Autumn is upon us, and as we begin thinking about the year-end holidays, we should also be thinking about year-end tax planning. It is again time to work with your legal and tax advisors to review plans and implement strategies to optimize tax efficiencies. As you go through this annual exercise, incorporating any or all of these strategies may help you reduce this year’s tax liability and enhance your overall wealth plan.

Tax Credits

There are many tax credits, and you may be eligible for one or more of them through routine actions. Consider the following credits:

  • Premium tax credit, for health insurance purchased through the Health Insurance Marketplace.
  • Energy efficient home improvement credit, for installing energy efficient windows, doors and certain heating and cooling systems in your home.
  • Residential clean energy credit, for installing qualified solar electric property and other such property.
  • Clean vehicle credit, for purchasing certain new electric and fuel cell vehicles (income limitations apply).
  • Used clean vehicle credit, for purchasing certain used electric and fuel cell vehicles from a licensed dealer for $25,000 or less (income limitations apply).

Philanthropy

Give cash. Higher charitable deduction limits apply to cash gifts than to gifts of appreciated securities. Selling appreciated securities and giving a charity the cash proceeds (notwithstanding that the sale results in a capital gains tax) could produce a better tax result than giving a charity appreciated securities. Do the math to see whether selling and giving cash will produce a better tax result.

Consider bunching. Making larger contributions less often could allow you to accumulate deductions and itemize in some years. A donoradvised fund (DAF) can facilitate this strategy, as gifts to a DAF qualify for a charitable deduction in the year of the gift but allow you to distribute DAF funds to recipient charities in the future.

Consider a qualified charitable distribution (QCD). Individuals age 70½ and older may make QCDs from their individual retirement accounts (IRAs) directly to qualified charities up to $105,000 in 2024 with some (or all) of the amount distributed being excluded from your gross income. Your adjusted gross income (AGI) is the starting point for calculating several tax-related items, and a lower AGI can produce many benefits.

Charitable remainder trusts (CRTs). Certain planning techniques perform better in a higher interest rate environment. One such technique is the CRT. CRTs are subject to complex rules that must be followed exactly for the technique to work. A CRT can allow you and your spouse to retain a stream of payments for the rest of your life (others can receive a stream of payments too, but that is not discussed here). When you and your spouse die, charitable organizations that you choose receive whatever remains in the trust. A CRT is a tax-exempt entity, but payments received will, generally, be taxable income to you. Ordinary income, capital gain income, tax exempt income and principal are distributed in that order, with income subject to higher tax rates being distributed before income subject to lower tax rates. A CRT is a tax-exempt entity and does not pay income tax on assets that it sells. This makes the CRT a useful tool for diversifying a low-basis concentrated position or reinvesting low basis assets, because the tax on the capital gain resulting from the sale of those assets will be spread out over the course of the stream of payments.

Deferred Compensation and Retirement Planning

Revisit deferred compensation arrangements. Before making 2025 elections regarding non-qualified deferred compensation arrangements, determine if deferring income is right for you and decide on the timing of the deferral. Your PNC Private Bank® Wealth Strategist can help you in making this determination.

Converting some or all of a traditional IRA to a Roth IRA. Converting your traditional IRA to a Roth IRA could save income tax over the long term. Although converting your traditional IRA will cause an income tax today on the amount converted, future growth in the converted assets (now in a Roth IRA) will be tax-free. This could be important if tax rates rise in the future. Qualified distributions from a Roth IRA are tax-free to the owner and/or beneficiary and the lifetime required minimum distribution (RMD) rules do not apply to Roth IRAs for the owner or the owner’s spouse.

New rules for RMDs. On July 19, 2024, the Internal Revenue Service released final and proposed regulations regarding RMDs from certain retirement plans. The final regulations are quite detailed, and you should consult with your tax advisors about their impact on your plan. Under the final regulations, non-eligible designated beneficiaries (with some exceptions, generally, non-spouse beneficiaries) who inherit an account (generally, a defined contribution plan or a traditional IRA account) from an owner who dies on or after the required beginning date must receive all the funds in the account by the end of the 10th year but must also receive RMDs during years 1 through 9. This requirement begins next year. Also, the rules with respect to designating a trust as beneficiary of a retirement account have been modified by the final regulations. If you have designated (or intend to designate) a trust as beneficiary of your retirement account, consult your legal and tax advisors to determine if the trust and the beneficiary designation fit your plan and (if desired) are designed to achieve the optimal tax result for your beneficiaries.

Tax-Loss Harvesting

Losses in your portfolio. If you have unrealized losses in your portfolio, tax-loss harvesting generates capital losses to offset capital gains recognized during the year.

Gift and Trust Planning

For 2024, the basic exclusion amount for the federal estate and gift tax is $13.61 million. Unless Congress takes further action, on January 1, 2026, the exclusion amount will be approximately halved (to 2017 levels, indexed for inflation). We are very close to that expiration date. Now may be a good time to talk to your attorney about planning to use the increased exclusion amount. If you intend to use the increased exclusion amount, we suggest not waiting until 2025 to meet with your attorney.

Planning for Business Owners

On June 6, 2024, the U.S. Supreme Court decided Connelly v. United States. As a result of the ruling in this case, if you own a business with others and have a redemption buy-sell agreement funded by life insurance that is owned by your company, you should contact your attorney to discuss the impact of the Connelly decision on your plans. At the same time, you should review the life insurance policies funding the buy-sell obligation to determine if they are performing as expected and will produce a sufficient death benefit to meet the company’s obligation.

Perennial Items

Review withholding and estimated tax payments. Be sure that you are withholding enough to satisfy your federal tax liability. Failure to withhold enough for this tax (or pay sufficient quarterly estimated tax) may cause you to owe tax with your return and to be subject to interest and penalties. Similarly, by withholding too much, you are making an interest-free loan to the government.

Fund employer-sponsored retirement plans. If you are able to do so, you should fund your retirement plans to the fullest extent possible. If you cannot fully fund your employer-provided plan and if your employer matches your contributions to a defined contribution plan, at least save enough to get the employer’s match. Failing to do that is “leaving money on the table.”

Plan Now

Each family’s tax and financial circumstances are different, yet each family should plan. We encourage you to consult with your tax, legal and financial advisors with respect to your year-end plans.