Five Essential Planning Strategies to Consider Before Year-end.

While many people associate tax planning with the preparation of their tax return, there are many strategies that need to be implemented before year end to count for the current year.? As the holiday season approaches, and everyone gets busy, it’s important to identify the potential strategies that need to be implemented sooner, rather than later.? Here are five planning ideas to consider before year end.

Charitable Giving

To take a tax deduction for a charitable gift given for the current year, the gift must be made before December 31st.? For those who are charitably inclined, it’s important to know the rules and deductibility limits for charitable gifts:

·? In general, you must itemize deductions on your tax return to take a tax deduction for charitable gifts.

·? ?The deduction limit is dependent on the type of gift and the nature of the charity the gift was given to. (see chart)

·???When gifting a long-term capital gains asset, the carry-over cost basis rules typically apply.? If an individual makes a gift of an appreciated capital asset, they can avoid paying capital gains.? Due to the tax-exempt nature of charities, the charity can sell the asset without paying capital gains, eliminating the tax bill for both the donor and the charity.

Gift Bunching: Under current tax law, many people take the standard deduction. This often means that small gifts would not be enough to allow them to itemize their deductions.? To potentially solve this problem, many people use a strategy called gift bunching, where they give multiple years’ worth of gifts in one year, giving them enough deductions to itemize.? For example, giving five years’ worth of gifts in one year, but then no gifts for the next four years.? Making gifts to a Donor Advised Fund can also accomplish the same goal. For example, someone gives a large gift to a Donor Advised Fund, and then advises the fund to make gifts over the next five years to the charities of their choice.

Donate and Replace: Oftentimes individuals are faced with the dilemma of having highly appreciated, non-qualified shares of publicly traded stock.? If they were to sell the shares to have use of the cash for other purposes, they would incur a large capital gains tax.? On the other hand, if they were to hold them until their death, their heirs would get a step-up in cost basis.? There is, however, a third option.? If they were to gift the shares to charity, they could eliminate the capital gains tax on the donated shares. If they wish to still own the stock, they could use cash to repurchase the shares at the current market price.? This not only eliminates the capital gains tax, but also increases the cost basis in the position.

Qualified Charitable Distributions (QCDs): A QCD allows an individual to make a gift from an IRA (including inherited IRAs) to a charity.? QCDs are only available for individuals over the age of 70 ? and distribution must go directly from the IRA account to the charity to qualify.? The benefit of a QCD, especially for those not itemizing, is that the distribution is not included in income, so it essentially acts the same as a charitable deduction.? Furthermore, for those past their required beginning date, it counts toward their required minimum distribution (RMD) for the year. QCDs are currently capped at $105,000 for 2024. Since a QCD is never included in income it does not increase MAGI, which can be extremely important regarding the taxation of Social Security benefits and the cost of Medicare premiums.

Planning Point: If an individual is charitably inclined, there are often better strategies to consider than donating cash.? With a donation of cash, the tax benefit is limited to the amount of the deduction only.? By giving a gift of an appreciated asset, or using a QCD, not only can the individual take advantage of a current tax benefit, but also eliminate or reduce a potential future tax bill.? This can be extremely beneficial for legacy planning, especially when considering leaving pre-tax qualified assets to heirs.

Tax-Loss Harvesting

The goal of a tax-loss harvesting strategy is to use the losses from the sale of one security to offset taxable gains from other income.? For example, if someone sells a non-qualified security and recognizes a loss of $5,000, they could also sell a security and recognize a gain of $5,000 and the loss could be used to offset the gain without any federal tax being owed.?? While a tax-loss harvesting strategy can be beneficial, there are some rules, limitations, and strategies to consider.

Offsetting Gains: Losses must first be applied to gain of the same type.? Long-term losses are first used to offset long-term gains, short-term losses are first used to offset short-term gains. If the amount of the loss exceeds gain for the current year, up to $3,000 of long-term gain can be used to offset ordinary income.? Any remaining losses can be carried forward indefinitely until they can be used.?

Wash-sale Rule: The IRS will disallow a loss if a substantially identical stock or security is purchased 30 days before or 30 days after the sale that produced the loss.? A substantially identical security is a security issued by the same company or a derivative contract issued on the same security.? If a transaction is considered part of a wash-sale, the loss cannot be used to offset gain.?

Doubling Down: Another strategy to take advantage of a decrease in an investment’s price, is to double down.? If it is desired to continue holding the stock because the future potential looks good, consider buying new shares at the current lower price, waiting 30 days, and selling the old shares at a loss.? This allows an individual to still have the same position long term but may allow them to take advantage of a fall in price by using the loss as a deduction.

Planning Point: One of the most common errors to the wash-sale rule, is the automatic reinvestment of dividends.? Before implementing a tax-loss harvesting strategy, it is important to look at equity positions that may be set up to reinvest dividends automatically.? These may need to be shut off at least 30 days prior to selling a position at a loss, as a dividend reinvestment is considered a purchase.

