As we approach the end of 2024, it's time to consider year-end tax planning strategies. While this year hasn't seen significant new tax legislation impacting year-end planning, several existing laws continue to influence tax decisions. Notably, provisions from the Tax Cuts and Jobs Act (TCJA), SECURE 2.0 Act, and the Inflation Reduction Act have deferred effective dates, phase-outs, or sunset provisions that could affect your tax situation for 2024 and beyond.
In this blog post, we'll highlight important tax updates and strategies to consider as you prepare for the upcoming tax season.
1. Inflation Adjustments
Tax Brackets: Inflation adjustments continue to slightly widen the tax brackets for 2024. This means you may experience reduced taxes on the same level of taxable income compared to 2023.
Standard Deduction: The standard deduction has increased modestly due to inflation:
Single Filers: $14,600
Head of Household: $21,900
Married Filing Jointly: $29,200
These increases may make it more advantageous for taxpayers to take the standard deduction rather than itemizing, especially if itemizable expenses haven't significantly increased.
Estate and Gift Tax Unified Credit: The unified credit has risen to $13,610,000 for 2024, providing an opportunity for wealth transfer without incurring federal estate or gift taxes.
Retirement Plans: Contribution limits have increased:
IRA Contributions: Up to $7,000 (with a $1,000 catch-up contribution for those aged 50 and over).
401(k) Contributions: Up to $23,000, with a total of $30,500 including catch-up contributions for those aged 50 and over.
2. Tax Cuts and Jobs Act (TCJA) Provisions
Many individual provisions of the TCJA are set to expire after 2025. Here’s how this might impact your planning:
Standard Deduction and Itemized Deductions:
Post-2025: If the standard deduction decreases and itemized deductions return to pre-TCJA levels, consider postponing significant charitable contributions until 2026 to maximize potential deductions.
Estate Planning:
Unified Credit Reduction: The unified credit is scheduled to halve after 2025. High-net-worth individuals should consider making substantial gifts in 2024 and 2025 to utilize the higher exemption.
Buy-Sell Agreements:
Supreme Court Decision in Connelly: A contractual obligation to redeem a deceased shareholder's shares at fair market value may not reduce the corporation's value for estate tax purposes. Review and possibly restructure buy-sell agreements, potentially using cross-purchase agreements between shareholders.
3. Phasing Out of Certain Business Provisions
Some business-friendly provisions are phasing out:
Research and Experimental Costs: The ability to fully expense these costs has expired.
Limits on Business Interest Deduction: Stricter limitations are now in effect.
Bonus Depreciation: Phasing down from 100% to 80% in 2023, and will continue decreasing in subsequent years.
Note: While there have been legislative efforts to restore these benefits, they have not yet been enacted. Businesses should plan accordingly, assuming the phase-outs remain in place.
4. SECURE 2.0 Act Updates
The SECURE 2.0 Act introduced several changes to retirement planning:
Penalty-Free Withdrawals:
Effective 2024: Up to $1,000 for emergency expenses and the lesser of $10,000 or 50% of the account value in cases of domestic abuse can be withdrawn penalty-free.
Student Loan Payments:
Employer 401(k) Matching: Employers can match employee student loan payments with contributions to the employee's retirement plan.
Enhancements to SIMPLE Plans:
Increased contribution limits and flexibility for employers.
529 Plan Rollovers:
Starting 2024: Beneficiaries can roll over up to $35,000 from a 529 plan to a Roth IRA over their lifetime, subject to certain conditions.
Required Minimum Distributions (RMDs):
Inherited IRAs: Non-eligible designated beneficiaries must deplete inherited IRAs within 10 years. The IRS has waived penalties for missed RMDs in 2023 and 2024 for certain beneficiaries.
Designated Roth Accounts: RMDs are no longer required starting in 2024.
5. Inflation Reduction Act Provisions
Effective in 2024:
Clean Vehicle Credit Transfer:
Taxpayers purchasing qualifying clean vehicles can transfer their credit to dealers, simplifying the benefit at the point of sale.
Zero-Emission Nuclear Power Production Credit:
A new credit for electricity produced and sold by zero-emission nuclear power plants after December 31, 2023.
6. Digital Asset Reporting
Delayed Implementation:
Form 1099-DA: Reporting requirements for brokers dealing with digital assets have been postponed. The reporting rules will not apply until 2025, with cost-basis reporting delayed until 2026.
7. Third-Party Payment Reporting
Form 1099-K Reporting Thresholds:
2024 Threshold: Reporting is required for gross payments exceeding $5,000.
Future Changes: There's a proposal to reduce the threshold to $600, but it hasn't been enacted yet.
8. Year-End Tax Planning Strategies
Despite legislative changes, traditional tax planning strategies remain valuable:
Income and Deductions Timing:
Deferring Income: Delay receiving income until 2025 if you expect to be in a lower tax bracket.
Accelerating Deductions: Pay deductible expenses in 2024 to reduce this year's taxable income.
Bunching Deductions:
Itemized Deductions: If you're close to the standard deduction threshold, consider bunching deductible expenses in one year to surpass the standard deduction and itemize.
Investment Review:
Capital Gains and Losses: Offset capital gains with losses to minimize taxes on investment income.
Maximize Retirement Contributions:
Utilize Increased Limits: Take full advantage of higher contribution limits to retirement accounts for tax deferral and potential employer matching.
Charitable Contributions:
Qualified Charitable Distributions (QCDs): If over age 70½, consider making QCDs directly from your IRA.
Conclusion
Staying informed about tax law changes and proactively planning can lead to significant tax savings. Given the complexity and the potential for future legislative updates, consulting with a tax professional is highly recommended to tailor strategies to your specific situation.
Our accounting firm is here to assist you with year-end tax planning and to navigate these changes effectively. Please contact us to schedule a consultation and ensure you're maximizing your tax benefits for 2024.
Disclaimer: This blog post is for informational purposes only and does not constitute tax advice. For personalized guidance, please consult a tax professional.
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