If you’ve reached age 70½, you can make cash donations directly from your IRA to IRS-approved charities. These qualified charitable distributions (QCDs) may help you gain tax advantages.

QCD basics

QCDs can be made from your traditional IRA(s) free of federal income tax. In contrast, other traditional IRA distributions are wholly or partially taxable, depending on whether you’ve made nondeductible contributions over the years.

Unlike regular charitable donations, you can’t claim itemized deductions for QCDs. That’s OK because the tax-free treatment of QCDs equates to a 100% deduction.

To be a QCD, an IRA distribution must meet the following requirements:

1. It can’t occur before you’re age 70½.
2. It must meet the normal tax-law requirements for a 100% deductible charitable donation.
3. It must be a distribution that would otherwise be taxable.

New provision 

Under the SECURE 2.0 Act, the annual QCD limit is now adjusted for inflation. In 2024, the limit is $105,000, up from $100,000 last year. In 2025, it will jump again to $108,000.

If both you and your spouse have IRAs set up in your respective names, each of you is entitled to a separate QCD limit. If you inherited an IRA from the deceased original account owner, you can make a QCD with the inherited account if you’ve reached age 70½.

Tax-saving advantages

QCDs have at least five tax-saving advantages:

1. They aren’t included in your adjusted gross income (AGI). That lowers the odds that you’ll be affected by unfavorable AGI-based rules or hit with the 3.8% net investment income tax on your investment income.
2. They always deliver a tax benefit, while “regular” charitable donations might not. The Tax Cuts and Jobs Act significantly increased standard deduction amounts, and you only get a tax benefit from a charitable donation if your total itemizable deductions exceed your standard deduction. Also, deductions for “regular” charitable donations can’t exceed 60% of your AGI. QCDs are exempt from that limitation.
3. For 2024 and 2025, you’re subject to the IRA required minimum distribution (RMD) rules if you turn 73 during the year or are older. RMD amounts will be fully or partially taxable depending on whether you made any nondeductible contributions over the years. QCDs made from your traditional IRA(s) count as RMDs. That means you can donate all or part of your annual RMD amount — up to the applicable annual QCD limit — that you’d otherwise be forced to receive and pay taxes on. In effect, you can replace taxable RMDs with tax-free QCDs.
4. Say you own one or more traditional IRAs to which you’ve made nondeductible contributions over the years. Your IRA balances consist partly of a taxable layer (from deductible contributions and account earnings) and partly of a nontaxable layer (from nondeductible contributions). Any QCDs are treated as coming first from the taxable layer but they’re tax-free. Any nontaxable amounts are left behind in your IRA(s). Later, you or your heirs can withdraw the nontaxable amounts tax-free.
5. They decrease your taxable estate. However, that’s not a concern for most folks with today’s large federal estate tax exemption ($13.61 million in 2024 and $13.99 million in 2025).

Act before year end

The QCD strategy is a tax-smart opportunity for many people. It’s especially beneficial for seniors with charitable inclinations and more IRA money than they need for retirement. Contact us if you have questions or want assistance with QCDs.

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Inflation can have a significant impact on federal tax breaks. While recent inflation has come down since its peak in 2022, some tax amounts will still increase for 2025. The IRS recently announced next year’s inflation-adjusted amounts for several provisions.

Here are the highlights.

Standard deduction. What does an increased standard deduction mean for you? A larger standard deduction will shelter more income from federal income tax next year. For 2025, the standard deduction will increase to $15,000 for single taxpayers, $30,000 for married couples filing jointly and $22,500 for heads of household. This is up from the 2024 amounts of $14,600 for single taxpayers, $29,200 for married couples filing jointly and $21,900 for heads of household.

The highest tax rate. For 2025, the highest tax rate of 37% will affect single taxpayers and heads of households with income exceeding $626,350 ($751,600 for married taxpayers filing jointly). This is up from 2024, when the 37% rate affects single taxpayers and heads of households with income exceeding $609,350 ($731,200 for married couples filing jointly).

Retirement plans. Some retirement plan limits will increase for 2025. That means you may have an opportunity to save more for retirement if you have one of these plans and you contribute the maximum amount allowed. For example, in 2025, individuals can contribute up to $23,500 to their 401(k) plans, 403(b) plans and most 457 plans. This is up from $23,000 in 2024. The general catch-up contribution limit for employees age 50 and over who participate in these plans will be $7,500 in 2025 (unchanged from 2024).

