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Year-End Planning Reminders: Last Minute Action Items

With 2024 looming, individuals should consider the following year-end planning action items.

Corporate Transparency Act (CTA)

Prepare for Beneficial Ownership Disclosure. As discussed in more detail in Loeb’s client alert here, filing requirements under the CTA take effect on Jan. 1, 2024, and will require disclosure of the beneficial ownership of most corporations, LLCs, limited partnerships and similar entities to the U.S. Treasury’s Financial Crimes and Enforcement Network (FinCEN). Entities in existence before Jan. 1, 2024, have at least one year to file the required beneficial ownership report; entities created in 2024 must file within 90 days of creation, and those created in 2025 or after will have 30 days to file. 

For individuals who anticipate forming reportable entities in 2024, creating the entity by Dec. 31, 2023, will allow them to fall under the extended filing deadline for preexisting entities. Existing entities also should be reviewed and consideration given to dissolving unused or defunct entities by year-end to avoid unnecessary reporting. 

Gift Tax Planning

Use or Lose 2023 Annual Exclusion Gifts. In 2023, individuals can give up to $17,000 each to an unlimited number of recipients without reducing their lifetime gift or estate tax exemptions, paying gift tax or filing a federal gift tax return. Married couples can give up to $34,000 per recipient by electing to “split” gifts on a gift tax return. Note that gifts made by check must be deposited by the recipient before year-end to qualify for the 2023 annual exclusion, and any unused 2023 annual exclusions will not carry over to 2024. 

An annual exclusion gift must be of a present interest, so the donor should make the gift directly to the recipient or, if the gift is made to a trust, the trust must provide Crummey withdrawal powers that allow the intended beneficiary to withdraw the annual exclusion amount. (A notification letter should generally be sent to the beneficiary.) Trusts for grandchildren should be designed to qualify for the generation-skipping transfer (GST) tax exemption annual exclusion or they will use a portion of the donor’s lifetime GST tax exemption. 

Plan for Use of Higher Gift Tax Exemption. Each U.S. individual also has a federal gift and estate tax exemption of $12.92 million in 2023, increasing to $13.61 million in 2024. This exemption will drop to $5 million (adjusted for inflation) in 2026, absent additional tax law changes. Accordingly, as discussed in the newsletter here, individuals with sufficient assets and a desire to make lifetime gifts should get a head start on planning to maximize this temporarily higher gifting capacity.

Charitable and Income Tax Planning

Offset Capital Gains. Taxpayers can manage their capital gains tax exposure by realizing capital losses to offset other capital gains recognized in the same tax year. Individuals should review their investments for potential capital loss harvesting opportunities or, conversely, their ability to accelerate capital gains to absorb any already-realized losses. Securities should be sold by Dec. 29, 2023, the last trading day of the year, to realize any capital gains or losses. Note that the asset holding period for tax purposes (i.e., long term or short term) is determined based on the trade date, when you initiate the buy or sell order, rather than its settlement date. Also keep in mind the wash-sale rules, which disallow a tax loss on the sale of a security if a “substantially identical” security is repurchased within a 30-day window before or after the sale.

Optimize Charitable Gifts. Individuals who make regular charitable gifts may want to optimize their potential charitable deductions, such as by bundling donations into an expected high tax year. Consideration also should be given to the types of assets donated. For example, making a charitable donation of publicly traded stock that has a low basis (rather than selling it and donating the proceeds) can give the donor a charitable deduction equal to the fair market value of the stock at the time of donation and eliminate the gain recognition that generally would be triggered upon the asset’s sale. When reviewing, consider the charitable deduction limitations that may apply based on adjusted gross income (AGI) for the year, the type of charity (public or private) and the asset given (cash, appreciated stock, etc.). A five-year carry forward applies for charitable contributions that are not currently deductible due to AGI limitations. 

Donors also should confirm that the charitable donation will take place in 2023. Gifts made by check or credit card are deductible for 2023 if the check is written and mailed or the charge to the credit card posts by Dec. 31, 2023. Charitable gifts of stock are not complete for deduction purposes until the stock certificate is actually delivered to the charity or ownership is changed in the corporation’s or broker’s records; accordingly, for any recently made or intended charitable donations of stock, it may be wise to confirm with the corporation or broker that will process the ownership change before the new year.

Consider Timing of Other Deductions. Individuals may wish to accelerate or delay other itemized deductions (such as medical costs and certain interest expenses), depending on their tax outlook for this year and next. Bunching available itemized deductions into a high tax year can help manage anticipated income tax liabilities. 

Retirement Planning

Take Required Minimum Distributions (RMDs). Individuals who must take RMDs from qualified retirement plans and traditional IRAs should do so by Dec. 31 to avoid penalties. 

Consider Qualified Charitable Distributions (QCDs). Charitably inclined individuals who have not yet taken 2023 RMDs (or who have attained age 70 1/2 even if not required to take RMDs) may consider making QCDs from their traditional and/or inherited IRAs. QCDs are IRA distributions of up to $100,000 per year directly to one or more qualifying public charities (not donor-advised funds or private foundations). Thanks to the recently enacted SECURE Act 2.0, as of 2023, donors also can direct a one-time $50,000 QCD to a charitable remainder trust or charitable gift annuity. QCDs do not count as taxable income and cannot be taken as charitable deductions but may count toward satisfaction of an individual’s RMD. These QCD limits will be indexed for inflation beginning in 2024.