Time for a financial check-in

How did you feel about 2024? Were you comfortable with the fluctuations in your investments, the income received and diversity of income sources, and your overall spending? Regardless of your answer, the end of the year presents an opportune time for reflection and planning. Consider how 2024 differed for you from prior years, and whether you anticipate any significant changes in 2025. If you have upcoming big-ticket purchases, liabilities, or plans, work closely with your advisors to ensure everyone is prepared to meet your liquidity needs and understand how that may impact your financial goals for 2025 and beyond.

Tax-loss harvesting

Despite seeing new market highs in 2024, a detailed dive into your investment holdings may reveal assets with unrealized losses. Instead of focusing on the less-than-stellar performance of these assets, consider realizing the losses to offset other income and reduce your overall tax bill. Realized capital losses first offset capital gains, and up to $3,000 of excess capital losses may offset ordinary income in 2024. Any unused capital losses may be carried forward into future tax years. Be mindful of the wash sale rule, which could prevent the realization of the loss if a “substantially identical” security is purchased within 30 days before or after the sale that generated the loss. If you have more than one investment manager, ensure that the actions of one do not negate the actions of the other. Always remember to rebalance your total portfolio after tax-loss harvesting to help stay on track with your investment goals.

Retirement planning and accounts

As we near the end of 2024, consider whether you can make additional pre-tax or post-tax contributions to retirement accounts.

Maximizing contributions to tax-deferred accounts may lower your 2024 tax bill while allowing you to benefit from tax-deferred growth for years to come. For 2024, employees may contribute up to $23,000 into 401(k)s, 403(b)s, and most 457 plans, and those 50 and older may make a “catch-up” contribution of an additional $7,500. Lower contribution limits apply to traditional and Roth IRAs: $7,000 with an additional $1,000 catch-up contribution permitted for those 50 and older. Income limitations may impact the deductibility of contributions to a traditional IRA and limit your ability to contribute to a Roth IRA. If your income prevents you from contributing to a Roth IRA, talk with your tax advisor to determine if a “back-door Roth” strategy may be right for you. If you are in a lower tax bracket in 2024, consider taking the opportunity to convert part or all of your traditional IRA to a Roth IRA.

If you are subject to Required Minimum Distributions (RMDs) from any retirement account, be sure to take the required distribution by yearend to avoid excise taxes. If you gift to non-profits, consider using a Qualified Charitable Distribution (discussed in the Philanthropic Goals and Contributions section below) to help pursue your philanthropic goals while fulfilling your RMD.

Inherited IRAs

For those with inherited IRAs, be mindful of rules regarding the timing of distributions. If the IRA owner died before January 1, 2020, continue using the same distribution method previously selected. If the IRA owner died on or after January 1, 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act impacts the distribution options. Check with your wealth advisor about the distribution options available to you.

If you inherited a traditional IRA from someone who died on or after January 1, 2020, and selected the 10-year payout option, regulations finalized in 2024 may impact how you must take distributions during that 10-year period. If the IRA owner died before the Required Beginning Date (RBD), then distributions may be taken at any time during the 10-year period, as long as you withdraw the entire IRA balance by December 31 of the tenth year after the IRA owner’s death. If the IRA owner died on or after the RBD, you must take distributions of the annual life expectancy amounts for the first nine years, with a full distribution by December 31 of the tenth year after the IRA owner’s death (note that this does not apply to inherited Roth IRAs, which simply must be withdrawn before the end of the tenth year after death).

Failure to take the annual life expectancy payments (or any RMD) may result in excise tax. In light of the lack of final regulations on the 10-year payout requirements until 2024, the IRS has provided penalty relief for certain impacted beneficiaries who failed to take required distributions in years 2020 through 2024. If you inherited an IRA in 2020 or later and selected the 10-year payout option, work with your wealth advisor to ensure that you take RMDs going forward to prevent the application of penalties starting in 2025.

Employee benefits

Did you take full advantage of tax-saving opportunities provided by your employer in 2024? Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) for healthcare or dependent care provide tax-advantaged opportunities to set aside and access funds for medical and dependent care purposes. If you enrolled in an HSA or FSA for 2024, be sure that you have maximized your contributions. 

If you did not enroll in an HSA or FSA for 2024, be alert for your opportunity to enroll for 2025.