However, under the SECURE 2.0 law, specific 401(k) participants can save more with catch-up contributions beginning in 2025. The new catch-up contribution amount for taxpayers who are age 60, 61, 62 or 63 will be $11,250.

Therefore, participants in 401(k) plans who are 50 or older can contribute up to $31,000 in 2025. Those who are age 60, 61, 62 or 63 can contribute up to $34,750.

The annual contribution limit for those with IRA accounts will remain at $7,000 for 2025. The IRA catch-up contribution for those age 50 and up also remains at $1,000 because it isn’t adjusted for inflation.

Flexible Spending Accounts (FSAs). These accounts allow owners to pay for qualified medical costs with pre-tax dollars. If you participate in an employer-sponsored FSA, you can contribute more in 2025. The annual contribution amount will rise to $3,300 (up from $3,200 in 2024). FSA funds must be used by year end unless an employer elects to allow a two-and-one-half-month carryover grace period. For 2025, the amount that can be carried over to the following year will rise to $660 (up from $640 for 2024).

Taxable gifts. You can make annual gifts up to the federal gift tax exclusion amount each year. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption. For 2025, the first $19,000 of gifts to as many recipients as you’d like (other than gifts of future interests) aren’t included in the total amount of taxable gifts. (This is up from $18,000 in 2024.)

Thinking ahead

While it will be quite a while before you’ll have to file your 2025 tax return, it won’t be long until the IRS begins accepting tax returns for 2024. When it comes to taxes, it’s nice to know what’s ahead so you can take advantage of all the tax breaks to which you’re entitled.

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The Inflation Reduction Act (IRA), enacted in 2022, created several tax credits aimed at promoting clean energy. You may want to take advantage of them before it’s too late.

On the campaign trail, President-Elect Donald Trump pledged to “terminate” the law and “rescind all unspent funds.” Rescinding all or part of the law would require action from Congress and is possible when Republicans take control of both chambers in January. The credits weren’t scheduled to expire for many years, but they may be repealed in 2025 with the changes in Washington.

If you’ve been thinking about making any of the following eligible purchases, you may want to do it before December 31.

1. Home energy efficiency improvements

Homeowners can benefit from several tax credits for making energy-efficient upgrades to their homes. These include:

• Energy Efficient Home Improvement Credit: This credit covers 30% of the cost of eligible home improvements, such as installing energy-efficient windows, doors, and insulation, up to a maximum of $1,200 this year. There’s also a credit of up to $2,000 for qualified heat pumps, water heaters, biomass stoves or biomass boilers.
• Residential Clean Energy Credit: This credit is available for installing solar panels, wind turbines, geothermal heat pumps, and other renewable energy systems. It covers 30% of the cost.
• Energy Efficient Property Credit: For those investing in clean energy for their homes, this credit offers a significant incentive. It covers 30% of the cost of installing solar water heaters and other renewable energy sources.

2. Clean vehicle tax credit

One of the most notable IRA provisions is the clean vehicle tax credit. If you purchase a new electric vehicle (EV) or fuel cell vehicle (FCV), you may qualify for a tax credit of up to $7,500. The credit for a pre-owned clean vehicle can be up to $4,000. To be eligible, the vehicle must meet specific criteria, including price caps and income limits for the buyer.

The credit can be claimed when you file your tax return. Alternatively, you can transfer it to an eligible dealer when you buy a vehicle, which effectively reduces the vehicle’s purchase price by the credit amount.

3. Electric Vehicle Charging Equipment Credit

If you install an EV charging station at your home, you can claim a credit of 30% of the cost, up to $1,000. This credit is designed to encourage the adoption of electric vehicles by making it more affordable to charge at home.

Act now

These are only some of the tax breaks in the IRA that may reduce your federal tax bill while promoting clean energy.

IRS data has shown that the tax breaks are popular. For example, in 2023 (the first year available), approximately 750,000 taxpayers claimed the credit for rooftop solar panels. Keep in mind that a tax credit is more valuable than a tax deduction. A credit directly reduces the amount of tax you owe, dollar for dollar, while a deduction reduces your taxable income, which is the amount subject to tax.

So, act now if you want to take advantage of these credits. There may also be state or local utility incentives. Contact us before making a large purchase to check if it’s eligible.

