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LAT NEWSLETTER

The official weekly newsletter of LAT Financial Group

IN THIS ISSUE

DID YOU KNOW?

  • ARRANGE YOUR TAX PAPERS AND FINANCIAL RECORDS
  • ESTABLISH AN ONLINE TAX ACCOUNT WITH THE IRS
  • DECLARE ALL SOURCES OF INCOME
  • SEEK ADVICE FROM A REGISTERED TAX PROFESSIONAL
  • WHAT IS TAX-RELATED IDENTITY THEFT?
  • IMPLEMENT ROBUST PASSWORDS AND MULTI-
    FACTOR AUTHENTICATION

  • BE ALERT FOR SCAM EMAILS,
    TEXTS AND CALLS

Tax Planning

by Audrey Jackson

Did You Know?

Tax planning is a crucial aspect of personal and business financial management, involving strategies to minimize tax liabilities and maximize financial benefits within the confines of the law. As we approach tax season 2025, it’s essential to understand key areas such as retirement planning, tax harvesting, educational savings plans, and other relevant strategies to ensure optimal financial health.

Congress is facing the expiration of the Tax Cuts and Jobs Act (TCJA), necessitating decisions on whether to pursue fundamental tax reform or follow the TCJA’s framework. Without legislative action, most Americans will encounter higher, more complex taxes beginning in 2026, as key TCJA provisions expire.

The TCJA temporarily reduced average tax burdens across the income spectrum and simplified tax filing through structural reforms. It lowered tax rates, expanded tax brackets, increased the standard deduction and child tax credit, and limited itemized deductions. These changes reduced the individual income tax compliance burden, making it more beneficial for most filers to take the standard deduction and eliminating the alternative minimum tax complexity for millions. Additionally, the TCJA reformed the corporate tax system, boosting capital investment and improving the international tax system. However, all these provisions will expire at the end of 2025, with several business provisions phasing out over the next few years

What is Tax Planning?

Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible. A plan that minimizes how much you pay in taxes is referred to as tax efficient. This involves strategic financial decision-making, such as optimizing retirement contributions, utilizing tax-loss harvesting, leveraging educational savings plans, maximizing deductions and credits, and staying informed about tax law changes. Effective tax planning requires a thorough understanding of tax regulations and proactive management of income, investments, and expenditures to legally reduce tax liabilities and enhance financial health.

Retirement Planning

Retirement planning is the process of determining retirement income goals and the actions necessary to achieve those goals. It involves identifying sources of income, estimating expenses, implementing a savings program, and managing assets and risk. Effective retirement planning can offer significant tax benefits.

Retirement Accounts

Traditional IRA and 401(k) Plans: Contributions to traditional IRAs and 401(k) plans are typically tax-deductible, reducing taxable income in the year of contribution. The investments grow tax-deferred until withdrawal, usually at retirement age, when they are taxed as ordinary income.

Roth IRA and Roth 401(k) Plans: Contributions to Roth IRAs and Roth 401(k) plans are made with after-tax dollars, meaning they do not reduce current taxable income. However, qualified withdrawals in retirement are tax-free. This can be particularly advantageous if you expect to be in a higher tax bracket in retirement.

SEP and SIMPLE IRAs: These are retirement plans designed for small businesses and self-employed individuals. Contributions to SEP IRAs are tax-deductible and grow tax-deferred. SIMPLE IRAs allow both employee and employer contributions, with similar tax advantages.

Catch-Up Contributions

The contribution limit for 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan is now $23,000, up from $22,500. The annual IRA contribution limit increased to $7,000 from $6,500. For those aged 50 and over, the IRA catch-up contribution limit remains $1,000 for 2024, now with an annual cost-of-living adjustment under the SECURE 2.0 Act.

Required Minimum Distributions (RMDs)

Retirees must start taking required minimum distributions from their traditional IRAs and 401(k)s at age 73 (as per the SECURE Act 2.0 adjustments). Failing to take RMDs can result in hefty penalties. Proper planning can help manage the tax impact of these distributions.

Tax Harvesting

Tax harvesting, or tax-loss harvesting, is a strategy to sell securities at a loss to offset capital gains taxes. This approach can be used to manage investment portfolios in a tax-efficient manner.

