The Wiser Financial Advisor Podcast with Josh Nelson

The Wiser Financial Advisor: End of Year Tax Planning #138

• Josh Nelson

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For many people the end of the end means it's time to review what influences the end of the year might have on your taxes. And it can get complicated if you aren't aware of the rules. Are they the rules the same as they've always been? it's smarter to check in and find out than to assume  because the rules might have changed or they may be changing in the months to come. Listen to this episode because host Josh Nelson and Jeremy Busch lay it all out for you in a manner that you can understand. 

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Podcast Editing: Tim Leaman/info.primegen@gmail.com

Wiser Financial Advisor – End of Year Tax Planning 2024 

Hi Everyone, and welcome to the Wiser Financial Advisor podcast with Josh Nelson where we get real, we get honest and we get clear about the financial world and your money. This is Josh Nelson, Certified Financial Planner, founder and CEO of Keystone Financial Services. Let the financial fun begin! 

Josh: I've got our very own Certified Financial Planner, Jeremy Bush with us today. Here at Keystone Financial, we’re just getting through what we call review season. We've got a couple of review seasons throughout the year and it kind of feels like a teacher who's going to be off on Christmas break and all the students are done; the teachers are done. We love our jobs, but it's one of those seasons that we're always glad when we go into a different mode, which right now is year-end planning for a lot of us. So what are the things coming up in the review meetings and conversations you're having on a day-to-day basis with people when they think about planning for the end of the year, Jeremy?

Jeremy: We’re getting this question a lot: “What are the things I need to do before December 31?” And so, the basic things I've been telling people are these: First off, review your income sources. Check whether you have any deferred compensation. For most people it's fairly simple. You have a job, maybe your spouse has a job as well. So look at those pay stubs to check where you're at and where you're going to end up on the tax bracket based on what your income sources are.

Josh: Maybe you or your spouse is self-employed. So you may have W2 income sources or business income too. It changes the game a little when you're thinking about a business. You get a little more control if you need to make some final purchases before the end of the year. Some business owners will accelerate some expenses to purchase something they were going to buy in January, but they can buy it right now and then take the write-off for 2024.

Jeremy: Business owners have the ability to write off a lot more than a W2 employee, which can impact overall reportable income.

Josh: And from an employee standpoint, people should be thinking about things that would relate to their employee benefits, double-checking to make sure they're taking advantage of what they've got.

Jeremy: It’s a good idea to verify contributions to 401Ks or whether you've maxed out your work HSA, your personal HSA or FSA for the year. Those are low fruit type things. Absolutely take advantage of those easy things that you can do before the end of the year to maybe save yourself a little in taxes.

Josh: Yeah. You bring up FSAs which are so-called Flexible Spending Accounts. That's kind of a misnomer because they're not flexible at all. In fact, that's kind of a big deal this time of year. If you still have a balance and you haven't used up all your FSA money, what happens? It goes away! Literally, it goes away and you will lose that money. So, get creative if for some reason you haven't used that up. Look at the terms of your plan. See if you can go to Walgreens, do a little shopping spree there for approved items. There may be an opportunity to use that money up.

Jeremey: Or see your doctor and talk about that thing you've been wanting to talk about for a while. 

Josh: Also at the end of the year, if you own investments that aren't in a retirement account, be thinking about moves you'd be making toward the end of the year with mutual funds or a company stock plan, things that would not be inside a retirement account.

Jeremy: Yeah, specifically for investments, I would say keep an eye on any stock options or restricted stock units that are coming due or vesting before the end of the year. If you're inside a brokerage account, review your capital gains. I know we do a lot of that for our clients this time of year. It’s a first world problem if you have a lot of capital gains. It’s not necessarily a bad thing, because your investments have done well, right. But at the same time, you can still do a few things to manage those so they don’t kill you on taxes.

Josh: Yeah. Tax loss harvesting, which admittedly is hard right now because we've had a couple of really good years for the stock market. Not that every stock is going up, but for the most part the general market has been on quite a tear here the last couple of years. But what's the opportunity there as far as tax loss harvesting; how does that work?

Jeremy: The idea is that you sell specific investments that might have a loss, to offset some of the ones that have had a gain. Now, like you said, coming off of the year that we've had in the market, losses have been a bit few and far between, but there have been some companies in particular that you might be able to harvest those losses to offset a few gains. We've helped a couple people out with that with their company stock or something of that nature.

