Year-end tax strategies

Before the calendar rolls over and bells ring in a new year, let’s take a moment to evaluate and optimise tax situations to save individuals and businesses money. A variety of factors affect business. This article is a high-level overview of certain US tax laws only; as such, businesses should consult with their tax advisor before acting on this information. Until then, there are three factors to consider when making these strategic decisions: current rules, future rules, and anticipated changes.

Current rules

Businesses – Eligible businesses have until the end of the year to act on these 2024 income tax savings. Additional rules apply to each item so businesses must consult with their tax advisor regarding eligibility:

• Bonus compensation: Bonus payments made by 15 March 2025, may still be deductible in 2024 by some taxpayers if the bonus plan provides for an amount that is fixed and determinable as of the end of the year.
• Covering business expenses: Remember to report all expenses paid on behalf of the business to the business’ accounting team or its tax advisor for proper reporting. The classification of these expenses, such as a contribution or loan, may impact the deductions you take and gain you recognize upon the sale of your business.
• Business transfers: Cash and assets received from the business and payments made by the business on its behalf should be evaluated for proper tax treatment. The classification of the payment, such as compensation, distribution, or loan repayment, has different tax consequences.
• Track attributes: Track unused tax attributes, such as net operating losses, passive activity losses, and tax credits to reduce future taxes.
• 401(k) tax credits: 401(k) plans do not require company matches. The federal government offers three tax credits to help small businesses subsidise the cost of (1) offering 401(k) plans to their employees, (2) automatically enrolling employees in the plan, and (3) making employer contributions.
• Enhanced charitable contributions: Larger deductions are available for donations of food inventory to a qualified charity.
• ‘Tips’ credit: Businesses that report tips compensation in employees’ W-2s may be eligible for a credit for the employer’s share of employment taxes on that compensation.
• Bonus depreciation: In 2024, businesses may deduct up to 60 percent of the cost of qualified assets placed in service in 2024.

Personal income taxes – individuals may have the following opportunities to reduce their 2024 personal income taxes:

• IRA and SEP IRA contribution deadline: Qualified contributions made to these tax-advantaged retirement plans by 15 April 2025, may still be deductible in 2024.
• IRA contributions: Individuals under the age of 50 may contribute up to an annual total of USD $7,000, or up to $8,000 if 50 or older, to these tax-advantaged retirement plan accounts.
• Self-employed 401(k) or SEP IRA contributions: Individuals under the age of 50 may contribute up to an annual total of $69,000, or up to $76,500 if 50 or older, to these tax-advantaged retirement plan accounts.
• 401(k) contributions: Individuals under the age of 50 may elect to contribute up to an annual total of $23,000, or up to $30,500 if 50 or older, to these tax-advantaged retirement plan accounts.
• 529 contributions: Individuals can contribute up to $18,000 to these tax-advantaged college savings accounts without triggering additional taxes. Qualified withdrawals from the plans are not subject to tax.
• Significant medical expenses: Individuals may be able to deduct significant medical expenses incurred during the year that were not reimbursed by healthcare insurance.
• Marriage: If an individual and their significant other are looking for another reason to marry before the year ends, the tax benefits of marriage may be a consideration. While exceptions apply, couples may realise tax savings when there is significant disparity between each partner’s taxable income.
• Home office: Expenses related to maintaining a home office may be deductible if the home office is used to generate income other than Form W-2 income. Similar rules apply to business use of personal assets such as an automobile.
• Worthless debt: A person may be able to deduct amounts loaned to others that have since become uncollectable.
• Hobbies: A person may be able to deduct expenses incurred in pursuit of a hobby up to the amount of revenue generated from the hobby.
• Gambling: A person may be able to deduct gambling expenses up to the amount of gambling revenue.
• Travel: A person may be able to deduct the mileage and travel expenses associated with business, medical, or charitable travel.
• Other income-generating expenses: A person may be able to deduct or capitalise and deduct over time other expenses incurred in the pursuit of current or future income. Examples are costs incurred in taking and posting photographs to social media accounts in the pursuit of building the brand or business.

Future rules

Following are changes to the tax rules above that take effect in 2025:

• Bonus depreciation: In 2025, businesses may deduct up to 40 percent of the cost of qualified assets placed in service in 2025.
• Self-employed 401(k) or SEP IRA contributions: Individuals under the age of 50 may contribute up to an annual total of $70,000, or up to $77,500 if 50 or older, to these tax-advantaged retirement plan accounts.
• 401(k) contributions: Individuals under the age of 50 may elect to contribute up to an annual total of $23,500, or up to $31,000 if 50 or older, or up to $34,750 for those age 60 to 63, to these tax-advantaged retirement plan accounts.
• 529 contributions: Individuals may contribute up to $19,000 to these tax-advantaged college savings accounts without triggering additional taxes.

Anticipated Changes

The following tax policy changes advocated by President-Elect Donald Trump and the 2024 Republican Party leadership have a likelihood of passing in 2025 due to strong support among Republicans elected to the 119^th Congress in 2024 or wide bipartisan support:

• Lowering corporate and personal income tax rates
• Lowering corporate tax rates for US manufacturing
• Making the qualified business income deduction permanent
• Increasing the bonus depreciation deduction
• Permitting the deduction of research and development expenses
• Increasing the deduction of net operating losses
• Eliminating taxes on tip earnings and overtime pay
• Eliminating the cap on the state and local income tax deductions
• Eliminating marriage penalty (where tax results are worse due to being married)
• Discontinuing energy credits
• Expanding access to tax-advantaged retirement savings accounts for married individuals
• Eliminating the alternative minimum tax, investment income surtax, and the base erosion tax
• Permanently repealing miscellaneous itemized deductions

If certain anticipated changes above are not enacted, then the following changes will go into effect in 2026:

• Qualified business income deduction will expire.
• Personal income tax rates brackets will revert to their pre-TCJA (Tax Cuts & Jobs Act) levels, with the highest tax rate returning to 39.6 percent.
• The state and local income tax deduction cap expires, thus removing the $10,000 limit.
• Restore miscellaneous itemised deductions and reduce the standard deduction.

 Businesses may want to take advantage of the anticipated changes by doing the following:

• Evaluate their tax classification and legal entity structure for optimal tax results.
• Accelerate the timing of sizable, planned purchases to 2024, when tax rates are expected to be higher, so the savings greater, and defer actions resulting in the recognition of income to 2025 or later years.
• Modify the employee compensation structure to shift more employee earnings to tip compensation. While this reduces the employer’s tips credit, the reduction in employer taxes increases the overall net benefit to the employer.

These are just a taste of the tax-saving opportunities available. We recommend that individuals and businesses consult with their tax advisor to identify those available opportunities.

Ashby Walters is a co-founder of AW Vanguard, a consultancy specialising in strategic tax, business advisory, and accounting services. With extensive experience in corporate tax planning and compliance, Ashby has built a reputation as a forward-thinking leader in the field. Her innovative approach focuses on aligning tax strategy with broader business objectives to drive growth and efficiency.

Ashby is also the creator of Future Tax Leaders (FTL), a professional organisation dedicated to empowering the next generation of tax professionals. FTL provides mentorship, education, and networking opportunities to tax professionals, fostering a dynamic community committed to excellence and innovation in the tax field.

With a career spanning several industries, Ashby Walters is known for her expertise, leadership, and commitment to shaping the future of the tax profession.