As the year winds down and holiday celebrations pick up, we understand if your mind drifts away from your financial plan to bright lights and festivities.
Before you settle in, though, make sure you take these four critical steps before the year ends. December is a critical month to lock in key tax savings, meet year-end deadlines, and set yourself up for success come April next year.
End-Of-Year Financial Checklist
Each item on this checklist is essential, but it does not need to be complicated. At M3 Family Office, we guide each of our clients through the following steps every year:
- Annual Gift tax exclusion
- Charitable deductions (including setting up a donor-advised fund)
- Tax-loss harvesting
- RMD IRA required minimum distributions
Gift Tax Exclusion
As of 2024, the annual gift tax exclusion (or limit) is $18,000 and $36,000 for married couples. This is the limit of how much you can give each year to an individual without paying a gift tax or eating into your lifetime gift exemption.
The gift tax applies to any assets you give to an individual (not a charity, and spouses are usually excluded), whether it be cash, stocks, or even a car. The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the lifetime gift exemption to $13,610,000 per person in 2024. The act is scheduled to sunset at the end of December 2025, and the exemption will be reduced to $7 million.
Prior to the election, there was a strategy of “use it or lose it” approach for your lifetime exemption so you can lock in any gifts you’d like to make before the sunset takes effect (unless Congress acts to continue it). However, given the Trump election and control of the House and Senate, we will look for news of tax reform prior to the sunset at the end of 2025.
With the year coming to a close and the holiday season in full swing, have you assessed your gifts this year against the limit?
Charitable Deductions
With Salvation Army Santas on every street corner, it’s natural to get in the charitable mood this time of year. That said, it’s easy to miss a few key opportunities to reap even more rewards come April.
Gift Appreciated Assets
Charitable contributions do not always need to be cash, they could be appreciated assets like stocks.
For example, let’s say you purchased shares in Nvidia last year that have gone up 190% and are now worth $10,000. Rather than making a cash gift to a charity, you could gift your shares of Nvidia. There are two benefits here:
- You’ll make a $10,000 charitable donation that can be deducted from your taxes.
- The charity can sell the stock without paying taxes on the gain.
- You can re-purchase the shares of Nvidia at their current price (assuming you still want the position in your portfolio), and due to the increased cost basis, you’ll pay less in capital gains once you sell.
We help our clients set up donor-advised funds that allow them to gift appreciated assets to charities of their choice.
Set Up A Donor Advised Fund (DAF)
A Donor Advised Fund (DAF) allows you to make charitable contributions, receive tax deductions, and recommend grant distributions.
We help our clients set these up and provide a seamless online method to make gifts of appreciated securities to their DAF and make grant recommendations to the charities of their choice.
We suggest that clients consider their goals for charitable giving in a year, and we can monitor their portfolio for positions with gains to contribute to their DAF. To be eligible for tax deductions, all contributions must be made by December 31st, so you still have time. Even if you were to mail a check on the 31st, it would still be written off for the same calendar year. Learn more about these strategies in our other article.
The stock market had an incredible run in 2024. Do not allow your capital gains to go to waste; donate them to a cause that you are passionate about today.
Tax-Loss Harvesting
As of December 2024, the S&P 500 is up nearly 30% on the year, but do you have any positions that dipped?
If so, then this is the time to sell them and harvest any losses against gains you had during the year. This can help mitigate any tax burden and allow you to re-purchase assets after the 30-day wash rule if you’d like to retain the position in your portfolio.
In 2025, if you like the idea of investing in the S&P index, consider Direct Indexing: a strategy we provide to track a stock index and actively harvest losses of positions at a loss. This can produce enhanced returns in what we refer to as Tax Alpha.
IRA Required Minimum Distributions
An IRA allows you to put off tax payments for your investments for many years, but once you hit 73 years old (the IRS recently updated the cut-off year from 72), it’s time to take distributions every year. Generally, these required minimum distributions (RMDs) must be withdrawn by December 31 of that year, either in a lump sum or in installments.
The IRS penalty for not taking an RMD or for taking less than the required amount is significant: 25% of the amount not taken on time. So, if you fell behind this year, now is the time to withdraw.
Follow These Steps for Fewer Headaches Come April
We’ve helped our clients through an array of year-end strategies to set them up for success (and fewer headaches) come tax season.
At M3 Family Office, we believe that your needs and financial plan should dictate your asset allocation and not the other way around. By betting on the long-term growth of the economy and seeking out key opportunities for tax advantages and rewards, we assist our clients in developing a financial operating system to grow their wealth and pass it on to the next generation.
As the incoming administration settles in (with Republican control across all three branches), we will retain our focus on proposed legislation to see how it may impact our clients. In the meantime, the four items we outlined here will help influence your tax bill next April.