Year-End Tax Planning for Individuals

Tax planning requires thoughtful consideration and flexibility. Taxpayers should anticipate potential shifts to proactively position their tax strategy, no matter what lies ahead. We’ve highlighted important information in this article to help guide your decisions as the situation unfolds.

Expiring Tax Provisions

The Tax Cuts and Jobs Act (TCJA) of 2017 brought about landmark tax reforms, with several key provisions scheduled to expire at the end of 2025. While there may be opportunities for Congress to extend these changes, it’s important to anticipate their potential expiration.

Below are the standout provisions to watch.

Estate and Gift Tax Exemption

The federal estate tax exemption currently stands at $13.61 million for individuals and $27.22 million for married couples in 2024. This amount is slated to increase in 2025 to $13.99 million per individual and $27.98 million for married couples. However, unless Congress acts, the exemption will revert to an inflation-adjusted base of approximately $7 million per individual in 2026. This reduction could lead to higher estate tax liabilities for individuals with estates exceeding the new threshold.

Planning Tip: To take full advantage of the high exclusion amounts now, married couples who may not utilize the entire exemption could consider using 100% of one spouse's exemption to lock in at least part of the increase. Any gifts made under the current exemptions will not be subject to “clawback” even if the exemption is reduced in the future. That said, careful consideration of how gifting may affect current and future financial needs is essential.

Inherited IRAs

Under the SECURE Act, non-spouse beneficiaries inheriting a retirement account are generally required to distribute the funds within 10 years of the account holder’s passing. However, the initial version of the law lacked clarity on whether these beneficiaries had to take required minimum distributions (RMDs) annually during the ten-year period or if they could wait until the final year to withdraw the entire balance.

Final regulations recently issued by the IRS have clarified that:

• If the account holder passed away before reaching their RMD start date, non-eligible beneficiaries have flexibility in withdrawing funds. They can either choose to withdraw the entire amount at the end of the ten years or spread-out withdrawals over the ten-year period, with no annual minimum requirements, as long as the account is fully distributed by the tenth year.
• If the account holder passed away after starting RMDs, the beneficiary must continue taking RMDs annually for the next nine years. The beneficiary must withdraw the remaining balance by the end of the tenth year.

Final rules for this change are set to take effect in 2025. While a series of IRS notices provided penalty relief for missed RMDs from 2021 to 2024 as a result of collective confusion, beneficiaries are still required to distribute the full account balance within the ten-year period.

Planning Tip: Given the complexity of the new rules, beneficiaries must carefully plan their distribution strategy for inherited accounts. Neglecting to consider specific rules and exceptions could result in significant tax consequences.

Wealth Transfer Planning Opportunities

In a high-interest rate environment, there are opportunities to tap into a more tax-efficient wealth transfer and estate planning process. Higher interest rates allow you to lower the value of future gifts for tax purposes, which reduces the amount of taxes owed later. The reason is that higher interest rates lead to higher monetary costs and the result is appraised values of property such as real estate, businesses, and other assets are generally lower. Thus, the higher the interest rate, the more advantageous this strategy becomes.

Traditional Year-End Tax Strategies

There are several tried-and-true strategies to consider before year-end. Here are a few to consider:

• Sell underperforming assets at a loss to offset capital gains. Tax-loss harvesting lowers taxable income by reducing net gains, helping to reduce your overall tax liability.
• Maximize your 401(k) contributions. The contribution limit for individuals under fifty is $23,000, while those fifty and older can contribute up to $30,500.
• Donate to your preferred charity. Explore effective charitable giving methods to offset tax burdens, such as through Donor-Advised Funds or IRA contributions. Consult with an advisor to find the best fit for your charitable goals.
• Arizona Tax Credits. Donations to state certified organizations can result in a dollar-for-dollar credit against your Arizona tax liability, subject to certain dollar limitations. Look for an upcoming email on this topic that will have detailed information on the various credits.
• Make a gift. Annual exclusion gifts allow you to transfer up to $18,000 per recipient ($36,000 for married couples) without triggering gift taxes, which helps reduce estate taxes and support wealth transfer.
• Accelerate or defer income. With changing tax laws, including the expiration of TCJA provisions, review your strategy for accelerating income or deferring deductions to align with potential tax increases in the coming years.

Review Beneficiary Information

It’s a good time to review and update beneficiary information to ensure that all accounts and assets, including retirement accounts, life insurance policies, employer benefits and estate planning documents, etc., are set up to transfer as intended.

Reviewing this information is especially important after recent life changes, such as marriage, divorce, or the addition of new children or grandchildren. Regular reviews help avoid any potential complications or confusion down the line.

Next Steps

Take time to assess your financial situation and how upcoming changes could impact your situation. Contact your R&A advisor with any questions you may have regarding your specific situation.