With the completion of 2023 tax returns, now can be a good time to revisit a personal tax situation. Effective tax planning involves proactive measures well in advance of the next filing. There are critical tax considerations individuals and business owners should heed in the current environment, including key actions that should be examined before Dec. 31.
The following planning opportunities are based on the current law, but it can be anticipated that there will be legislative changes.
Capital gains: If a taxpayer has a net capital gain, recognizing capital losses before the end of the year allows taxpayers to offset capital gains with capital losses, potentially reducing their taxable income.
Basic exclusion: The estate, gift, and generation-skipping transfer tax basic exclusion amount is at an all-time high for 2025 at $13.99 million. This is an increase from $13.61 for 2024 and is scheduled to be cut in half for 2026. Taxpayers should use the exclusion before it is reduced.
Gift exclusion: Utilizing the annual gift tax exclusion is another key opportunity for taxpayers who may be subject to transfer taxes. For 2024, the annual exclusion is $18,000 per recipient. By having your spouse make a gift or electing to split gifts with your spouse, this exclusion can be doubled to $36,000 per recipient. Annual exclusion gifts do not reduce the basic exclusion amount.
Charitable deductions: These may reduce a taxpayer’s taxable income but may be limited to a percentage of adjusted gross income, with any excess carried over for the next five years. Charitable deductions must be substantiated with a contemporaneous written acknowledgement from the charitable organization and in some cases a qualified appraisal.
Reporting requirements: The IRS imposes many informational reporting requirements and failure to disclose may be subject to a substantial penalty. Requirements you should keep in mind are:
- FBAR: Taxpayers with financial interest in or signature authority over a foreign financial account that exceeds $10,000 must file a disclosure by April 15.
- Foreign gifts and trusts: Transactions with foreign trusts and the receipt of certain foreign gifts may require informational reporting to the IRS on Form 3520 or 3520A. For example, the use of property owned by a foreign trust, a loan from a foreign trust, or a foreign pension may be subject to the reporting rules.
- Foreign financial assets may also need to be disclosed.
SALT cap: The $10,000 cap on the individual state and local tax deduction expires at the end of 2025. The pass-through entity election regime allows owners of a business an entity-level deduction for state income taxes.
Business loss limitation: The excess business loss limitation, extended through 2028 by the Inflation Reduction Act of 2022, restricts the amount of business losses that taxpayers can deduct against non-business income. For 2024, this limit is set at $540,000 for joint filers. It is essential to incorporate this limitation into your annual tax planning for 2024 and beyond.
IRA inheritance: Taxpayers that inherit an IRA have separate distribution rules. If you inherit an IRA from a spouse, you have more options, including rolling over into your own IRA or taking distributions based on your own life expectancy. Starting in 2025 most other taxpayers are required to distribute the account within 10 years of inheriting the IRA, even if they are under the age for required minimum distributions.
Qualified business interest deduction: Section 199A offers substantial tax advantages for business owners by allowing eligible taxpayers to deduct up to 20% of their qualified business income. Proper planning can maximize this benefit. This valuable deduction is scheduled to expire on Dec. 31, 2025.
Life insurance: Life insurance can be used by closely held businesses to fund buy-outs or redemptions of deceased stockholders. A recent Supreme Court case has emphasized the importance of holding the life insurance policy outside of the business entity so that the policy proceeds will not be included in the valuation of the business.
With the year nearing the end, these opportunities should be considered as part of your personal tax plan.
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