Josh: Yeah, we do see that when we're doing an analysis of people's brokerage accounts. We’re not talking about retirement plans here. With investment accounts, you can do what you want inside that account from an investment standpoint. You can place trades, move money around, and it doesn't make any difference until someday when you start pulling the money out. 

The advantage of retirement accounts, of course, are the tax advantages. The downside is that you don't have access to that money for a while. Most people don't have access until age 59 1/2. 

And this isn't an exhaustive list necessarily, but it's things to think about, kind of like a menu. You can be seeing what applies to you, and certainly gains and losses are a big part of that. 

So let's talk about retirement contributions. We talked about looking at if you're self-employed or if you're working for a company. There are different types of plans that would be available.

Jeremy: Most companies have your general 401K benefits. If you're a nonprofit or school district employee, you'd have a 401A or 403B. All these types of 4-whatever plans basically mean the same thing: pretax contributions may be coming in from the employer. A lot of the time you yourself can choose whether you're doing pretax or Roth. For anything pretax, you get the deduction this year. With Roth, you're betting that taxes might be higher in the future or you just want to take advantage of building up a tax free pot of money for that future  retirement. 

Josh: We won't dig into that topic in huge detail because we did a recent episode on the Roth Advantage, where I unpacked why we like Roth so much and why, in the long run, we think it does pay off. This is my 25th year in the business, and some of my clients have been around that long and have done Roth, so we’ve been able to see how well it works in people's retirement. And there was a Wall Street Journal article recently that referred to a study showing that doing Roth conversions earlier on in retirement could extend people’s number of years of having income by 7 years. That's not even counting the advantage of passing it on tax free to your heirs.

Jeremy: And then, if you are contributing to a 401K, be aware of what you can contribute. For 2024 you can contribute up to  $23,000, but if you're 50 or older, you can throw another $7500 on top of that. If you don't have a 401K or if you're under the income limit, you can add Traditional IRA or Roth IRA contributions. The deciding factor there for Traditional IRAs is that you get the tax deduction for whatever you contribute this year. In a Roth, you don't get that, but you're building up a tax-free pot of money. Important to remember that those also have income limitations and income phase-outs. So if you make too much money, you can't contribute to them anymore.

Josh: And if you work for a company, you want to make sure you're taking advantage of any employee benefits, including matching contributions from your employer. And because of the limits that Jeremy just mentioned, you want to look at your plan. What are the limits? If you're trying to max out that plan, sometimes you need to go back, look at your most recent pay summary, and see if you’re on track to max out with these next couple paychecks. It may be that you’d want to bump up your contributions. It could also work the opposite way, where maybe your compensation's gone way up, and whatever percentage you were putting into the 401K, you might have maxed out early. So, it's possible that they cut you off if you hit the dollar limit in say, August or September. With some employer plans, when you stop contributing, you stop getting the match. You need to understand the rules of the game and make sure that you're taking advantage of that employer max.

Jeremy: For example, a client has been in the habit of making Roth contributions at the beginning of the year, and during a review meeting looking at income and phase-out level, his situation with RSU's (Restricted Stock Units) threw him potentially into that phase-out range. That's a situation where now we go back and correct the Roth contributions that he did earlier plus the earnings, so he doesn't get dinged at tax time. So, you might have been living your life and working, but all of a sudden you get some more RSU's or you have a really big vesting period that could potentially throw you into that phase-out range. It's important to have conversations with us or just be aware of what that phase-out range is. 

Josh: As you can see already, we're not even very far into this conversation and there are all these gotchas, right? That's a good reason to talk to your tax advisor, talk to your Certified Financial Planner, so you understand the rules of the game. That's a huge part of finance. Along those lines, let's talk about charitable giving. We still have some time this year for that.

Jeremy: The nice thing about charitable giving is that if you have a bunch of extra cash or if you are in a situation, maybe with RSU's or of being a high-income earner, sometimes charitable giving, whether that's a donor-advised fund or just regular charities, can be used for one of those last holdout tax deductions that are available to you.