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Employee stock options remain a potentially valuable asset for employees who receive them. For example, many Silicon Valley millionaires got rich (or semi-rich) from exercising stock options when they worked for start-up companies or fast-growing enterprises.

We’ll explain what you need to know about the federal income and employment tax rules for employer-issued nonqualified stock options (NQSOs).

Tax planning objectives 

You’ll eventually sell shares you acquire by exercising an NQSO, hopefully for a healthy profit. When you do, your tax planning objectives will be to:

1. Have most or all of that profit taxed at lower long-term capital gain rates.
2. Postpone paying taxes for as long as possible.

Tax results when acquiring and selling shares

NQSOs aren’t subject to any tax-law restrictions, but they also confer no special tax advantages. That said, you can get positive tax results with advance planning.

When you exercise an NQSO, the bargain element (difference between market value and exercise price) is treated as ordinary compensation income — the same as a bonus payment. That bargain element will be reported as additional taxable compensation income on Form W-2 for the year of exercise, which you get from your employer.

Your tax basis in NQSO shares equals the market price on the exercise date. Any subsequent appreciation is capital gain taxed when you sell the shares. You have a capital loss if you sell shares for less than the market price on the exercise date.

Let’s look at an example

On December 1, 2023, you were granted an NQSO to buy 2,000 shares of company stock at $25 per share. On April 1, 2024, you exercised the option when the stock was trading at $34 per share. On May 15, 2025, the shares are trading at $52 per share, and you cash in. Assume you paid 2024 federal income tax on the $18,000 bargain element (2,000 shares × $9 bargain element) at the 24% rate for a tax of $4,320 (24% × $18,000).

Your per-share tax basis in the option stock is $34, and your holding period began on April 2, 2024. When you sell on May 15, 2025, for $52 per share, you trigger a $36,000 taxable gain (2,000 shares × $18 per-share difference between the $52 sale price and $34 basis). Assume the tax on your long-term capital gain is $5,400 (15% × $36,000).

You net an after-tax profit of $44,280 when all is said and done. Here’s the calculation: Sales proceeds of $104,000 (2,000 shares × $52) minus exercise price of $50,000 (2,000 shares × $25) minus $5,400 capital gains tax on the sale of the option shares minus $4,320 tax upon exercise.

Since the bargain element is treated as ordinary compensation income, the income is subject to federal income tax, Social Security and Medicare tax withholding.

Key point: To keep things simple, the example above assumes you don’t owe the 3.8% net investment income tax on your stock sale gain or any state income tax.

Conventional wisdom and risk-free strategies

If you had exercised earlier in 2024 when the stock was worth less than $34 per share, you could have cut your 2024 tax bill and increased the amount taxed later at the lower long-term capital gain rates. That’s the conventional wisdom strategy for NQSOs.

The risk-free strategy for NQSOs is to hold them until the earlier of 1) the date you want to sell the underlying shares for a profit or 2) the date the options will expire. If the latter date applies and the options are in-the-money on the expiration date, you can exercise and immediately sell. This won’t minimize the tax, but it eliminates any economic risk. If your options are underwater, you can simply allow them to expire with no harm done.

Maximize your profit

NQSOs can be a valuable perk, and you may be able to benefit from lower long-term capital gain tax rates on part (maybe a big part) of your profit. If you have questions or want more information about NQSOs, consult with us.

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Hiring household help, whether you employ a nanny, housekeeper or gardener, can significantly ease the burden of childcare and daily chores. However, as a household employer, it’s critical to understand your tax obligations, commonly called the “nanny tax.” If you hire a household employee who isn’t an independent contractor, you may be liable for federal income tax and other taxes (including state tax obligations).

If you employ a household worker, you aren’t required to withhold federal income taxes from pay. But you can choose to withhold if the worker requests it. In that case, ask the worker to fill out a Form W-4. However, you may be required to withhold Social Security and Medicare (FICA) taxes and to pay federal unemployment (FUTA) tax.

2024 and 2025 thresholds

In 2024, you must withhold and pay FICA taxes if your household worker earns cash wages of $2,700 or more (excluding the value of food and lodging). The Social Security Administration recently announced that this amount will increase to $2,800 in 2025. If you reach the threshold, all the wages (not just the excess) are subject to FICA.

However, if a nanny is under age 18 and childcare isn’t his or her principal occupation, you don’t have to withhold FICA taxes. So, if you have a part-time student babysitter, there’s no FICA tax liability.