HSAs offer multiple tax benefits, including tax deductible contributions (and avoiding any related FICA taxes when made via payroll deductions), tax deferred growth, and tax-free withdrawals if used for qualified medical expenses. For 2024, individuals may contribute up to $4,150 and families may contribute up to $8,300. Individuals 55 and older may contribute an additional $1,000. Amounts contributed to your HSA by your employer count toward the total contribution.

For those without access to an HSA, healthcare FSAs provide similar tax benefits. Healthcare FSA contributions are capped at $3,200 for 2024. Unlike HSAs, healthcare FSA funds must be used in the year of contribution (or in some cases within a short time into the next calendar year, as set forth in the FSA plan document), so make sure that you have utilized funds in your FSA before time runs out.

Participants in a dependent care assistance program should similarly confirm that they have maximized their contributions and used their contributions by year end. Contributions for 2024 are limited to $5,000 per household ($2,500 if married filing separately).

Family businesses and entities

Does your family have an operating business or entity? If so, you may be subject to reporting requirements under the Corporate Transparency Act (CTA), a body of federal law aimed at combating money laundering and other financial crimes. The CTA requires certain businesses and entities to report information about the beneficial owners (i.e., the individuals who own or control the business or entity) to the Financial Crimes Enforcement Network (FinCEN). While some exceptions exist, if your business or entity is an LLC, corporation, or was otherwise created in the U.S. by filing documents with a state’s Secretary of State or a similar office of the state or an Indian tribe, you may be subject to reporting requirements. Similarly, if your business or entity is a foreign company registered to do business in the U.S. or with an Indian tribe by such a filing, you may be subject to reporting requirements.

Businesses and entities subject to the reporting requirements and formed or registered before January 1, 2024, must submit their initial report to FinCEN no later than January 1, 2025. If registered on or after January 1, 2024, the initial report to FinCEN must be submitted within 90 days after formation. The CTA imposes a short 30-day window to submit any changes to the reported information to FinCEN. Several lawsuits regarding the CTA have been brought, but as of this writing, the CTA and its reporting deadlines remain intact. For more information, including tools to assist you in determining whether the CTA applies to your business or entity, see FinCEN’s dedicated reporting website (https://fincen.gov/boi) and speak with your legal advisor.

Gifting and estate planning

Annual gifting can transfer significant assets over time and remove the future growth of the transferred assets from your estate, possibly helping to reduce your future estate tax liability.

In 2024, each taxpayer may gift $18,000 to an unlimited number of recipients tax-free without having to file a gift tax return. A married couple with two children and four grandchildren, for example, could gift a total of $216,000 in 2024 to these six family members tax-free ($18,000 x 2 x 6). If the couple’s assets were to later be subject to the 40% federal estate tax at their deaths, that gift could yield $86,400 in estate tax savings, even before taking into consideration the future growth of the gifted assets.

Consider using gifts to 529 accounts to combat the increasing cost of education. Gifts to 529 accounts may be front-loaded with up to five years of $18,000 tax-free gifts; be sure to check the appropriate box on your gift tax return. In addition, if a child has earned income from a job, consider gifting to facilitate Roth IRA contributions. This will help jumpstart their retirement savings, provide them with tax-free growth over the years, and may even give you an opportunity to educate them about finances and the power of investing. Remember that all gifts from one taxpayer to an individual must be aggregated for purposes of the $18,000 annual gift tax exclusion.

Gifting cash is easier and faster than gifting securities. If you plan to gift securities, coordinate with your wealth advisor and the gift recipient well in advance of year-end. If you are approaching the December 31 deadline, consider gifting cash instead to ensure the gift is completed by year-end. If gifting by check, make sure that the recipient deposits the check into his or her account by December 31 for it to count as a 2024 gift.

For those with family or friends facing large medical bills or tuition payments, note that you may pay certain medical or educational providers directly without having those payments count as a gift to the person who incurred the bill, or against the applicable annual exclusion amount in the year of the direct payment.

With significant gift and estate tax changes on the horizon, now is the time to discuss planning opportunities. Absent Congressional action, the federal estate and gift tax exemption is scheduled to plummet from $13.61 million per person in 2024 ($27.22 million per married couple), to approximately one-half of that value (projected to be approximately $7.15 million per person, depending on inflation) as of January 1, 2026. In simplified terms, this amount represents what a person can give away during life and at death (combined) without incurring additional gift or estate tax (currently 40%).