Josh: Just the other day I saw that it's like 94% of taxpayers in the US now do not itemize deductions on their taxes; they just take the standard deduction. So one thing to keep in mind is to look at your situation. If you have tons of itemized deductions, great, then you'll get more than the standard. But if you've been contributing charitably, let's say to your church or something like that, normally that would be an itemized deduction. But if you're taking the standard deduction, you're not going to be able to write off those gifts. So it's wonderful that you're giving in that way, but to get the greatest tax advantage, you may want to consider doing the donor-advised fund, which is a 501C. By doing that, you can throw in a larger amount of money in one year. You can put in maybe five years’ worth of your normal charitable giving, which could kick you above the standard deduction. And then of course the next four or five years you would just take the standard deduction. Meanwhile, you could still be giving to the charity through the donor-advised fund. It's a way to take advantage of the rules.  And that's changed dramatically over the last several years since the 2017 tax bill. So right now we're in an environment where you've got some special rules and strategies that you wouldn't have used prior to 2017.

Jeremy: And a donor-advised fund can also be a great tool to use when you have appreciated stock, say some Apple stock from way back in the day that you still have. If you were to sell it right now, that would just kill you on capital gains. But inside of a donor-advised fund, you can donate shares of that and avoid the capital gains on it and still get the tax deduction. Of course, there are rules associated with that. So talk to a professional, but it's definitely a legal option that's out there.

Josh: Yeah. One thing to consider there, is that at Keystone Financial, we've got relationships. We're an independent firm, so we partner with organizations like Fidelity and Schwab, which are our primary two custodians. Both of them have donor-advised fund vehicles set up through their organizations. Not only can they accept cash, but also securities. They can even accept property, so if you've got a highly appreciated piece of land or something that you want to get rid of anyway, but it's got a super low basis and you don't really need the money, maybe your church is having a big capital campaign or something like that, instead of you selling the land, paying the taxes and giving cash to your church, you could gift the land to the donor-advised fund. Then that fund can turn around and give the money to the church. In the end, the worst beneficiary is the IRS, but you want to play by the rules, right? And of course, we never want to cheat on taxes, but we do want to make sure that you're taking advantage of all the rules and strategies available to you.

Jeremy: That's never more important than to someone who is, say, a business owner. Being a business owner, you get a lot more avenues for specific expense deductions. There are a lot of record keeping requirements that go along with it, but a lot of things that you can deduct and chip away at whatever income you did have.

Josh: Yes. And if you're self-employed and let's say you're a one person show; you're a consultant or you've got some kind of a business where it's just you, you can still open up a retirement plan. As long as you've got earned income, you can open up a 401K or SEP IRA.  . If it is a 401K type plan, those need to be established by December 31st of the year that you're going to be taking the tax advantage for. You'd need to have the plan established by December 31st, and you can set it up even at a 0 balance. Then you'd be working with your tax advisor to understand the rules of the game. 

Jeremy: Yeah. And you mentioned SEP IRAs for self-employed, and those have a slightly different time requirement as well, right? October, so we're already past the date on that. You’ve got to know the rules so you know what you can do. 

Josh: Yep, and RMD, which is Required Minimum Distributions, talk about those rules. 

Jeremy: So, as it currently sits, if you are aged 73 or turned age 73 at any time during 2024, and you have a Traditional IRA or old 401K, you are required by the IRS to take a Required Minimum Distribution. 

Josh: Which would be taxable in most cases, right? They will want you to start taking the money out on a percentage basis. The age for that used to be 70 1/2. They gradually increased that age—for  our younger clients and someday us, right, Jeremy? For us it will be age 75, right? So you have bit more time, but for all of our clients, we double-check retirement accounts to make sure people have taken their required distribution, because the penalty is 25 percent, plus you still have to pay the taxes. So in many cases, you'll lose half of it or more if you don't take the money out. 

Jeremy: And there are very specific rules regarding that as well. And if you do have any beneficiary IRA's, those have their own required minimum distribution rules attached to them as well, which just got finalized this year. 2024 is the last year that the IRS will waive penalties on inherited IRA's that have come in post January 1, 2020. So, 2025 will be the first year that you are absolutely required to take a distribution from an inherited IRA that you got after January 1, 2020. There are a lot of rules that go along with that 10-year rule. 

Josh: And there are multiple distribution strategies that we can use, depending on the particular person and income limits and what their situation looks like, so that's going to be different for everybody. If you're a spousal beneficiary, it works differently. Your spouse can inherit your retirement account and roll it into their own retirement account. Then you move forward based off of that person's age and the rules that apply to them individually. But if you're not a spouse, anybody else inheriting, it does have to be distributed out over 10 years, and that even includes Roth money. Of course, it's tax free upon the distribution, so that's great, but it still has to be completely out of there by the end of the 10th year. 