Capital Gains and Losses

  1. Short-Term vs. Long-Term Gains: Short-term capital gains (from assets held for one year or less) are taxed at ordinary income rates, while long-term capital gains (from assets held for more than one year) are taxed at preferential rates. Tax harvesting can strategically realize losses to offset these gains.
  2. Harvesting Losses: By selling investments at a loss, you can offset capital gains from other investments. If losses exceed gains, up to $3,000 of the loss can be used to offset ordinary income per year, with any remaining losses carried forward to future years.

Wash Sale Rule

The wash sale rule disallows a tax deduction for a security sold at a loss if the same or a substantially identical security is purchased within 30 days before or after the sale. It’s essential to understand this rule to avoid inadvertently invalidating tax losses.

Rebalancing Portfolios

Tax harvesting should be integrated with portfolio rebalancing. This ensures that the investment portfolio remains aligned with financial goals and risk tolerance while maximizing tax efficiency.

Educational Savings Plans

Educational Savings Plans

Educational savings plans provide tax-advantaged ways to save for future educational expenses. Two popular plans are the 529 College Savings Plan and the Coverdell Education Savings Account.

529 College Savings Plan

  • Tax Benefits: Contributions to a 529 plan are not tax-deductible at the federal level, but many states offer tax deductions or credits for contributions. The earnings grow tax-free, and withdrawals for qualified education expenses are also tax-free.
  • Qualified Expenses: These include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Recent changes also allow up to $10,000 per year to be used for K-12 tuition and up to $10,000 in total to pay off student loans.
  • Estate Planning Benefits: Contributions to 529 plans can be a part of estate planning strategies. Contributions are considered completed gifts, meaning they are removed from the donor’s estate, which can reduce estate tax liability.

Coverdell Education Savings Account (ESA)

  • Contribution Limits: Contributions to Coverdell ESAs are capped at $2,000 per year per beneficiary, and contributions must be made before the beneficiary turns 18.
  • Tax Benefits: Like 529 plans, Coverdell ESA contributions grow tax-free, and withdrawals for qualified education expenses are tax-free.
  • Qualified Expenses: Coverdell ESAs can be used for a broader range of educational expenses, including elementary and secondary education costs.

Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.

Contribution Limits

For 2024, individuals under a high deductible health plan (HDHP) have an HSA annual contribution limit of $4,150. The HSA contribution limit for family coverage is $8,300.

Qualified Medical Expenses

HSAs can be used to pay for a wide range of medical expenses, including deductibles, copayments, prescriptions, and certain over-the-counter medications. Withdrawals for non-qualified expenses before age 65 incur a 20% penalty and are subject to income tax.

Retirement Benefits

After age 65, HSA funds can be used for any purpose without penalty, though withdrawals for non-medical expenses are taxed as ordinary income. This feature makes HSAs a versatile tool for both health care and retirement planning.

Business Tax Planning

Business tax planning involves strategies to minimize tax liabilities and maximize after-tax income for businesses.

Entity Selection

Choosing the right business entity (sole proprietorship, partnership, corporation, S corporation, or LLC) can have significant tax implications. For example, S corporations and LLCs can offer pass-through taxation, avoiding double taxation on corporate income.

Deductible Business Expenses

  • Ordinary and Necessary Expenses: Businesses can deduct ordinary and necessary expenses incurred in the course of running the business, such as rent, salaries, and utilities.
  • Depreciation and Section 179 Expensing: Businesses can depreciate capital assets over their useful life or take advantage of Section 179 expensing to immediately deduct the cost of qualifying assets, subject to limits.

Tax Credits

  • Research and Development (R&D) Tax Credit: This credit is available for businesses that incur expenses for research and development activities. It can significantly reduce a business’s tax liability.
  • Work Opportunity Tax Credit (WOTC): This credit is available for businesses that hire individuals from certain targeted groups who have consistently faced significant barriers to employment.

Several corporate tax provisions under the TCJA are set to expire, including the ability to immediately deduct certain expenses. Businesses will need to reassess their tax strategies, potentially adjusting their capital expenditures and other financial plans to adapt to these changes​.