Let's Talk Taxes in 2024

2024 brings slightly higher contribution AND deduction limits to many Americans thanks to changes the IRS made to adjust for inflation. New IRS tax brackets and increased standard deductions started January 1 along with other tax inflation adjustments (including the deductible mileage rate increasing by 1.5 cents a mile and higher contribution limits for tax-deferred retirement plans).

The IRS adjusts tax brackets and a few deduction amounts every year to adjust for inflation. Here are a few impacted areas.

The 2024 standard deduction for married couples filing jointly will be $29,200, a $1,500 increase from $27,700 for the 2023 tax year. There is also an additional standard deduction for those 65 or older. For single taxpayers, the standard deduction is $14,600, an increase of $750 from the 2023 deduction of $13,850.

2024 401(k) contribution limit increases to $23,000 - $500 more than the $22,500 contribution limit for 2023. The limit on annual contributions to an IRA increased to $7,000, up from $6,500. For 401(k) plans, the catch-up contribution limit for employees 50 and over is $7,500 for 2024. The IRA catch-up contribution limit for individuals aged 50 and over remains at $1,000 for 2024. The IRS also raised the limit for contributions to health flexible spending arrangements to $3,200, up from $3,050 in 2023. 2024 Health Savings Account (HSA) contribution limits are $4,150 for self-only coverage and $8,300 for family coverage, up from $3,850 and $7,750 in 2023.

A new tax year is a great time to plan out your income for the year. It's important to know your AGI (adjusted gross income). AGI measures a filer’s income before deductions and tax credits. The income limits for making contributions to traditional IRAs and Roth IRAs are pegged to AGI. Most married couples who have more than $240k of AGI (up from $228k in 2023) can’t make Roth IRA contributions. The income threshold for allowable medical-expense deductions is also 7.5% of AGI. 

The 3.8% surtax on net investment income such as interest, dividends and capital gains kicks in at AGI of $200,000 for most single filers and $250,000 for married joint filers, and these amounts are not indexed for inflation. Keep an eye on your AGI. With the rise in interest rates, it’s important to check whether the rise in income from bank accounts, CDs, or bonds could cause you to pay this 3.8% surtax.

What reduces AGI?

Making pre-tax contributions to retirement plans like 401(k)s and traditional IRAs. Timing investment gains, say by pushing part of a year-end stock sale into a new year, could also help. Having low or tax-free income, such as from municipal bonds, can lower AGI as well.

Take advantage of low-income years

Maybe you’re a new retiree, leaving the workforce due to school, becoming a care giver or a worker caught by layoffs. Whatever the cause of a low-income year, use it to make smart moves at low tax costs if possible. That could include converting a traditional IRA to a Roth IRA, or contributing after-tax dollars to a Roth IRA if you have enough earned income from wages or self-employment. Do you hold appreciated assets such as stock shares in a taxable account? When you sell, the tax could be $0 if your income is low enough. 

State tax-traps

With higher rates on government Money Market funds and more investors using these accounts, investors may expect the income to be free of state tax. While it’s true the states can’t tax income from federal obligations, this exemption is for Treasuries, savings bonds, and bonds from some agencies but not others. Investors who want to skip state taxes on government-bond funds should consider Treasury-only funds. 

The loss of a loved-one requires special attention

The death of a spouse is difficult, so taxes are often the last thing the surviving spouse is considering. But it’s important not to overlook the tax ramifications- the year of death is the last for which the surviving spouse can file a joint return. Joint filing often results in lower taxes, so the year of death can be an ideal time to accelerate income, such as from a Roth IRA conversion. When selling assets—including a home—be sure to consider the “step-up” in cost basis. Under this provision, investment assets held at death aren’t subject to capital-gains tax. Tax-wise decisions about asset sales after death often turn on the step-up. 

Home improvements

If you sell your home, capital-gains taxes are due on the difference between the purchase price and sale price. Single taxpayers get an exemption of up to $250,000 of gains, married couples get $500,000. This exemption isn’t indexed for inflation and is losing value, so be sure to keep records of capital improvements to your home such as new appliances or an addition. These costs can be added to the purchase price to reduce the amount of taxable gain when the home is sold—but you need proof.  

Avoid tax underpayments

The U.S. income tax is pay-as-you-go, and most Americans must pay at least 90% of their taxes before April 15th or face interest-based penalties. These penalties were less severe when interest rates were low. But with rate increases, the rate on underpayments—which resets quarterly—has climbed to 8% annually.

Bottom Line: These are a few areas to pay attention to that may help you keep a little more of what you earn in 2024. Feel free to reach out to your tax professional if you have specific questions regarding your situation.