I Wish I’d Met You in December

Key Takeaway: Too often, I meet people in January who, if I had met in December, could have had a better outcome. The change in the tax year from December 31 to January 1 can affect these people. December is the month to optimize!

Sometimes, I walk a tightrope. On the one hand, I never want anyone to feel embarrassed about their past decisions; whenever someone seeks help, that day is a great starting point for new opportunities. On the other hand, I can often see where someone’s situation could have been optimized and they would have been much better off for it. This last point always comes to mind in January when I wish I had started working with someone in December so I could have helped much more with the previous year’s tax planning.

Moving into a new year, here are four ideas that can make a difference this December versus next January:

Accelerate Charitable Deductions

It is hard to find deductions under the current tax system. Business owners sometimes find them more easily with certain spending they can do in December versus waiting until the new year. For individuals, though, the biggest opportunity is often charity. The issue isn’t just giving to charity; it is when to give to charity.

Too often, people’s charitable contributions don’t count because they use the standard deduction instead of itemizing. For example, assume the following: real estate taxes and state income taxes equaling $10,000 (the maximum deduction you can take); mortgage interest of $14,000; and charitable deductions of $5,000.

In this scenario, those all add up to $29,000. However, the standard deduction in 2024 is $29,200, and since that number is higher, you would take the standard deduction. In this scenario, the $5,000 given to charity wasn’t really deductible since the standard deduction was higher; you could not give the $5,000 to charity and still get the standard deduction.

And that is the key. Instead of giving to charity slowly year over year, give zero for three to five years straight, taking the standard deduction, and then give it all in one year so you go over the standard deduction limit and can itemize.

I’m not saying don’t give to charity all those years. I’m advocating for a donor-advised fund (DAF), where you get the charitable deduction in the year you put the money in but can hand it out to charities over the next many years as fast or as slow as you want. This strategy allows you to control your deductions.

Other Gifting

People often gift money to their children for specific purchases, such as cars, down payments on a home, or just to share a little. If you do this under the gift tax exemption ($18,000 in 2024; $19,000 in 2025), you do not need to file a gift tax return. But often, Mom and Dad want to gift more than this amount since things are expensive. Splitting the amount between December and January (literally a couple of days) often accomplishes what they want, if they only think to do it.

For example, suppose Mom and Dad want to help Junior with a down payment on a home. They want to give him $74,000. Mom can give $18,000 in December 2024, and then $19,000 in early January 2025, for a total of $37,000. Dad can do those same amounts at the same time for another $37,000.

But if they forget to do it in December, then they can only gift $19,000 each in January 2025. And if they want to give Junior the rest so he can purchase his new home next year, they will have to file a gift tax return for the remaining amount.

They will not need to pay a gift tax (I won’t get into that here), but they will probably spend a few thousand dollars on the gift tax return, which could have been avoided.

Use Up Tax Brackets

Saving money on taxes is often thought of as a current problem. But if you can prepay some tax in order to pay less over a period of time, that is good tax planning. Often, someone’s tax return shows me that they landed in a lower tax bracket than expected, but in future years, they will likely be in higher tax brackets. Not using up a lower bracket in those years is a missed opportunity.

For example, the 12% tax bracket (federal; I will ignore state taxes for now) goes up to $94,300 for married filing jointly. After that, the next tax bracket is 22% (up to $201,050 for married filing jointly). Suppose you had a low-income year where you were reporting $50,000 of taxable income, but in most other years, you probably would be over $100,000. The win here is to accelerate income this year up to the $94,300 since you only pay 12% on it versus 22% in the future. $94,300 minus $50,000 equals $44,300. Saving that extra 10% of tax on that would save you approximately $4,400 (yes, in the future, but it’s still your money).

The easiest way to do this is a Roth conversion or simply taking money out of an IRA. There could be other ideas if you are a business owner and you can accelerate income into a year. But if you don’t think of this in December, it is too late in January.

BOI

There is a new law regarding Beneficial Ownership Information (BOI) reporting (get more information here). Basically, you have to now report who are the underlying owners of a corporation (LLC, S corp, etc.). If you don’t do it, the fines start at $500 per day up to $10,000.

This initial reporting has to be done by January 1, 2025. After that, you have to report any material change within 30 days of the change or be subject to fines. The idea behind the rule is to prevent money laundering or other crime, and by knowing who actually is behind corporate shells, the government can track things easier.

Three points to consider here: First, there are a few exceptions to this rule, so make sure you understand if you have to report.

Second, material changes in the future can include something as simple as your driver’s license expiring. So again, make sure you know the rules. Most CPAs and attorneys are knowledgeable about this.

And third, this reporting can be triggered by new things you do, like setting up a new LLC or even doing certain estate planning. Thus, it is important to ask your advisors (CPA, attorney, financial advisor) moving forward if anything they are doing could mean you need to report.

A Good Start

There are many more ideas that I could come up with (might be a good article for next December). My plea to you is that if you are considering seeking help from a professional in the next few months, do it in the next two weeks. That way, you have a shot at optimizing this year.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.