If you are concerned about your 2024 tax liability, don’t wait until April 15th to plan for it. The time for tax planning is now until the end of the year. Let’s review the 2024 tax landscape.
The Tax Cuts and Jobs Act (TCJA) of 2017 — or “tic-ja” if you’re a cool kid — is set to expire at the end of 2025. This could have far-reaching effects on all taxpayers. However, it’s an election year and it doesn’t expire until the end of 2025, so speculating on how/what/when feels like a waste of time. Please keep in mind that it is expiring, and I’ll do another update in the summer of 2025 on what that will look like.
For 2024 tax planning, please keep in mind these five big tax strategies -
- The TCJA imposed a $10,000 limit on the state and local tax deduction. In response to this, 35 states have elected to allow pass-through entities a tax credit or deduction to mitigate this limitation. In other words, if your shop is operated through a S-Corp or Partnership, you may be able to have the entity pay the tax on its income so that you are not limited by the $10,000 federal deduction. The states vary widely in how to take advantage of this option but if your shop is profitable and you live in a state with a high state income tax, this should be explored before year-end.
- Interest rates have been on the rise as well as home prices across the nation. It is predicted that we will soon see interest rates start to fall again. If you are in the market for a new home, consider financing as much as the home as possible and using any available cash to pay off your personal debt. Under current law, mortgage interest is fully deductible for mortgages up to $750,000. Therefore, using cash to pay off personal debt where interest is not deductible and potentially carries a higher interest rate is a smart play.
- If you have sold assets during 2024 that created a capital gain, consider “harvesting losses” before the end of the year. Ask your financial advisor to review your brokerage accounts and determine if there are any poor-performing investments or if rebalancing is needed in your portfolio that could create some capital losses to offset the capital gain incurred.
- Charitable giving and your philanthropic goals should be evaluated prior to year-end. Since charitable giving is considered an itemized deduction and the standard deduction is $29,200 (married filing jointly), it may be wise to group your charitable giving so that one year you take the standard deduction, then in the following year, double up on your charitable contributions which would allow you to itemize your deductions. One way to accomplish this is to contribute to a community “donor-advised fund” (DAF), which would allow you to contribute a lump sum amount of cash and receive an immediate deduction in the current year, but you could advise the fund on how you would like the contributions to be distributed.
- If your shop offers a retirement plan to the employees, be sure your contributions to the plan are maximized. I always recommend that shops that are interested in offering retirement plans to their employees offer a 401K plan as the higher contribution limits and benefits of the 401K plan far outweigh the cost of implementing the plan. One thing I like about the 401K option is that employees can make contributions to a ROTH 401K plan, which is normally not possible for high-income earners outside of a 401K plan. Therefore, ensure that you’ve maximized your personal 401K contributions ($23,000 per employee and $30,500 if you are age 50 or older) and considered making any “catchup” contributions needed as a ROTH contribution instead of the traditional pre-tax option prior to year-end.
In addition to these tax strategies, a quick reminder that the interest charged by the IRS on the failure to make estimated tax payments is 8% per year for 2024. In general, every taxpayer is required to make quarterly estimated tax payments (unless the W-2 withholding is sufficient to satisfy their estimated tax requirements.) Due to the high interest rates being charged by the IRS, please review your requirements with your tax provider and catch up on any past-due payments to stop the interest from continuing to accrue.
Redline Business Advisors (f/k/a Williamson Advisors) is a national business advisory firm that provides monthly bookkeeping services, Profit First coaching, and tax preparation and tax strategies to the auto repair industry. To learn more visit: https://www.RedlineBA.com/.
