As we approach the end of 2024, it’s the perfect time to get your finances in order. Don’t forget to download our comprehensive 2024 year-end financial checklist for more guidance.

1. Tax-loss harvesting & Washington state capital gains tax

Despite strong market performance limiting tax-loss harvesting opportunities, political events may create volatility in Q4. Selling underperforming investments at a loss can offset capital gains. Losses exceeding gains can offset up to $3,000 of ordinary income, with excess losses carried forward.

In Washington state, only long-term capital losses (investments held for 365+ days) can offset long-term capital gains. Capital gains tax applies to gains over $262,000, with some exemptions. Be mindful of IRS “wash-sale” rules, which disallow loss deductions if you repurchase the same security within 60 days.

2. Required minimum distributions

The age to begin RMDs was raised this year. If you’re over 73, take your RMD before year-end. Those turning 73 this year have until April 1, 2025, for the first distribution, but delaying means double distributions in 2025. RMDs apply to all tax-deferred retirement accounts, except for employer plans for those working past 73 and less than 5% business owners, and inherited IRAs post-January 1, 2020. Missing an RMD incurs a 25% IRS penalty. The IRS has waived RMDs and penalties for post-2020 inherited IRAs through 2024 but plan your strategy to avoid future penalties.

3. Flexible spending accounts

Don’t forget the funds you set aside in your flexible spending account for 2024. These funds are used for expenses related to the special purpose of the fund. The accounts may pay for eligible medical, dental, vision, and/or dependent care costs. Verify the rules under your plan to determine if you may roll over unused funds into 2025. If your balance exceeds the permissible rollover amount, plan to spend the balance on qualified expenses before the end of the year.

4. Defer income and accelerate expenses

The income you receive in 2024 is considered taxable in 2024. If your employer allows you to defer your year-end bonus, consider deferring some income from 2024 to 2025. The delay of the sale of capital-gain property and receipt of distributions in 2025 can also help reduce this year’s taxable income. Deferring into the next tax year only makes sense if you expect to be in the same or lower tax bracket for 2025.

Since the Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction, fewer taxpayers itemize their deductions—a game changer for many who previously itemized deductions. For some taxpayers, it may make sense to strategically accelerate and pre-pay certain tax-deductible expenses—bunching into a single year what you had planned to pay over two years—and benefit from itemized deductions this year and not next year. Boosting your total itemized deductions beyond the standard deduction will also allow you to deduct part of the medical and dental expenses you have paid. Consider pre-paying qualified medical expenses—the threshold for qualified medical expenses for 2024 is 7.5 percent of your adjusted gross income (AGI). This threshold was scheduled to increase to 10 percent beginning in 2021; however, Congress has elected to maintain the 7.5 percent threshold.

5. Gifts and donations

During the holidays, it seems timely to make gifts to support your favorite charitable organization(s) and realize deductions, and/or give to loved ones and maximize your annual gift exclusions.

Charitable Contributions:

• Cash Gifts: Common and straightforward.
• Appreciated Stock: Offers tax benefits by deducting the stock’s fair market value and removing capital gains from your portfolio.
• Qualified Charitable Distributions (QCDs): For those over 73, QCDs count toward RMDs and are excluded from taxable income, up to $105,000 annually. An advantage of this strategy over other options is it directly reduces taxable income rather than being subject to the standard deduction. Donations must be made directly from your retirement account to a charity.

Donor Advised Funds (DAFs):

• DAFs don’t qualify as QCDs but are useful for bunching itemized deductions. Consider making an irrevocable donation, equal to several years’ worth of charitable gifts, to a DAF before the end of the year. You can deduct the entire donation in the current tax year and control the disbursements to the charities of your choice over multiple years.

Estate Planning:

• Tax-free gifts: In 2024, you can make tax-free gifts up to $18,000 per person ($36,000 for couples) to as many individuals as you´d like. These gifts will not be subject to federal gift taxes and will not be considered taxable income for the recipient.
• Front-Loading 529 Plans: Consider contributing to 529 plans for children/grandchildren, which grow tax-deferred and are tax-free for educational expenses. Contribute up to $90,000 ($180,000 for couples) in one year, spreading it over five years without creating a taxable gift, enhancing wealth transfer potential. This amplifies the wealth transfer potential and is worthy of careful consideration. For example, a married couple with four grandchildren could reduce their taxable estate up to $720,000 by contributing to four separate 529 plan accounts without consuming part of their lifetime gift exemption.

6. Roth conversions

Considering a Roth conversion during market volatility can be beneficial. Here are two main reasons:

1. Future Tax Benefits: Converting now might help if you expect higher future tax rates, such as avoiding the “tax torpedo” (a sharp rise in marginal tax rate due to social security benefits and required minimum distributions at age 73) or reducing Medicare premium surcharges for high-income retirees. Consider your current and future income tax rates, withdrawal timing, and time horizon.
2. Estate Planning: It may be advantageous to leave Roth IRA assets to heirs and traditional IRA assets to charities.

Consult with professional advisors to understand your options and the consequences before deciding. Given the political climate, now might be a good time to act on a Roth conversion.

7. Don’t forget to download our annual checklist

In addition to the year-end strategies mentioned, it’s helpful to create and review an annual financial checklist. You can start by downloading our sample financial checklist as a guide. This is particularly important if you or your family have experienced any major life events this year, such as marriage, divorce, births, deaths, or job transitions—or expect one soon. Completing these simple but crucial tasks can help you avoid serious financial pitfalls.

Our financial planning team is also here to help—contact us today.

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the article. These opinions are subject to change without notice and are not intended to provide specific investment advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable. However, Badgley Phelps cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Badgley Phelps does not provide tax, legal, or accounting advice; nothing contained in these materials should be taken as such.