2024 Year-end Tax Letter

December 13, 2024

As 2024 draws to a close, it is a good time for individuals and business owners to review tax savings strategies and potential pitfalls.

We present the 2024 Year-End Tax “Letters,” from A to Z. 

Remember that these concepts are intended to provide a general overview. It is recommended that you review your specific situation with your trusted Honkamp advisors.

Alternative Minimum Tax

Certain high-income taxpayers must pay the alternative minimum tax (AMT) in lieu of regular income tax. Since the Tax Cuts and Jobs Act’s higher AMT exemptions took effect, fewer taxpayers have owed AMT than in the past. Nonetheless, your tax advisor can assess whether AMT applies to you and suggest ways to plan for and manage such liability.

Business Repairs

Could your business place use a few repairs? Completing minor repairs before the end of the year can generate deductions to help offset taxable income in 2024.

Note: Generally, a repair keeps property in efficient operating condition, while an improvement prolongs the property’s life, enhances its value or adapts it to a different use and must be capitalized rather than expensed. For example, fixing a leaky faucet is a repair, but adding a new parking deck is an improvement.

Charitable Donations

Step up charitable gift-giving before the end of the year if you expect to itemize in 2024.  “Bunch” two or more years of donations into a single calendar tax year so you can itemize in one year and take the standard deduction in years you do not donate.

Generally, your current deduction for cash donations cannot exceed 60% of your adjusted gross income (AGI). If you donate appreciated property held longer than one year (i.e., it will qualify for a long-term capital gain if sold), you can generally deduct an amount equal to its fair market value (FMV) on the donation date, up to 30% of your AGI. If the property is held on year or less, your deduction is limited to the lesser of cost or FMV.

Donations made by check must be postmarked by December 31, 2024, to be considered 2024 donations.

If you donate online by credit card in December, the donation is deductible in 2024, even if you do not make the credit card payment until 2025. 

Depreciation Deductions

Businesses can save on taxes with first-year 60% bonus depreciation in 2024. This deduction is allowed for new and used qualified business property with lives of 20 years or less that are placed in service by December 31, 2024. In 2025, the bonus percentage is scheduled to drop to 40%. 

The Section 179 expense limit for 2024 is $1,220,000.

The 2024 tax deductions for new and used vehicles (subject to business usage and business income limitations):

• Cars – First year cap is $20,400 with bonus; $12,400 without bonus
• Heavy SUVs – Up to $30,500

Estate and Gift Taxes

Current federal rules allow an individual to transfer $13,610,000 by a combination of lifetime and death time transfers without incurring gift or estate tax. This exclusion increases to $13,990,000 in 2025 and is set to revert to about half of this amount in 2026 absent any legislative action. Many taxpayers are taking action now to prepare for a possible lower estate exclusion amount by making larger gifts, transferring appreciating assets and establishing trusts.

There is also an annual exclusion for gifts of present interests that does not use the $13,610,000 amount. In 2024, the annual gift exclusion is $18,000 per donor per donee. In 2025, that amount is $19,000. To count as a 2024 gift, the recipient of a personal check must deposit the check in 2024. 

Flexible Spending Accounts

Flexible Spending Accounts (FSAs) are employer-established benefit plans that allow employees to set aside pre-tax dollars to pay for eligible medical and dependent care expenses. The contribution limits in 2024 were $3,200 for health care FSAs and $5,000 for dependent care FSAs.

Manage your FSA accounts as the year draws to a close. Depending on your employer’s plan, you may have to forfeit any unused funds at the end of the year under the “use-it-or-lose it” rule.  However, if the plan permits, you may be able to benefit from a 2½ month grace period and carry over up to $640 of your 2024 health care funds into 2025.

Gains and Losses

Review your portfolio for gains and losses. When appropriate, realize losses before 2025 to offset capital gains, plus up to $3,000 of high-taxed ordinary income. Any losses in excess of the $3,000 are  carried over to the next year. Conversely, gains can be absorbed by prior losses.
In particular, it is often a benefit to harvest losses to offset net short-term gains of securities owned a year or less. Normally, such short-term gains are taxed at ordinary income rates as high as 37% (versus long-term capital gain rates of 15% or 20%).

