With the election behind us and year-end approaching, it’s time to start thinking about moves that may help lower your tax bill for this year. The standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most taxpayers. We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end.
• Depreciation rules for businesses. Businesses should consider purchasing assets and placing them in service prior to year-end. The first year Section 179 expense limit has been raised to $1,220,000. However, ‘Bonus’ first year depreciation has been reduced to 60% for 2024, 40% for 2025, and is scheduled to be phased out completely by the end 2026 if the new administration doesn’t reinstate the full deduction.
• Arizona Tax Credits. Contributions to charities that qualify for the various Arizona (“AZ”) Tax Credits (listed below) generate a dollar-for-dollar state tax credit. While these don’t qualify for the federal charitable deduction, taxpayers who itemize deductions and whose state and local taxes paid are less than $10,000 can still get the extra benefit of a federal itemized deduction in addition to the state tax credit. Either way these are still valuable tax planning tools.
You can contribute to one or more of the following:
The public school tax credit for donations to qualifying public schools allows a maximum credit of $200 ($400 if married filing jointly (“MFJ”)).
The private school tax credit has two parts. The basic part allows a maximum credit of $731 ($1,459 if MFJ). Additionally, a ‘switcher’ credit of $728 ($1,451 if MFJ) is also allowed, bringing the combined total to $1,459 ($2,910 if MFJ). You can make both parts of your contribution to the same private certified school tuition organization.
The Charitable tax credit for donations to charities that assist the Working Poor allows a maximum credit of $470 ($938 if MFJ).
The Foster Care tax credit for donations to qualifying foster care organizations allows a maximum credit of $587 ($1,173 if MFJ).
Lists of qualifying organizations appear on the ADOR website https://azdor.gov/tax-credits.
For the school, charitable and foster care credits, qualifying contributions made between January 1, 2025, and April 15, 2025, can be used as a tax credit on either your 2024 or 2025 AZ income tax return.
The AZ Military Family Relief Fund tax credit. This credit of $200 ($400 if MFJ) is administered by the AZ Dept of Veterans’ Services. Annual donations qualifying for this credit are capped at $1 million. At this time credit donations are still being accepted at https://dvs.az.gov/donate/military-family-relief-fund-2024.
• Contributions to 529 College Savings Plans. Arizona allows a deduction for 529 Plan contributions paid by year-end of $2,000 per beneficiary ($4,000 if MFJ). For example, a married couple contributing $4,000 to each of their five grandchildren’s 529 accounts can claim a $20,000 deduction on their AZ tax return.
• Important new filing requirement for small entities (including LLCs) under the Corporate Transparency Act related to Beneficial Ownership Interest reporting through FINCEN (the Federal government agency Financial Crimes Enforcement Network). This requires owners of entities, including single-member LLCs, registered with the Arizona Corporation Commission or Secretary of State, or with any similar government body in another state, to register as a beneficial owner with FINCEN. Reporting includes providing identifying information of beneficial owners, including uploading supporting documentation such as driver’s licenses. It is similar to applying for a passport or TSA pre-check. Note this is not related to income taxes. Clients should self-report. Penalties for noncompliance are significant, up to $500 per day. In general, initial reports must be filed by December 31, 2024. For more details visit our website at https://patinella.com/small-entity-including-llcs-filing-requirement-corporate-transparency-act-and-fincen/. Our clients can also refer to the instructions included with the copy of your 2023 tax returns.
• Penalty for Underpayment of Estimated tax. If you’re facing a penalty for underpayment of estimated tax and increasing your withholding before year-end won’t sufficiently address the problem, here’s a strategy that might help minimize or eliminate the penalty if you haven’t already used your ‘once-per-12-month IRA rollover’. Take an eligible rollover distribution from a qualified retirement plan or IRA before the end of the year. Have income tax withheld from the distribution which will be applied toward your current year tax liability. Then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in this year’s income, but the withheld tax will be applied pro rata over the full tax year to reduce previous underpayments of estimated tax.
• IRS Online Account. The IRS encourages taxpayers to sign up for an IRS Online Account, which allows secure access to your individual account information. Benefits include the ability to obtain an Identity Protection PIN, which protects your identity and prevents someone else from filing a fraudulent tax return using your Social Security number. Additional benefits include making online payments, accessing tax records & payment history, requesting transcripts, responding to IRS notices, etc. For security reasons IRS will not allow us to create an account on your behalf.
• Clean Energy Vehicle Credit. Here’s a brief summary of the complex rules.
1. $7,500 tax credit is available on qualifying new vehicles.
2. Income Test: The credit is only available to taxpayers with current year or prior year modified adjusted gross income less than $150k (single), $300k (MFJ) or $225k (head of household).
3. Cost Test: The credit is only available for SUVs, vans & pickup trucks if the MSRP is less than $80k. For other vehicles MSRP must be less than $55k.
4. Beginning in 2024 buyers may transfer their credit to a qualified dealer for a reduction in purchase price or rebate. However, this must be reconciled on your tax return and if you fail the income test the credit must be repaid with your tax return.
5. Used vehicles that qualify are also eligible for a credit equal to the lesser of 30% of the purchase price or $4k. Among other qualifications, the used vehicle must be purchased from a dealer, cost less than $25k, and the income test thresholds are one-half of the new vehicle income limits.
The tax planning strategies mentioned in this letter are general suggestions that may not apply to every taxpayer. Please feel free to contact us to discuss your specific tax situation. By doing year-end tax planning now, we can take a proactive approach to reducing your taxes, rather than just being reactive.