A post-election checklist for year-end tax talks with clients

Individuals waiting until after the presidential election to begin their year-end tax planning election can wait no longer: The votes have been cast, and Dec. 31 is right around the corner. 

While there's no sure way to predict what tax policy will entail under the new administration, there are timely strategies wealth holders can leverage now. With 2024 deadlines fast approaching and a tax sunset looming, sitting down with clients before January is more important than ever. 

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Consider the following checklist when having these conversations.

Estate plans and gifting: Use it or potentially lose it

Much can change over a year, including a family's circumstances or goals, making year-end a critical time to review and update wills, trusts and other estate planning documents. It's also an opportune time to transfer wealth to heirs, especially under the Tax Cuts and Jobs Act's current provisions. While the TCJA's ultimate fate hinges on the actions by the new administration, any law that extends or replaces it would likely not pass until well into 2025, creating a limited window to act on current policies.

READ MORE:  A primer on the IRA 'bridge' to bigger Social Security benefits

Individuals should consider maximizing the current $13.61 million ($27.22 million for married couples) federal estate, gift and generation-skipping transfer tax exemption to transfer wealth and mitigate some of the estate and/or gift tax burdens. Wealth holders should evaluate allocating an increased generation-skipping tax exemption to trusts that are not fully exempt from the generation-skipping tax. Clients may also capitalize on the increased lifetime federal estate tax exemption by deploying spousal lifetime access trusts (SLATs), dynasty trusts or irrevocable life insurance trusts (ILITs). 

Those wishing to transfer wealth to loved ones should also take advantage of the 2024 annual gift exclusion, which allows for tax-free gifts up to $18,000 per individual, or a combined $36,000 per married couple, without counting toward their lifetime gifting exemption. This includes cash gifts and tax-free transfers on behalf of another individual, such as paying school tuition or medical expenses directly to the provider.

READ MORE: How a life insurance strategy could save some wealthy estates millions

Charitable gifting: Tax-efficient strategies

For clients wishing to pay it forward this giving season, several tax considerations should be factored into their strategies. 

Gifts to donor-advised funds may be used to secure a charitable deduction in 2024, while deferring a distribution to a public charity to a later year. Clients may consider "giving away the gain" — giving appreciated assets held longer than one year — to a public charity in exchange for a fair market value income tax charitable deduction while avoiding income tax on the appreciation and the 3.8% surtax on net investment income, if applicable. They may also combine multiple years of charitable contributions into a single year to exceed the standard deduction threshold required to fully deduct contributions. 

Additionally, those 70½ years or older may consider making a direct transfer from an IRA to a public charity while avoiding paying taxes on the distribution. 

It's important to ensure any charitable contribution meets the strict substantiation rules. Failure to adhere to these has denied charitable deductions in recent cases.

Income tax: Accelerate income or deductions?

Clients have the option to accelerate income into 2024 to avoid potential tax rate increases in 2025. We recommend individuals defer net investment income or reduce modified adjusted gross income, or MAGI, to minimize or avoid the 3.8% surtax on net investment income. This applies to a MAGI over $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly and $125,000 for married taxpayers filing separately. We also suggest reviewing the breaks in tax brackets for capital gains to determine if an individual or their family members may benefit from a 0% or 15% tax rate on long-term capital gains. 

READ MORE: Ask an advisor: How can I save my investments from taxes?

If a client's itemized deductions will exceed the standard deduction, consider accelerating itemized deductions into 2024 in the 32%, 35% and 37% tax brackets, as they may be capped at a 28% tax benefit in the future. Similarly, consider deferring deductions if there is an expectation they will provide a greater benefit under the potential of higher tax rates.

Lastly, sit down and review income tax withholding and estimated tax payments. If clients are potentially subject to a penalty for underestimated payments, consider increasing their withholding from wages and bonuses in the fourth quarter.

Retirement plans: Maximize contributions and brush-up on RMDs

Forthcoming legislation may limit the size of retirement accounts, making now an ideal time to maximize contributions to 401(k)s as well as to traditional, Roth, simplified employee pension (SEP) and Simple IRAs. For those 50 years or older, consider making "catch-up" contributions to eligible contributions. 

Traditional IRA holders may also explore converting to a Roth IRA. While this will result in taxable income in 2024, assets will accumulate tax-free in the Roth IRA, allowing for tax-free distributions in the future when income tax rates may be higher.

Ensure clients review retirement account beneficiary designations and are familiar with the latest required minimum distribution rules. If applicable, clients should also take 2024 RMDs from traditional IRAs, SEP and Simple IRAs and most qualified plans.

READ MORE: Final IRS rules to IRA beneficiaries: Get going on those RMDs already

Investment considerations: Time for a portfolio checkup?

Year-end — or early in 2025 if the holiday season proves too hectic — is a good time to revisit investments to ensure they maximize tax efficiencies and are aligned with broader wealth goals. 

The "nice" list of reasons to rebalance portfolios includes: staying on track with goals whether it be selling overweighted assets; purchasing securities in underweight asset classes or adjusting future investments to compensate. 

Individuals may also offset the tax impact of any realized gains taken in 2024 by harvesting losses in the portfolio or realizing gains to offset losses. Any harvested tax losses not offset by gains in 2024 can offset up to $3,000 of other income with the balance carried forward to future tax years. 

The election outcome will be instrumental in shaping the future of tax and economic policy in 2025, which makes it all the more important to make a well-thought-out plan for your client today. Now is an important time to review these strategies to ensure alignment with clients' broader financial goals.