Home Energy Credits

Under the Inflation Reduction Act, you may benefit from two types of “home energy” tax credits on your 2024 return.

Energy Efficient Home Improvement Credit: This is a 30% credit for qualified expenses such as insulation, central air conditioners, water heaters, furnaces, heat pumps, biomass stoves and boilers, and home energy audits. There is a general $1,200 aggregate yearly credit limit, though specific upgrades have lower monetary caps and others have larger caps. If you intend to make multiple upgrades, it may benefit you to stagger them over 2024 and 2025.

Residential Clean Energy Credit: This is a 30% credit for the cost of new qualified clean energy property such as solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells and battery storage technology.

Installment Sales

If you sell real estate property at a gain, you must pay tax on the full amount of the capital gain in the year of the sale and receipt of the proceeds.

However, if you arrange to sell real estate on an installment basis (meaning you receive installment payments over two or more tax years), the gain on the sale is spread over the period in which payments are received.

Not only does this technique defer some of the tax due on a real estate deal, but it also often reduces your overall tax liability because you may end up paying tax on a greater portion of the gain at the 15% capital gain rate, as opposed to the 20% rate.

Note: When it makes sense (e.g., your taxes will be relatively lower this year or you are carrying over losses), you may “elect out” of installment sale treatment on your 2024 return. Otherwise, the installment tax treatment is automatic.

Job-hiring Credits

Do you need to increase your staff? The Work Opportunity Tax Credit (WOTC) is available to employers that hire workers from several designated “target” groups that face barriers to employment.
 
Generally, the WOTC equals 40% of the first-year wages of up to $6,000 per employee, for a maximum of $2,400. For certain qualified veterans, the credit may be claimed for up to $24,000 of wages, for a $9,600 maximum. There is no overall limit.

Note: The WOTC has expired and then been reinstated multiple times in the past, but it is currently available through 2025.

Kiddie Tax

The so-called “kiddie tax” is triggered when a dependent child who is age 18 or younger, or a full-time student younger than 24, receives unearned income above an annual level. The threshold for 2024 is $2,600. Any excess is taxable at the parents’ top tax rate. 

Managing your children’s income by shifting more investments into growth stock or municipal bond funds may help reduce this tax. Using Section 529 plans for college savings rather than investment accounts held by the child can  also lessen income that could otherwise be subject to this tax. If the Kiddie Tax will no longer apply to your child after 2024, postpose capital gains to 2025.

Long-term Care Insurance

The health insurance premiums you personally pay with post-tax funds generally qualify for the medical expense deduction if you itemize and your total unreimbursed expenses exceed 7.5% of your AGI.

Long-term care insurance (LTCI) premiums also count toward the medical deduction threshold.

However, be aware that only a portion of your LTCI cost is deductible, based on your age as shown below. The deductible amounts, which are indexed annually for inflation, actually declined from 2023.

Age at end of year	2023 deduction limit	2024 deduction limit
40 and younger	$480	$470
41 to 50	$890	$880
51 to 60	$1,790	$1,760
61 to 70	$4,770	$4,710
Older than 70	$5,960	$5,880

Medical Expenses

As explained above, you can deduct unreimbursed medical expenses above 7.5% of your AGI in 2024 if you itemize.

If it is appropriate and still achievable, move non-emergency expenses from 2025 into 2024 if it will push you over the threshold or boost your existing deduction. For example, you might arrange to have a year-end medical exam or a dental cleaning in December instead of January. This might also apply to purchasing medical supplies.

Conversely, if you absolutely will not qualify for a deduction, you might as well postpone these expenses to 2025 when they may do you some tax good.

Net Investment Income Tax

Certain high-income investors must cope with the 3.8% “net investment income tax” (NIIT) in addition to regular income tax.

The tax applies to the lesser of net investment income — including capital gains, dividends and interest — or the modified adjusted gross income (MAGI) above $200,000 for single filers or $250,000 for joint filers. These NIIT thresholds are not indexed for inflation. You can minimize NIIT by harvesting capital losses to offset gains, selling real estate on the installment basis, investing in municipal bonds and taking steps to reduce your MAGI.

