Proactive Tax Planning for 2024 and Beyond
As the 2023 tax season wraps up for many of you, it's prudent to start thinking about optimizing your tax situation for the current year and beyond. The best time to begin planning for next year’s taxes is to proactively start now. As surprising as it may sound, the higher inflation rates we have been experiencing may positively impact your 2024 tax planning. We’ll address some upcoming changes that should be on your radar and things to consider as you plan your multi-year tax strategy. This is a reminder that the goal of a multi-year tax strategy isn’t just to lower taxes in any one year but instead to lower the amount you’ll pay over the course of your life, whether you are working or retired.
Tax Changes for 2024
Tax brackets are pegged to inflation to ensure that the brackets reflect real income. In 2024, the tax bracket income ranges increased by approximately 5.5% which means that more income may be taxed at a lower tax rate.
2024 Tax Brackets
The standard deduction and contribution limits for retirement accounts and healthcare savings have increased meaningfully since 2023. Nuanced adjustments can be made to your long-term savings plan to maximize your future retirement benefits and maintain a similar average tax rate as in previous years. Here’s how you calculate your average tax rate, which differs from your tax bracket rate and your marginal tax rate, which is the tax rate on the next $1 you earn. Your average tax rate is what you should use to review if you’re having enough withheld from your paychecks as you’re earning throughout the year.
What Tax Changes May Be on the Horizon
Before diving into specific strategies to build your multi-year tax plan, it's essential to grasp the current tax bracket rates and the sunset provision set to take effect in 2026. The Tax Cuts and Jobs Act (TCJA) passed in 2017 brought significant changes to the tax code, including lower tax rates for individuals. However, if Congress fails to make amendments, these rates are set to revert to pre-TCJA levels in 2026, potentially resulting in higher taxes for many taxpayers after many years of increased wage growth.
If you remember, the higher Standard Deduction that was introduced in 2017 replaced the unlimited State & Local tax deduction, personal exemptions and deductions for unreimbursed business expenses, and capped home equity loan interest deductions, among many other minor deductions. It’s unclear whether these will be returned or if the higher standard deduction will stick. Lastly, many small businesses have been able to take advantage of the 20% qualified business income (QBI) deduction in recent years, and while the tax rate for corporations was permanently reduced to 21%, the QBI business deduction for small businesses is set to expire along with the lower tax brackets in 2026. Knowing this timeline can inform your tax planning decisions for the years ahead.
Strategies to Help you Lower your Tax Spend
Fine tune Retirement Contributions: Review your retirement savings strategy and consider adjusting your contributions to optimize tax savings. As we mentioned earlier in this, article, the contribution limits increased in 2024 from previous years. You can now add $23,000 (or $30,500 if you are 50 or older) to your 401k plan. The limit to contribute to your IRA or Roth IRA outside your company-sponsored retirement account has increased to $7,000/year (or $8,000/year age 50+). If you've primarily contributed to the Roth side of your 401(k) plan, shifting more of your contributions to the pre-tax side can lower your taxable income, reducing your tax liability for the year. Knowing that tax brackets today are some of the lowest in history, we recommend staying in the after-tax Roth contribution side of your 401k until you’re in or above the 24% tax bracket. As your income pushes you into those higher tax brackets, it may be more advantageous to contribute to the pre-tax side of your 401k, deferring the taxes to a later date (and hopefully lower tax bracket).
Make the Most of Itemized Deductions: Since 2017, the combination of low mortgage rates and high standard deductions has made it unnecessary for many Americans to itemize their annual tax deductions. Since 2019, property values have increased by 25%/year, resulting in higher real estate taxes. During this same time period, mortgage interest rates have more than doubled. It may make sense to itemize your deductions again for an even more considerable reduction to your taxable income. You can also strategically maximize your itemized deductions with your charitable contributions. Charitable giving not only benefits worthy causes but can also provide significant tax advantages. Consider "stacking" contributions in higher-income years to maximize your tax benefits. Additionally, donating low-basis stock, such as shares in your Employee Stock Purchase Plan (ESPP), can be a tax-efficient way to support charities. Utilizing a Donor Advised Fund (DAF) as a vehicle for charitable contributions offers greater flexibility and the potential to create a lasting charitable impact in your community.
Tap into Health and Flexibility: Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) aren't just for covering medical expenses—they're also handy tax tools. Alongside retirement plan contribution limit increases, HSAs, and FSAs also got a boost in 2024. A family can contribute up to $8,300 each year into their Health Savings Account or $3,200 into a Flexible Spending Account. By socking away pre-tax dollars for healthcare costs, you can shrink taxable income while staying on top of your healthcare needs. Win-win!
Harvest Those Tax Losses: Finally, let's talk about tax loss harvesting. It's a fancy term for selling off investments within your portfolio that have taken a hit to offset capital gains and trim down your tax bill. By realizing losses in your investment portfolio, you can mitigate your tax liability while rebalancing your portfolio to align for long-term growth. Think of it as a little financial spring cleaning—tidying up your portfolio while saving some cash on taxes.
The bottom line
As tax laws evolve and potential changes loom on the horizon, proactive tax planning becomes increasingly valuable. By implementing some of these strategies, you can take control of your tax situation and lower your next year's tax bill. Remember, these solutions may be viable for some people in 2024, yet each household needs a strategy that fits their own unique situation. Remember to consult with a tax professional or financial advisor to tailor these strategies to your specific financial circumstances and goals. As appealing as it sounds to reduce your tax exposure, talking with a professional can help you plan today to secure a more tax-efficient future.
Brandy Branstetter, CFP®