What should individuals know about optimizing investments and charitable giving before the year ends? 

GHJ’s Tax Practice has developed a comprehensive 2024 Year-End Tax Guide to help businesses and individuals navigate key tax considerations before closing out the year. Each installment in this series addresses critical topics that will help taxpayers plan proactively.

Learn strategies to maximize year-end tax efficiency through investments and charitable giving. By leveraging long-term capital gains rates, donating appreciated stock and implementing smart gifting practices, individuals can reduce tax liabilities and set a strong financial foundation for 2025.

LONG-TERM CAPITAL GAINS

Depending on one’s taxable income, the current 2024 federal income tax rates on long-term capital gains (LTCGs) and qualified dividends are 0 percent, 15 percent and 20 percent. High-income individuals can also be subject to a 3.8-percent net investment income tax (NIIT), which can result in a marginal long-term capital gains/qualified dividend tax rate as high as 23.8 percent. 

RECOMMENDED ACTION: Take advantage of these rates while they are still at historic lows:

Whenever possible, hold appreciated securities for at least one year and a day to qualify for the preferential LTCG tax rates. In contrast, short-term gains are taxed at the regular rate, which can be as high as 37 percent (or 40.8 percent, if the NIIT applies) under the current tax law. Be sure to consider this when evaluating an investment portfolio. 

SELLING SECURITIES

By default, when selling stock or mutual fund shares, shares purchased first are considered sold first unless the shares that are sold can be specifically identified. While this “first in, first out” approach often qualifies for long-term capital gains treatment, selling recently purchased shares with minimal gains may be a better choice, especially if selling long-held shares would result in significant taxable gains. Notify your broker to ensure specific shares are sold to optimize tax outcomes.

Tax-loss harvesting can offset capital gains and reduce taxable income. Selling "loser" securities — i.e., those worth less than you paid — before year-end generates capital losses to offset gains, including high-taxed short-term gains. For 2024, short-term gains are taxed at a maximum rate of 37 percent, with an additional 3.8 percent NIIT potentially applying for a total effective rate of up to 40.8 percent. Capital losses can reduce this liability to 0 percent for offset gains. Additionally, net capital losses (losses in excess of gains) can shelter up to $3,000 of ordinary income ($1,500 if married filing separately) in 2024, with any excess carried forward to future years to offset future gains.

However, it is important to be aware of the wash sale rule, which prohibits repurchasing identical securities within 30 days of the sale. Violating this rule disallows the deduction. 

For securities that are all but worthless with little hope of recovery, consider selling them before the end of the year to claim a loss. Proving total worthlessness can be difficult, so selling securities with any remaining marketable value is often the simpler option. A loss can be claimed that is equal to the difference between a person’s tax basis and the sale proceeds as long as it is not sold to a family member. Be mindful that wash sale rules also apply in this scenario. If there is no readily available market for the shares due to bankruptcy or some other “worthlessness” situation, it may be possible to write-off the original investment in the shares.

OTHER PLANNING FOR LONG TERM CAPITAL GAIN ASSETS

If one owns highly appreciated stock or real estate held for more than a year with no debt, these holdings may be transferred to a Charitable Remainder Unitrust (CRUT) before selling. A CRUT allows the trust to sell the asset without triggering immediate income tax, diversifying the proceeds across various investments. Taxpayers can receive periodic distributions from the trust during their lifetime, with the remaining balance going to a charity of their choice upon their or their spouse’s death. This strategy also provides a current-year charitable deduction for the present value of the gift. Consult GHJ’s High Net Worth Practice to determine whether this approach aligns with one’s financial goals.

GIFTING SECURITIES

When gifting securities, follow these tax-smart principles: 

• Do not give away loser shares (those currently worth less than what was paid for them). Instead, sell them to realize the capital loss, then gift the sales proceeds to relatives. 
• Gift appreciated (winner) shares to relatives who are more likely to pay lower tax rates than an individual would pay if they sold the same shares. Relatives in the 0-percent federal income tax bracket for LTCGs and qualified dividends will pay a 0-percent federal tax rate on gains from shares that were held for over a year before being sold. (For purposes of meeting the more-than-one-year rule for gifted shares, taxpayers can count their ownership period plus the gift recipient’s ownership period.)  Gift tax rules and exemptions will apply.
• When gifting dividend-paying stock, be mindful of the recipient. If gifting to someone under age 24, Kiddie Tax rules could cause some of the resulting capital gains and dividends to be taxed at the higher rates that apply to trusts and estates, which would defeat the purpose. 

QUALIFIED SMALL BUSINESS STOCK PURCHASES

The Small Business Jobs Act of 2010 offers significant tax advantages for investments in Qualified Small Business Corporations (QSBCs). Gains on QSBC stock (a) purchased and issued after Sept. 28, 2010 and (b) held for at least five years are fully exempt from federal income tax — up to $10 million or 10 times an individual’s basis, whichever is greater.

This 100-percent-of-gain exclusion is also effective for Alternative Minimum Tax (AMT) purposes. Gains from QSBC stock purchased between 1993 and Sept. 28, 2010, may qualify for either a 50-percent or 75-percent exclusion from capital gain (up to $10 million dollars). 

To meet the definition of a QSBC, the corporation:

• Must have always been a C corporation with assets under $50 million before and immediately after the stock was purchased
• Does not provide services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services 
• Is not a business of operating a hotel, motel, restaurant or similar business, a real estate investment trust or a real estate mortgage investment conduit
• Is not a cooperative of corporations that own real property the value of which exceeds 10 percent of its total assets or portfolio stock, or securities the value of which exceeds 10 percent of its total net assets 

To learn more about optimizing investments and charitable giving strategies, contact GHJ’s Tax Practice for personalized guidance.