Office-at-home Expenses

If you are a self-employed individual who works from home, you may have a unique opportunity to write off a portion of your everyday household expenses.

To qualify, you must use a portion of your home “regularly and exclusively” as your principal place of business or a place where you normally meet or deal with clients, customers or patients.

The deductible expenses include direct expenses plus a portion of indirect expenses based on business percentage use of the home. Typically, indirect expenses may include utilities, insurance, repairs, a home security system and a depreciation allowance.

Note: In lieu of deducting actual expenses, you may use a simplified method of $5 per square foot of space used for business up to an annual maximum of $1,500.

Pass-Through Entity Tax (PTET)

PTET is a strategy used by 36 states as a workaround to the $10,000 state and local tax deduction cap that is imposed on individuals at the federal level. Electing to pay this state tax at the business level generally allows for a full federal deduction of the tax on the business return versus facing $10,000 limitations at the individual level. 

While many states’ PTET provisions are similar, each has its own regulations and rules, which can make for complicated planning. States have also amended and modified provisions from year to year. 

Cash-basis businesses can deduct payments made during the year, so paying amounts expected to be due for 2024 before December 31, 2024, rather than next spring will accelerate the deduction. Accrual basis businesses often need to make some type of formal PTET election during 2024 to meet the “all events test” for deductibility. 

If you have any questions regarding the applicability or timing of PTET for your pass-through entity, please contact Honkamp before year end.

Qualified Charitable Distributions (QCDs)

IRA owners who are 70 ½ and older can transfer up to $105,000 from their IRAs directly to charity without having to include the distributions in income. These QCDs can count as all or part of your required minimum distribution (see letter R below) for the year. QCDs have been part of the tax code for years, but they started indexing for inflation in 2024. The 2025 maximum QCD amount is $108,000. 

Required Minimum Distributions

Usually, participants in qualified retirement plans and traditional IRAs must take “required minimum distributions” (RMDs) after reaching a specified age. Currently, that age is 73  (and  is scheduled to increase to age 75 in 2033). The amount of each annual RMD is based on IRS life expectancy tables and your account balance at the end of last year.

Arrange to receive your 2024 RMDs before year end. Otherwise, you will face  a tax 25% penalty  on the shortfall (10% if corrected promptly).

The SECURE Act and SECURE 2.0 added a number of new and complex rules for  beneficiaries of qualified plans and IRAs. See your Honkamp advisor for more details.

Note: Previously, participants in Roth 401(k)s had to take RMDs, as required with regular 401(k)s. Beginning in 2024, this is no longer required for Roth 401(k) participants. 

Start-up Costs

Costs incurred starting a new business venture must generally be amortized over 15 years. However, the tax law allows an entrepreneur to claim a current deduction of up to $5,000 for qualified start-up costs, subject to a phaseout above $50,000.

You must officially be “open for business” before January 1, 2025, in order to deduct start-up costs in 2024. Typically, this means your business must begin offering goods or services.

Start-up costs are those that would be deductible as business expenses, such as studies of potential markets, products, labor supply, transportation facilities, etc.; advertisements for the opening of the business; salaries and wages for employees who are being trained and their instructors; travel costs to secure prospective distributors, suppliers, customers or clients; and salaries and fees for executives and consultants or similar services.

Note: Your business may be entitled to an additional current deduction of up to
$5,000 for qualified organizational expenses (e.g., expenses of an attorney or CPA).

Tuition Expenses

Although you can no longer deduct tuition expenses, the tax law still provides two tax credits for tuition and other qualified higher education expenses. Both credits are phased out based on modified adjusted gross income.

If you qualify, pay for next year’s first semester in December. The tuition can count toward a 2024 credit even though the semester starts in 2025.

The two available credits are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). You can claim either credit but not both in the same tax year.

• The maximum annual AOTC is $2,500 per student for up to four years of study.
• The maximum annual LLC is $2,000 per family for all years of study.

Underpayment of Tax

If you do not pay enough “estimated tax” during the year through a combination of quarterly installments and wage withholding, the IRS may assess an underpayment penalty, unless a safe-harbor rule applies.

Make adjustments now  if you will be subject to underpayment. For instance, you may increase withholding at the end of the year or add to your fourth quarter installment.