Tax Diversification

Diversifying assets based on the way in which they are taxed can be just as important as diversifying investments across different asset classes.? There are fundamentally three different buckets of money when it comes to savings: taxable accounts, tax-deferred accounts, and tax-free accounts.? Being diversified from a tax standpoint allows an individual to take withdrawals from the source that makes the most sense given the tax environment at that time.

·?? Taxable: Non-qualified savings accounts, CDs, mutual funds, brokerage investments

·???Tax-deferred: Traditional, SEP, and SIMPLE IRAs, 401(k), 403(b), pension, profit sharing, non-qualified annuities

·?? Tax-free: Municipal bonds, Roth IRAs, employer plan Roth options, Health Savings Accounts

When it comes to collecting Social Security, enrolling in Medicare, and building a retirement income plan, the amount of taxable income is a crucial component.? Taxable income determines how much of someone’s Social Security is subject to federal tax, how much someone pays for part B and D of Medicare, and also an individual’s income tax and capital gains brackets.? Having a plan to keep taxable income low can help to reduce taxes and other costs in retirement.

Planning Point:? While a Roth conversion or Roth funding strategy may result in more current taxes paid, it’s important to determine what the long-term cost savings of having more tax-free income may be.

Roth Conversions and Contributions

If more money in Roth accounts is desired, here are a few items to remember:

·?? Roth conversions need to be made in the calendar year in which you want them to count.??

·?? Roth conversions are not the only way to increase Roth savings.? If there is enough time before retirement, it may mean just changing the course.? For example, if someone has been putting money into the pretax side of an employer plan or Traditional IRA, maybe it’s time to consider Roth options and build a future tax-free bucket of money.

·? Many 401(k) and 403(b) plans allow for after-tax contributions.? These contributions are in addition to the salary deferral and can be made up to the total maximum contribution limit for the plan.? These cumulative contributions can be rolled to a Roth IRA.? This strategy can allow an individual to ultimately end up with money in a Roth IRA, without having to give up the tax deduction for making pre-tax salary deferral contributions.

Planning Point: Many employer-sponsored plans allow for in-plan conversions without a triggering event.? This can allow someone to exercise a Roth conversion while they are still employed by the company sponsoring the plan.?

Taking Advantage of Low Tax Brackets

Whether it’s retirement, loss of a job, or loss of another source of income, it’s important to explore the opportunities that can come with a reduced-income year.? For 2024, the 12% marginal tax bracket ends at $94,300 for a married couple filing jointly.? If we assume the standard deduction, they could have gross taxable income up to $123,500 ($94,300 + $29,200) and still be in the 12% ordinary income tax bracket.? The 0% capital gains bracket ends at $94,050.? A married couple with gross taxable income up to $123,250 ($94,050 + $29,200) would still be in the 0% capital gains bracket.? Identifying these opportunities and taking advantage of any remaining room in these brackets could mean the ability to do a Roth conversion at a low tax rate, or even selling a long-term capital gains asset with no tax liability.

Planning Point: For many individuals, these are rare opportunities, so it is important to not miss them. If they are missed, there is little that can be done to get them back.?

Planning for Next Year

Even though most people don’t want to think about next year until after New Year’s Day, there are planning ideas for next year that should be considered before the 1st of the year.? Here are some questions to consider for next year:

·???Should qualified plan contributions be adjusted for next year?

·???Are catchup contributions available?

·???If RMDs are required, is there a plan for taking them?

·???Are there any inherited retirement accounts that need to be carefully looked at????????????????

Prudential is Here to Support You

The holiday season, and all the joy of friends and family that comes with it will be upon us soon.? It’s important to take some time to consider the opportunities that have year-end deadlines.? Carefully considering these decisions now can help avoid having to make last-minute decisions at the end of the year, or worse yet, missing out on opportunities.? Talk to a financial professional about strategies that could help you achieve your financial planning goals.

?

This Advanced Planning Insights and Ideas bulletin was published in October 2024.

Annuities are issued by The Prudential Insurance Company of America, Newark, NJ, and its affiliates.

This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any clients or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. If you would like information about your particular investment needs, please contact a financial professional.

Conversions to a Roth IRA are generally fully taxable. Before clients convert to a Roth IRA, consider how their tax bracket will affect the overall benefit of the rollover. Conversion income may push them into a higher tax bracket. It is, however, possible to convert only part of their traditional IRA. This could enable them to remain in the same tax bracket they would be in without the conversion. It is generally advisable to pay the taxes on the conversion with funds other than those in a client’s traditional IRA. If clients are under age 59? when they do a conversion, any funds not deposited in the Roth IRA will be subject to a 10% additional tax. (unless an exception applies).

?We do not provide tax, accounting, or legal advice. Clients should consult their own independent advisors as to any tax, accounting, or legal statements made herein.

?? 2024 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

?1083334-00002-00