4 Actions to Take Before 2025
As 2024 winds down and we begin to look ahead to 2025, it’s important for everyone to take steps to lower their tax liabilities. Yet, as a high-net-worth family, you may have unique opportunities to reduce your tax exposure prior to year-end. The following strategies can help.
#1 – Make gifts to family members.
If your goals include providing financial assistance to family members, it may make sense to finalize your annual gifts prior to year-end. In 2024, the IRS allows individuals to give up to $18,000 per recipient without incurring gift tax. If you’re married, both you and your spouse can give up to $18,000, for a total gift of $36,000 per recipient.
As long as your annual gifts don’t exceed this limit, they don’t count toward the lifetime gift tax exclusion. In 2024, this limit is $13.61 million for individuals or $27.22 million for married couples filing jointly. However, if no legislative action is taken in the meantime, that amount is set to revert to an estimated $7 million on January 1, 2026. Now’s a great time to make tax-free gifts to family members while lowering your eventual estate tax liabilities.
#2 – Contribute to a donor-advised fund.
A donor-advised fund (DAF) is a charitable giving vehicle that allows the donor to set aside donations and receive a tax deduction in the current year while retaining the flexibility to allocate the funds to charities in either the current year or future years. Assets within the DAF grow tax-deferred over time, and there’s no deadline that specifies when you need to distribute funds. When you’re ready, you can make tax-free donations to any qualified charity.
One particularly effective tax planning strategy is to “bunch” DAF contributions. Using this approach, you would combine several years’ worth of charitable donations into a single contribution. Assuming you itemize your tax return, doing so allows you to take a tax deduction in the current year while making charitable donations over time to your chosen charities.
Contributing to a DAF can also be an effective way to avoid paying capital gains taxes on a highly appreciated stock position, a long-held concentrated stock position or a security with no cost basis. In these situations, you can complete an in-kind transfer of the security to your DAF and avoid paying taxes on the stock sale.
#3 – “Superfund” a 529 college savings account.
If your financial goals include covering the cost of college for your children or grandchildren, you may be able to save on taxes by contributing to a 529 college savings account. 529s are tax-advantaged savings vehicles that offer an immediate tax savings opportunity while also providing tax-exempt growth and tax-free distributions when the funds are used to pay for qualified educational expenses.
When contributing to a 529 plan, the annual gift tax exclusion amount applies. As noted earlier, this limit is $18,000 per individual donor per recipient. However, the IRS allows individuals to frontload (or “superfund”) up to five years’ worth of contributions in a single year. This means individual donors can contribute up to $90,000 in one year. For married couples, that amount doubles to $180,000. And because this amount is per individual recipient, you can contribute this amount to multiple family members’ college savings plans.
Superfunding a loved one’s 529 college savings plan can be a great way to lower the taxable value of your estate while also supporting your family members’ college education goals.
#4 – Harvest investment losses to offset gains.
Another smart tax planning move for high-net-worth families is to use investment losses to offset gains elsewhere in your portfolio. Known as tax-loss harvesting, this strategy allows you to sell assets that have declined in value in the short term and replace those investments with highly correlated alternatives. When done correctly, your risk profile and expected portfolio returns remain unchanged while the realized investment loss generates a tax deduction that can help you save on taxes. These tax savings can then be reinvested to further grow the value of your portfolio.
The IRS allows taxpayers to offset up to $3,000 per year in taxes, and additional losses can be carried forward to offset gains in future tax years.
When implementing a tax-loss harvesting strategy, it’s important to be aware of the IRS’s wash sale rule. This rule is intended to prevent investors from selling at a loss for the sole purpose of obtaining a tax deduction while they continue to maintain their current investment allocation.
The wash sale rule may be triggered if you sell an investment at a loss and buy a “substantially identical” security within 30 days before or after the sale. A wash sale can also be triggered if your spouse or a company you control buys a substantially identical security during the 30 days before or after you sell a security at a loss.
If your security transaction triggers the wash sale rule, the tax loss won’t be allowed. The rule also applies when you sell an investment at a loss in a taxable account and buy it in a tax-advantaged account during the 30 days before or after you sell.
