Maximize Your Savings with these Year-End Tax Planning Strategies for 2024

Why Year-End Tax Planning is Critical

Reviewing your year-end tax plans is crucial to maximize savings and minimize liabilities before 2024.

Taking proactive steps now can reduce your tax burden, identify overlooked deductions, and strengthen your financial situation. Reviewing your tax plans involves assessing your income, expenses, and potential tax credits to ensure you’re taking advantage of all available tax benefits.

Now, what is tax compliance and how do you ensure you are up to the standard? Tax compliance refers to tax laws and regulations set by federal, state, and local tax authorities involving several key aspects such as:

• Accurate Reporting: Providing truthful and complete information on your tax returns, including all sources of income, deductions, and credits.
  
• Timely Filing: Submitting your tax returns by the prescribed deadlines. For individuals, this typically means filing annually by April 15th, while businesses may have different deadlines based on their entity type.
  
• Payment of Taxes: Paying the taxes you owe on time, which includes income tax, sales tax, property tax, and other applicable taxes.
  
• Record Keeping: The process of keeping organized and detailed records of financial transactions, expenses, and income. Good record-keeping is essential for accurate reporting.
  
• Compliance with Tax Codes: Adhering to the specific tax codes and laws that apply to your financial situation, business type, and location.

Tax compliance is essential for everyone. By prioritizing compliance in your year-end tax plans – individuals, businesses, and families can safeguard their financial well-being and avoid costly mistakes, including:

• Avoiding Penalties and Interest: Non-compliance can lead to hefty financial penalties and interest charges, quickly diminishing your savings.
  
• Maintaining Good Financial Standing: Filing taxes accurately and on time helps maintain a positive financial reputation with government agencies and financial institutions.
  
• Ensuring Access to Government Benefits: Compliance is often necessary to qualify for government benefits such as tax credits, deductions, and loan programs.
  
• Protecting Your Business: For businesses, non-compliance can result in audits, fines, and even potential closure.
  
• Legal and Ethical Obligations: Tax evasion is illegal and unethical, with serious legal consequences.
  
• Estate Tax Planning: Proper planning can help minimize the estate tax burden on your heirs, ensuring that more of your assets are passed on to your loved ones rather than being lost to taxes.
  
• Gift Tax 2024: Understanding the annual gift tax exclusion and how it applies can help you make informed decisions about gifting assets, potentially reducing your taxable estate.

Estate Planning: Managing Taxes on Wealth Transfers

Inheritance Tax Capital Gains

Estate tax planning and inheritance tax have different implications. Let’s explore the key distinctions and discuss who pays estate tax: 

• Estate Tax: Taxable estates depend on the property transfer upon an individual’s death. The decedent’s estate is responsible for paying the estate tax before the assets are distributed to the beneficiaries.
  
• Inheritance Tax: Unlike estate tax, inheritance tax is imposed on the recipients of inherited property. The tax is calculated based on the fair market value of the inherited assets and the recipient’s tax bracket.

Navigating taxable estates can be complex, involving a deeper understanding of the relevant tax laws, determining the value of assets, and exploring potential tax-saving strategies. 

Trust and Tax

The same could be said for trusts’ taxability, which is influenced by nuances such as the type of trust, the tax treatment of trusts, its beneficiaries, and the trust’s income. 

Individuals often wonder, do trusts pay taxes? Generally, taxation for trusts is considered a separate tax entity, and trusts must file their tax returns and report their income and expenses. However, the specific tax treatment can vary:

• Type of Trust: Some trusts are taxed as individuals, while others may be taxed as corporations.
  
• Income Distribution: How income is distributed to beneficiaries can affect the overall tax burden.

Gifting Strategies and the Gift Tax 2024

The $18,000 Annual Gift Tax Exclusion

The federal gift tax exclusion allows individuals to give up to $18,000 annually to anyone without incurring gift tax. You can give up this amount to as many individuals as you choose up to the annual limit.

How Does This Impact Estate Planning?

The annual gift tax exclusion is valuable for estate planning to reduce taxable estates and avoid high tax rates.

Here’s how gift tax can be used:

• To Reduce Your Estate: By gifting assets during your lifetime, you can reduce the size of your taxable estate, potentially lowering the estate tax your beneficiaries will owe upon your death.
  
• To Transfer Wealth to Beneficiaries: Gifting allows you to transfer wealth to your beneficiaries while you are still alive, allowing you to see how they use it.
  
• As a Bypass Probate: Gifts made outside your will can bypass the probate process, which can be time-consuming and expensive.
  
• As a Gift to Minors: You can use the annual exclusion to establish custodial accounts for minors, allowing them to receive assets without managing them until adulthood.

Additional factors to consider when it comes to the gift tax 2024:

• Spousal Gifts: Married couples can gift assets jointly, doubling the annual exclusion to $34,000 per recipient.
  
• Gift Tax Returns: While gifts made within the annual exclusion are generally not subject to gift tax, you may still need to file a gift tax return to track your lifetime gifts.
  