Notably, no penalty will be imposed if you pay during the year:

• At least 90% of the current year’s tax liability; or
•  At least 100% of the prior year’s tax liability (110% if your AGI exceeded $150,000). This second safe harbor rule is easier to plan for than the first.

Note: Another safe harbor rule is available to certain seasonal businesses. Contact your tax advisor for more details.

Vacation Home Rentals

If you own a vacation home that you rent out, steer clear of a common tax trap. When your personal use exceeds the greater of 14 days or 10% of the time the home is rented out, you cannot claim a tax loss on for the vacation home rental for the year. Plan to avoid the 14 day/10% limit if you are cutting it close. For instance, you might postpone a December ski trip to January if it would trigger excess personal use.

A day spent making repairs or sprucing up the home for rental does not count as a “personal use” day; detailed records of workdays will help keep total personal use days down. 

Wash Sale Rule

As indicated earlier, you may harvest capital losses from securities sales at the end of the year to offset high-taxed capital gains.

But watch out for the “wash sale” rule. You cannot deduct a loss from a sale of securities if you reacquire “substantially identical” securities within 30 days of the sale.

However, you can easily avoid the wash sale rule by waiting at least 31 days before you reacquire substantially identical securities. Alternatively, to preserve a current position, you can buy more shares of the securities and wait at least 31 days to sell the original shares.

Note: If a loss is disallowed due to the wash sale rule, the amount is added to your basis in the securities, so it may reduce a taxable gain on a future sale.

eXpensing Deduction

As noted under “D” for Depreciation, Section 179 of the tax code allows a business to “x-pense” (taking liberty here) in one year the cost of qualified property placed in service, up to an annual limit.

The property cannot be considered as “placed in service” until it is ready to be used.

The Section 179 limit for 2024 is the lesser of $1.22 million or taxable income from business activities. This tax break begins to phase out for property costing more than $3.05 million.

Note: A business may combine Section 179 expensing with bonus depreciation to write off most, if not all, of the cost of qualified property placed in service in 2024.

Year-end Bonuses

Normally, wages paid to employees by cash-basis companies — including commissions and year-end bonuses — are deductible in the year in which they are paid and received. But there is a special tax break for accrual-basis companies.

An accrual- basis company operating on a calendar year can delay paying bonuses until 2025 but deduct them in 2024 if the bonuses are paid within 2½ months after the close of the tax year, or March 17, 2025, and the amounts are determined and documented in 2024.

To sweeten the deal, the employees are not taxed on the bonuses until the year they are received — in this case, 2025.

Note: The early deduction is not available for bonuses paid to C corporation shareholders or owners of S corporations or personal service corporations.

Zero-percent Capital Gains Taxes

Recipients of long-term capital gains may often benefit from favorable tax treatment with a rate as low as 15%.

Some taxpayers, such as a child, a fixed income retiree, or a business owner with losses, may do even better when they sell securities qualifying for long-term capital gains because their taxable income is low enough to qualify for a zero percent capital gain rate.

The 2024 tax brackets, which are based on total taxable income, are shown below.

Filing status	0% rate	15% rate	20% rate
Single	$47,025 and under	$47,026–$518,900	$518,901 and above
Joint	$94,050 and under	$94,051–$583,750	$583,751 and above

Note: If this is a low tax year for you — say, your S corporation incurred an overall loss — a portion of your long-term capital gains may qualify for the zero percent rate.

Conclusion

The items discussed above are based on the current federal tax laws, rules and regulations and are subject to change, especially if additional tax legislation is enacted by Congress before the end of the year.

Remember that this list is intended to serve only as a general guideline. Your personal circumstances  likely require careful examination. We would be glad to schedule a meeting to discuss your tax planning needs and concerns.

This year-end tax-planning letter is published for our clients, friends and professional associates. It is designed to provide accurate and authoritative information with respect to the subject matter covered. The information contained in this letter is not intended or written to be used for the purpose of avoiding any penalties that may be imposed under federal tax law and cannot be used by you or any other taxpayer for the purpose of avoiding such penalties. Before any action is taken based on this information, it is essential that competent, individual, professional advice be obtained.