines said. MMB has grown on its own at a 60% clip over the past three years and increased its number of people, too.
MMB has 14 people, a number that will rise to 17 when the Hesch deal is completed, Hines said,
“We thought our clients would benefit from us adding someone who has served his clients well and offers some additional services,” Hines said. “And this gives us economies of scale as well.”
MMB has about 1,000 clients and will add 300 with the addition of Hesch, Hines said.
MMB has grown so rapidly that it’s moving its office, Hines said. It’s in about 2,500 square feet in Blue Ash Place now at 4340 Glendale Milford Road near Summit Park. It plans to move into 4,500 square feet in the Pfeiffer Woods building on Pfeiffer Road, about a mile east of its current location, later this year.
MMB was founded 10 years ago by John Michel, Kurt Marty and Mike Bain. The latter retired in 2020 and Hines became a member-owner.
The firm focuses on tax consulting and serves companies in a variety of industries, including financial services, alternative energy, real estate, manufacturing, hospitality and professional services.
The Hesch deal is just the latest in a recent spate of Greater Cincinnati CPA firm mergers and acquisitions. Barnes Dennig is merging Indianapolis-based Greenwalt CPAs into its operation in a deal that takes effect Jan. 1, 2025, and Hamilton-based Kirsch CPA Group selling to its employees.
On April 27, 2022, the Internal Revenue Service updated its processes and procedures in the Internal Revenue Manual for audits of Global High Wealth (GHW) individuals. These individuals are defined as those holding assets or having income in the tens of millions of dollars.
The IRS utilizes employees within the GHW group to conduct audits of the “complete financial picture of high-wealth individuals and the enterprises they control.” A typical case entails an audit of an individual tax return and related tax returns of enterprises in which the individual holds a controlling interest. Individuals and controlled enterprises are selected for audit based on a compliance “risk score” derived from the IRS’ Compliance Data Warehouse. The IRS may also select such individuals for audit based on referrals, whistleblower claims, or awareness of industry-specific issues that make the GHW individual more likely to be out of compliance with federal income tax law.
The increased interest of the IRS in GHW individuals is driven by a 10-year trend of low and decreasing audit rates. The Government Accountability Office reported on this in May 2022, and the Senate Finance Committee has heard recent testimony on the matter. While the IRS can use technology to identify compliance issues for lower-income individuals, it contends that GHW individuals are less likely to have non-compliance issues identified in this manner due to the complexity of their income and business affairs.
GHW individuals are perceived to have benefitted from a decreasing and less experienced IRS workforce. This has led Congress to pass additional funding legislation to enable the IRS to actively recruit talent to increase the audit rate for this group of taxpayers.
We have recently been engaged to provide IRS audit defense for a GHW client. The audit is being conducted remotely by a highly experienced IRS Revenue Agent from the Large and Mid-Size Business group. The audit approach employed by the IRS is more detailed and emphasizes the lifestyle of the person being audited.
The Joint Committee on Taxation released on June 17, 2021, its Technical Explanation of the Clean Energy for America Act (CEAA), which passed the Senate Committee of Finance on May 26, 2021. Here are the highlights if the underlying legislation becomes law as proposed:
Effective for taxable years beginning after the date of enactment, the “working interest” exception to the passive activity loss rules is repealed. This means there will no longer be an unlimited first-year write-off for pedestrian investors in oil and gas wells, who typically seek these types of investments for tax planning purposes. The legislation would also repeal the immediate deduction for intangible drilling costs and percentage depletion, as well as the exemption enjoyed by certain publicly traded energy partnerships from corporate taxation.
In general, the CEAA creates a new 1.5 cent per kWh domestic production tax credit for projects initially placed into service after 2022 that pay a federal prevailing wage to the project workers and use qualified apprentices for not less than 15% of the total labor hours. The credit may electively be converted into a payment by the U.S. Treasury.
In lieu of the domestic production credit, there is a 30% investment tax credit, also convertible into a payment by the U.S. Treasury.
A 30% tax credit is available to residential property owners for investments made in property that generate electricity from zero-emission sources and are placed into service after 2022. The credit is non-refundable, but any excess credit may be carried forward for up to three years. The CEAA also retains the current 30% tax credit for residential energy-efficient projects placed into service after 2020.
For construction that commences before 2024, the 30% energy property tax credit is restored. This also includes qualified biogas property. Credit may be arranged as a payment in lieu of a tax credit.
A 6% tax credit is made available. Credit may be arranged as a payment in lieu of a tax credit.
Beginning in 2022, the maximum tax credit becomes $12,500. It is a refundable tax credit and is not phased out based on the EV manufacturer’s production of EVs. However, the credit is phased out if the manufacturer’s suggested retail price exceeds $80,000.
Construction contractors can earn tax credits of up to $5,000 per new home construction project acquired by the purchaser after 2021.
There are new tax credits of up to $1,500 for homeowners who make energy-efficient improvements after 2021.
Owners of energy-efficient commercial buildings may claim an income tax deduction of up to $2.50 per square foot for qualified expenditures made after 2021.