• Lifetime Gift Tax Exemption: As of right now, a single taxpayer can take advantage of a federal estate and lifetime gift tax exemption of $13.61 million. For couples making joint gifts, this amount doubles. This exemption allows affluent families to transfer significant wealth without incurring gift taxes.

However, it’s important to note that this exemption is set to expire at the end of 2025. After this date, the exemption will essentially be cut in half to approximately $7 million for an individual.

Understanding the gift tax rules and how they can be used effectively can help you create a more comprehensive, effective estate plan.

Investing in Equities: Understanding Tax Implications

Capital Gains Tax on Equities

You realize a capital gain when you sell an equity investment, such as a stock, for a profit. This gain is subject to capital gains tax, which varies based on your income tax bracket and how long you held the investment.

• Short-Term Capital Gains: If you hold the equity for less than one year before selling, the gain is taxed as ordinary income, subject to your regular income tax rate.
  
• Long-Term Capital Gains: If you hold the equity for over a year, the gain qualifies for long-term capital gains tax rates, generally lower than ordinary income tax rates.
  
• Example: You purchase 100 shares of a company’s stock at $50 per share. After a year, you sell the shares for $75 each. Your capital gain is $2,500 ($75 – $50 per share x 100 shares). If you’re in the 24% tax bracket, your long-term capital gains tax rate would be 15%, resulting in a tax of $375 on the $2,500 gain.

Capital Gains Tax on Business Sales

Selling a business is also considered a capital gain event, but the tax treatment can be more complex. The gain is typically calculated as the selling price minus the adjusted basis of the business.

• Ordinary Income: The gain is usually taxed as ordinary income if you sell a business structured as a sole proprietorship or partnership.
  
• Capital Gains: If you sell a corporation (C corporation), the gain is generally taxed as a capital gain, though there are exceptions and complexities.
  

1031 Exchange: Deferring Capital Gains Tax

A 1031 exchange allows you to defer capital gains taxes when you sell a business property, such as real estate, and reinvest the proceeds in a similar property. This can be a valuable strategy for businesses looking to upgrade or expand without incurring immediate tax liabilities.

Retirement Accounts: Take Advantage of Triple-Tax Savings

Contributing to your Health Savings Accounts (HSAs) can lower your taxable income by providing a triple tax benefit: tax-deductible contributions, tax-free investment growth, and tax-free withdrawals for qualified medical expenses. 

For older investors, it’s essential to take the required minimum distributions (RMDs) by year-end to avoid hefty penalties. RMDs ensure that retirement savings are distributed throughout a person’s lifetime, preventing excessive accumulation that might trigger estate tax issues.

Real Estate and Estate Taxes

Real estate taxes vary significantly from state to state, impacting estate planning. Real estate taxes can be deducted from federal income taxes in many states, providing a financial benefit. However, estate taxes can also be a significant burden, especially for those with substantial real estate holdings. 

To minimize inheritance tax liabilities, strategies like gifting assets during your lifetime and understanding inheritance tax exemption limits can occur. By carefully considering real estate taxes and estate planning strategies, individuals can reduce their tax responsibilities and ensure a smoother transition of assets to their recipients. 

How Financial Advisors Can Help with Year-End Tax Planning

Working with a financial advisor is essential for creating a personalized year-end tax plan. Financial advisors possess the expertise to navigate the complexities of tax laws and regulations, ensuring you maximize your tax benefits while minimizing your liabilities.

Key benefits of working with a financial advisor include:

• Understanding tax compliance: Financial advisors can help you stay informed about the latest tax laws and regulations, ensuring you comply with all relevant requirements.
  
• Trusts and tax: If you have established trusts, your financial advisor can help you understand the tax implications of these arrangements and optimize your tax strategy.
  
• Tax on the sale of a company: When selling a company, financial advisors can provide guidance on the tax implications of the transaction, helping you minimize your tax burden.
  
• Capital gains tax strategies: Financial advisors can recommend strategies to optimize capital gains tax treatment by understanding your investment portfolio and financial goals.

Ultimately, a financial advisor can provide you with the personalized guidance and support needed to create a comprehensive year-end tax plan that aligns with your specific financial situation and objectives.

Conclusion: Act Now for 2024 Tax Savings

By proactively reviewing your year-end tax plans, you can minimize your tax liability and increase your available tax benefits. 

Understanding the complexities of estate tax, inheritance tax, gift tax, and capital gains tax can help you make informed decisions about your financial future and protect your assets for generations to come. Consult with a financial advisor to help you protect your assets for generations to come.

Click here to schedule a financial review with Richburg Enterprises so we can help you minimize your tax liabilities and maximize your after-tax earnings. 

Disclaimer 
The information provided on the Richburg Enterprise blog is intended for general informational purposes only and should not be considered financial advice. It is crucial to consult with a qualified financial advisor before making any investment decisions. Individual circumstances and risk tolerance vary, so the information presented here may not be suitable for everyone