If the pending reduction of the federal estate and gift tax exemption concerns you, consider implementing gifting strategies to take advantage of the current exemption amount. For those comfortable parting with assets, consider gifting assets to irrevocable trusts for your children or grandchildren. A married person who would like to utilize the current exemption amount but would prefer their spouse to have access to those assets could consider establishing an irrevocable trust for the spouse, commonly referred to as a Spousal Lifetime Access Trust (SLAT). Talk to your wealth advisor about your options.

Regardless of whether you want to implement strategies to take advantage of the current estate and gift tax exemption, the end of the year is a great time to review your existing estate plan, including wills, trusts, medical and financial powers of attorney, and medical directives to confirm that they still reflect your intent. Don’t forget to check your beneficiary designations on retirement accounts, life insurance policies, and annuities.

Philanthropic goals and contributions

Non-profits always appreciate contributions. Help yourself while doing good by structuring your giving to maximize tax benefits. To take an income tax deduction in 2024 for a charitable contribution made by check, the check must be post-marked by December 31 if using the USPS. Note that if you send the check via a private delivery service, such as FedEx or UPS, you may only take an income tax deduction in 2024 if the non-profit receives the check on or before December 31 (regardless of when the check was surrendered to the private delivery service). If donating by credit card or debit card, the charge must occur no later than December 31, regardless of when you pay the credit card bill.

Consider donating appreciated assets to non-profits rather than cash. You not only avoid reporting any gain on the asset on your income tax return, but your income tax deduction may be based on the asset’s value at the time of donation, rather than the value you originally acquired the asset for. Furthermore, a non-profit’s tax-exempt status generally allows it to sell the appreciated asset without paying tax on gains.

If you are at least 70½, consider fulfilling your philanthropic goals via a Qualified Charitable Distribution (QCD) from your IRA. In 2024, you may donate up to $105,000 directly from your IRA to one or more qualified charities. Note that a QCD cannot be used to fund a Donor Advised Fund (DAF) or many private foundations. The amount gifted by QCD applies against your Required Minimum Distribution (RMD) while avoiding inclusion of the amount of the QCD on your income tax return. Since the QCD is not reported as topline taxable income, this method is more tax efficient than itemizing the same contribution amount as a charitable deduction for many taxpayers. Be sure to coordinate the QCD early to ensure the distribution can be made timely.

Donor Advised Funds (DAFs) make charitable giving simple and, once funded, allow you to avoid the stress of mailing checks to non-profits. A gift to a DAF in 2024 results in a charitable deduction for 2024, even if the funds are not distributed from the DAF to your selected charities until later years. This offers a great solution when a deduction would be valuable, but you have not completed your research on charities, formulated your overall giving plan, or simply are not yet ready for the ultimate gift to the non-profit. Giving to a DAF presents an opportunity to “bunch” several years of philanthropic giving into one year, increasing the deduction in the year of the gift to the DAF. If you do not currently have a DAF and would like to donate to one in 2024, be sure to talk to your wealth advisor far enough in advance of year end to set up and fund the account.

Looking ahead

As you consider your planning opportunities, remember that in addition to the scheduled estate and gift tax exemption reduction, absent new federal legislation, several income tax changes will also occur on January 1, 2026, when income tax brackets and rates will revert to those in place before 2018. This would mean tighter tax brackets and a higher maximum income tax rate than those currently in place. Consider how that may impact your tax picture based on your anticipated income and any planned shifts, such as a retirement, attaining RMD status for your retirement accounts, or a liquidity event. While the standard advice of “defer income and accelerate deductions” may still work for you, talk to your BMO Wealth Management advisory team about these changes and whether you may be better off accelerating income into 2024 or 2025.

Year-end planning, especially when future tax legislation is unknown, can be a great time of opportunity.

BMO Wealth Management — its professionals, its disciplined approach, its comprehensive and innovative advisory platform — can help by providing strategic wealth planning specific to your unique goals and objectives. For greater confidence in navigating these complexities, call your BMO Wealth Management Advisor today.