Both an employer and a household worker may have FICA tax obligations. As an employer, you’re responsible for withholding your worker’s FICA share. In addition, you must pay a matching amount. FICA tax is divided between Social Security and Medicare. The Social Security tax rate is 6.2% for the employer and 6.2% for the worker (12.4% total). Medicare tax is 1.45% each for the employer and the worker (2.9% total).

If you want, you can pay your worker’s share of Social Security and Medicare taxes. If you do, your payments aren’t counted as additional cash wages for Social Security and Medicare purposes. However, your payments are treated as additional income to the worker for federal tax purposes, so you must include them as wages on the W-2 form that you must provide.

You also must pay FUTA tax if you pay $1,000 or more in cash wages (excluding food and lodging) to your worker in any calendar quarter. FUTA tax applies to the first $7,000 of wages paid and is only paid by the employer.

Making payments 

You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than making an annual lump-sum payment.

As an employer of a household worker, you don’t have to file employment tax returns, even if you’re required to withhold or pay tax (unless you own your own business). Instead, employment taxes are reported on your tax return on Schedule H.

When you report the taxes on your return, include your employer identification number (EIN), which is not the same as your Social Security number. You must file Form SS-4 to get one.

However, if you own a business as a sole proprietor, you include the taxes for a household worker on the FUTA and FICA forms (940 and 941) you file for the business. And you use your sole proprietorship EIN to report the taxes.

Maintain detailed records 

Keep related tax records for at least four years from the later of the due date of the return or the date the tax was paid. Records should include the worker’s name, address, Social Security number, employment dates, amount of wages paid, taxes withheld and copies of forms filed.

Contact us for assistance or if you have questions about how to comply with these requirements.

© 2024

When you think about tax deductions for vehicle-related expenses, business driving may come to mind. However, businesses aren’t the only taxpayers that can deduct driving expenses on their returns. Individuals may also be able to deduct them in certain circumstances. Unfortunately, under current law, you may be unable to deduct as much as you could years ago.

How the TCJA changed deductions

For years before 2018, miles driven for business, moving, medical and charitable purposes were potentially deductible. For 2018 through 2025, business and moving miles are deductible only in much more limited circumstances. The changes resulted from the Tax Cuts and Jobs Act (TCJA), which could also affect your tax benefit from medical and charitable miles.

Before 2018, if you were an employee, you potentially could deduct business mileage not reimbursed by your employer as a miscellaneous itemized deduction. The deduction was subject to a 2% of adjusted gross income (AGI) floor, meaning that mileage was deductible only to the extent that your total miscellaneous itemized deductions for the year exceeded 2% of your AGI. However, for 2018 through 2025, you can’t deduct the mileage regardless of your AGI. Why? The TCJA suspends all miscellaneous itemized deductions subject to the 2% floor.

If you’re self-employed, business mileage can still be deducted from self-employment income. It’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.

Medical and moving

Miles driven for a work-related move before 2018 were generally deductible “above the line” (itemizing wasn’t required to claim the deduction). However, for 2018 through 2025, under the TCJA, moving expenses are deductible only for active-duty military members.

If you itemize, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. For example, you can include in medical expenses the amounts paid when you use a car to travel to doctors’ appointments. For 2024, medical expenses are deductible to the extent they exceed 7.5% of your AGI.

The limits for deducting expenses for charitable miles driven are set by law and don’t change yearly based on inflation. But keep in mind that the charitable driving deduction can only be claimed if you itemize. For 2018 through 2025, the standard deduction has nearly doubled, so not as many taxpayers are itemizing. Depending on your total itemized deductions, you might be better off claiming the standard deduction, in which case you’ll get no tax benefit from your charitable miles (or from your medical miles, even if you exceed the AGI floor).

Rates depend on the trip

Rather than keeping track of your actual vehicle expenses, you can use a standard mileage rate to compute your deductions. The 2024 rates vary depending on the purpose:

• Business, 67 cents per mile.
• Medical, 21 cents per mile.
• Moving for active-duty military, 21 cents per mile.
• Charitable, 14 cents per mile.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls. There are also substantiation requirements, which include tracking miles driven.

We can answer any questions 

Do you have questions about deducting vehicle-related expenses? Contact us. We can help you with your tax planning.

© 2024