Jeremy: And then there’s estate planning and how much you can give to an individual. Everybody always asks how much can be given within a calendar year. Obviously there are limits for 2024. You can give $18,000 per person without the recipient paying estate taxes. And we're still under the tax cuts and JOBS Act, so the estate tax limit as a whole is ridiculously high. 

Josh: Yeah, it's like 26 million or something like that for a married couple or half of that if you’re single. 

Jeremy: Yeah, it's pretty high up there. That can always change. But it's one of those things that's good to be aware of. If you do see yourself projecting out where you're going to be above that 26 million of assets when you pass away, it’s time to start talking to people like us about strategies you can do in order to bypass some of those taxes. 

Josh: And these are wonderful problems. Basically everything we've talked about today means that you've got wonderful problems. You've got excess cash flow. For example, if you're retired and we think it's really unlikely you’ll run out of money, we're talking about giving money away. We're talking about charity. We're trying to minimize taxes. Those are wonderful problems to have. 

One thing to note about the 2017 tax cuts and JOBS Act, many of those things do expire after 2025. We still don't know what will happen as of right now. There are several things that are going to expire, but it's increasingly likely that several of those things will end up getting extended. There is some bipartisan support on a number of the items that were included in that. So stay tuned. Everything we just talked about today is likely to change. Every two to four years, some significant tax legislation comes about that changes the rules of the game and not always in your favor. Sometimes, it could completely upend what you're planning on doing. 

Jeremy: And that’s probably the biggest reason to seek guidance from a trained professional. Because taxes are one of those things that are always changing, even if it's within a year or a couple of years. And we'll be here for any questions as that stuff comes up. 

Josh: Yep. So, some final items before we break for today, let’s talk about stock options or restricted stock units. If you work for a company that gives you what we call equity awards, which means those are part of your compensation from a publicly traded company, you probably work for a big company. For many of our clients, it's a technology company. There are different strategies and different tax treatments based off of what those benefits are. So for those of you who don't have that, you probably have no idea what we're talking about. But if you do have that, I'm sure you're aware if you’ll be receiving stock. If you do, there are some special tax treatments there. There could be some advantage with the incentive stock options and non-qualified stock options to making a move before the end of the year, That would be something you would have control over as far as when you choose to exercise those. With restricted stock units you have a lot less choice. It's kind of good in some ways because they never expire. They typically will sell some shares to cover your taxes, and that shows up on your pay stub. 

Jeremy: And with incentive stock options or non-qualified stock options, depending on what types of options you have, you might also be subject to alternative minimum tax depending on the timing of those. Some of those rules get pretty specific. I think we've done an entire webinar based on the different types of equity awards, and taxability of each of those. 

Josh: Yeah, if you want to do the deep dive on that, I think we turned it into a podcast episode. But also, if you go to our website, www.keystonefinancial.com and click on the YouTube link, you'll be able to find that webinar with the slides and the specifics on that. So, if you've got company stock, even if it's company stock that you bought and you've held on to for a long time, consider before the year’s end if you want to be making any moves. 

Pretty much all these items we’re talking about, we could do a whole webinar on or a whole podcast episode on, and sometimes we do. So this is kind of a menu of things to be thinking about between now and the end of the year. Begin to consult your tax professional, and consult your Certified Financial Planner, which is the gold standard in our industry. Jeremy and I are  both Certified Financial Planners. That means that we have a certain amount of experience and education and ethical requirements that we abide by. We are fiduciaries, which not all advisors are. That's something that oftentimes consumers don't know. So make sure that you're working with somebody who truly is a fiduciary, meaning they have a legal obligation to give you advice that's in your best interest at all times. 

So with that in mind, if any of these things trigger questions for you, whether you are client or not, we're happy to hop on a call with you to get you pointed in the right direction. The easiest way to find us is by going to www.keystonefinancial.com . And of course we always like your feedback. If you have feedback as far as topics you'd like us to cover on the podcast or on a webinar in the future, just e-mail us at communications@keystonefinancial.com . Thanks for listening to the podcast. If you would give us a rating and click subscribe, all those things do help us as far as getting this out and helping people find us.

I hope you have a wonderful week and  a wonderful holiday season and we'll talk soon. 

Jeremy: Happy holidays. 

The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult your attorney, accountant, financial or tax advisor prior to investing. Investment advisory services offered by Keystone Financial Services, an SEC registered investment advisor.