November 20, 2024 / 5 min read
As the end of 2024 approaches, it’s time to review your investments and tax planning strategies for the year ahead. Use the following guide to prepare.
Investment losses never feel good, but harvesting capital losses in taxable brokerage accounts can help ease the pain. Selling investments held at a loss can create substantial tax savings in both the current year and, potentially, future years.
Tax-loss harvesting is a strategy in which you sell holdings that have depreciated below their cost basis, booking (or “harvesting”) those capital losses to offset realized capital gains. Current year realized capital gains are offset first, then excess capital losses can offset up to $3,000 of ordinary income. Remaining losses will carry forward and offset what could otherwise be taxable capital gains in future years.
With tax-loss harvesting, you must pay close attention to wash-sale rules that prohibit proceeds from being reinvested in the same or substantially identical securities within 30 days. Failure to do so would negate the ability to claim the loss on your income tax return.
While booking tax losses can be beneficial, it’s critical that the transactions don’t result in material changes to your portfolio or asset allocation. Therefore, we typically recommend that any positions sold be replaced by a comparable strategy that allows you to maintain exposure to the corresponding asset class or industry. It’s important to develop a comprehensive plan, and given the tax nuances involved in executing it properly, its recommended that you consult with professionals when considering tax-loss harvesting strategies.
Conversely, harvesting capital gains should also be considered in your year-end tax planning. If you have a low taxable income, you may have opportunities to take advantage of the 0% tax brackets for available long-term capital gains: For the 2024 tax year, single taxpayers with $0 up to $47,025 of taxable income and married filing jointly taxpayers with $0 up to $94,050 of taxable income could qualify for 0% tax treatment of capital gains from selling investments held for longer than a year.
Wash-sale rules aren’t applicable when booking capital gains, but you should pay close attention to short-term trading restrictions imposed by fund managers when reinvesting as well as your overall asset allocation.
Year-end dividends and capital gains distributions should be on every taxable investor’s radar as the end of the year approaches. As “pass-through” entities, mutual funds and exchange traded funds are required to distribute the capital gains and dividends they incurred during the year. These distributions can present an immediate, and potentially costly, tax liability particularly if you’re investing for a short holding period.
As a rule of thumb, you should take a distribution if your position in a fund is subject to a capital gain that’s larger than the amount of the distribution. Conversely, you should consider skipping a distribution if the tax cost of continuing to hold the position is greater than the cost of selling the fund and reinvesting in another similar strategy.
Most dividend and capital gain distributions are announced during the fall and then distributed before year-end. Pay close attention to the fund’s record dates for distributions so you know when to sell and, just as important, when to purchase and avoid buying into distributions. While taxes can’t be avoided entirely, skipping year-end dividend and capital gain distributions can be an effective tax deferral strategy that enhances your after-tax returns. Given both the tax and timing considerations, be sure to consult with professionals as needed.
Roth IRAs are attractive retirement savings vehicles because of the potential for tax-free growth and income. While converting traditional IRA assets to Roth IRAs is often a taxable event, doing it now can be an effective strategy to hedge against potentially higher tax rates in the future and possibly reduce the value of mandatory distributions from traditional IRAs in future years. This is an area where consulting with professionals is advised, but if you self-manage investments and/or prepare your own tax returns, be sure to fully understand the considerations and consequences before moving forward with a Roth IRA conversion.
Evaluate how required minimum distributions (RMDs) will impact your cash flow and tax planning. If your RMD is in excess of required tax payments, consider the use of year-end RMD withholding as a replacement for quarterly estimates. If you’re charitably inclined, consider qualified charitable distributions (QCDs) from your IRAs to partially or fully satisfy RMDs, especially if you don’t need cash from RMDs for your lifestyle or tax payments.
In 2024, donors can give up to $105,000 per person directly from their IRAs to qualified charities once they’ve reached age 70 ½. The SECURE 2.0 Act increased the age for which RMDs must begin from 72 to 73 until 2033, then age 75 in 2033. Investors who have reached age 70 ½ but aren’t yet subject to RMDs may consider QCDs as a method to accomplish charitable goals while also reducing the value of their IRAs, and ultimately RMD amounts in future years.
If you’re charitably inclined, a great way to avoid paying capital gains on highly appreciated securities is to donate those securities “in-kind” to a charity or a personal donor-advised fund. This strategy can result in a win-win for both you and the charity as it reduces the potential taxes paid on selling the security and allows the charity to receive a donation that they also don’t need to pay taxes on as a tax-free organization. It’s important to ensure the charities you’re considering are 501c3 organizations in order to receive the charitable deduction for your donation.
If donating to a donor-advised fund, an added benefit is the ability to use the funds to complete charitable gifts over multiple tax years. Note that in this scenario the charitable deduction occurs upfront in the year the gift was made to the donor-advised fund and not in the years that the charitable gifts are necessarily given. As with other strategies discussed, we recommend working with your investment and tax professionals to avoid any potential pitfalls.
It’s always important to revisit estate plans every few years, at a minimum, to make sure goals and objectives are still applicable. This is especially important in the coming year as the current estate tax exemption amount is scheduled to sunset as of Dec. 31, 2025, returning the exemptions to prior, adjusted-for-inflation amounts. Depending on your total estate value, there could be some important planning opportunities to discuss with your wealth management team and estate planning attorney.
Additionally, don’t forget there are some simpler strategies that can be impactful such annual exclusion gifting, and paying medical and/or educational expenses directly to the institution or school on behalf of individuals.
With 2024 drawing to a close, now’s the time to connect with your wealth management professionals to explore the full range of opportunities and plan your year-end tax strategy.
