This year has been full of news regarding the presidential election, inflation, interest rates, AI development and the wars in Ukraine and Gaza.
But even with a flurry of often negative news, the US stock market reached historical high levels, and the Dodgers and Yankees made it to the World Series.
While we can’t control any of these external factors, we can address our personal finances and make changes specific to our lives. As with any year, a general financial review is necessary at year-end to help optimize your finances. With that in mind, here are a few year-end topics that would be prudent to review:
Tax-loss harvesting
Tax-loss harvesting is a tax-efficient investing approach used for taxable accounts. Retirement accounts do not qualify.
To take advantage of tax-loss harvesting, consider selling select investments from your portfolio at a loss to help offset the tax implications from other holdings that have generated taxable capital gains. Eligible investments aren’t limited to stocks or stock funds, which means losses from bonds and other asset classes can be used to offset gains as well.
Additionally, if your losses are larger than your gains, you can use the remaining losses to offset up to $3,000 of your ordinary taxable income (for married couples filing separately, the limit is $1,500). Any amount over $3,000 can be carried forward to future tax years.
The tax impact of tax-loss harvesting can be significant for taxable account holders with high incomes. However, an investor selling securities as part of a tax-loss harvesting strategy should trade cautiously due to the Internal Revenue Service restriction known as the wash-sale rule.
This rule states that if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, the loss is typically disallowed for current income tax purposes.
Required minimum distribution
Unless your retirement funds are in a Roth IRA, you may need to take the annual required minimum distribution from your individual retirement account per year’s end.
If your 70th birthday landed before July 1, 2019, you began taking the RMD at age 70½. In 2023, one change under SECURE 2.0 was to delay the required beginning date to age 73 for individuals who were born between 1951 and 1959. People born in 1960 or later will not be required to take RMDs until age 75.
The distribution amount varies annually and is determined by an IRS table, the year-end balance of your account, and your age. If you miss the window to take your annual RMD, you will be subject to an IRS penalty of 25 percent of the RMD amount.
Inherited IRA RMD
An inherited IRA is an account that is opened when a person inherits an IRA after the original owner’s death. This may happen at the death of a spouse or when a child inherits a parent’s IRA.
There are many rules for inherited IRAs. Distribution rules are specific to different types of beneficiaries, are not the same for everyone, and are often confusing. The following rules do not apply to eligible designated beneficiaries, such as, the surviving spouse, a child, a disabled or chronically ill person, or someone less than 10 years younger than the account holder.
For the non-spouse designated beneficiary, the time clock for distributions starts the year after the owner dies. If the inherited IRA is not depleted in 10 years, the IRS will tax the remaining balance with a 50% penalty following year 10.
—If the IRA owner dies before the required beginning date and the 10-year rule applies, no distribution is required for any year before the 10th year. The entire balance of the IRA must be distributed by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2023, the beneficiary would have to fully distribute the IRA by Dec. 31, 2033.
—If the original owner of the inherited assets passed away after they began taking required minimum distributions, the beneficiary will transfer the account to an inherited IRA in their name and must fully withdraw the account by the end of year 10. A major difference in this scenario is that the new owner of the inherited IRA must take a required minimum distribution in years one through nine, with a full withdrawal of the remaining assets by the end of the year that concludes the 10-year withdrawal period.
Speak with your CPA or financial adviser regarding the distribution rules that are applicable to you.
Annual gifting
In 2024, an individual can give $18,000 to as many people as they want without reporting the gift on their tax return and paying additional tax. This is called the gift tax annual exclusion or exemption.
If the person is married, both individuals can give $18,000 to any person, for a total gift of $36,000. This exemption applies to more than cash gifts. Forgiving debt and transferring stock are two other examples that would also qualify if the fair market value of the gift is below the annual limitation.
Cash donations to charities
For individuals who can still itemize their deductions, this year you can deduct up to 60 percent of your adjusted gross income (AGI) for cash donations to public charities.
One caveat is that the 60 percent deduction applies only to cash that is donated to qualified public charities. If you choose to donate non-cash assets to public charities, the deduction falls to a limit of 30 percent of your AGI.
Gifting appreciated securities
Donating long-term, highly appreciated taxable securities — that is, stocks, mutual funds and exchange-traded funds that have realized significant appreciation over time — to nonprofits is one of the most tax-efficient ways to give. You receive a tax deduction for the full value of the gift without having to pay the capital gains you would have paid if you sold the securities.
Also, you can significantly increase the amount of funds available for charitable giving because you are not paying capital gains taxes on the gift. In other words, you are giving the full value of the security, not the after-tax net value.
Assets held for one year before they are gifted reap the following benefits:
— Capital gains taxes are avoided on the future sale of the securities.
— A tax deduction is received for the full fair market value of the securities, up to 30% of your AGI.
— This tax deduction is only relevant if you itemize your deductions on your tax return. If the sum of your deductions falls below $14,600 for single filers or $29,200 for joint filers, this strategy will not help reduce your taxes.
Most banks and brokerage firms can assist you with this transaction but will require you to sign a letter of instruction to transfer the shares to a charity. Do not wait until the last week of December to begin this task, or it may not happen in 2024.
Qualified charitable deductions
At the end of 2015, lawmakers approved a permanent measure allowing individuals who are 70 ½ years old or older to make qualified charitable distributions directly from their IRAs to their favorite qualified charities.
The amount is excluded from taxable income, unlike regular withdrawals from a donated IRA, which are taxed as ordinary income. A lower income may also help reduce your Medicare premiums, which are income based.
A few facts about QCDs:
— The QCD can be made only on or after the IRA owner is 70 1/2 years old.
— The distribution must be paid from the IRA directly to the qualified charity.
— QCDs are limited to $100,000 per person annually and must be distributed by December 31 of the calendar year.
— Account holders may give a one-time gift of $50,000 deducted from their $100,000 limit to a charitable remainder unitrust, charitable remainder annuity trust, or a charitable gift annuity.
— The charitable distribution can satisfy the IRA’s annual RMD, but not exceed it.
— QCDs are not subject to tax withholdings.
Tax-free 529 to Roth IRA
In 2024, a new law regarding excess cash in a 529 college savings plan, went into effect. Taxpayers who have owned a 529 plan for more than 15 years can now make tax and penalty-free rollovers from the 529 plan to a Roth IRA. Here are the rules:
— The lifetime rollover limit is $35,000 per person, not per 529 Plan.
— The 529 plan beneficiary and the Roth IRA owner must be the same person.
— The rollover cannot exceed the annual Roth IRA contribution limits, including contributions made to an IRA.
— The rollover is limited by the beneficiary’s earned income.
— Contributions and earnings in the 529 plan made within the last five years are not eligible for a rollover.
Check with your tax preparer before initiating this rollover. This is a federal law, not all states currently consider this rollover to qualified distribution.
As year-end approaches, take the time to review your financial situation with your adviser and implement the strategies you can control before the year is over. When you actively manage your finances and plan for your future, the feeling of personal financial empowerment is justly earned.
Teri Parker CFP® is a vice president for the Riverside office of CAPTRUST Financial Advisors and has practiced in the field of financial planning and investment management since 2000. Contact her at Teri.parker@captrust.com.
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