The inflation rate has come down from the forty-year highs we saw in 2022, but it is still high. While we are witnessing relief in prices, higher inflation has some positive impacts.
The IRS sets tax brackets, tax deductions, 401(k), and other tax-efficient retirement savings account contribution amounts by pegging them to inflation. These changes in contribution limits mean you can increase retirement savings, reduce your tax burden, and earn more without moving into a higher tax bracket. And while inflation may continue to decrease, the tax bracket and standard deduction changes and contribution limits are likely to be permanent.
Now is the time to begin your 2024 tax planning.
Higher Tax Brackets Can Help You Plan a Multi-Year Strategy
Inflation reduces the value of tax credits and exemptions, which means you pay more taxes. To offset this, tax brackets are pegged to inflation to ensure that they reflect real income. Increasing the income range in each tax bracket means more income may be taxed at lower tax rates.
Planning to keep more of your income in the lowest possible brackets can save you considerably on taxes. It requires a multi-year plan to consider all sources of income and a strategy to handle large amounts of taxable income in years in which all income may be lower.
Thinking through sources of income, the tax impacts of more significant asset sales, capital gains taxes on investments, and other taxable events can help you devise a multi-year plan. The goal isn't just to lower taxes in any year but to reduce the amount you pay over your life, whether you are working or retired.
The Standard Deduction Increase is Meaningful
The federal standard deduction for single filers will increase to $14,600 next year from $13,850 in 2023. For married couples filing jointly, the new deduction amount is $29,200. If your mortgage interest, charitable contributions, and the allowable amount of state and local taxes are more than the new standard deduction, itemizing may make sense. But it's worth doing the calculation to find out.
You have an option for charitable gifts that can increase the amount you can deduct. You can "bunch" your philanthropic gifts intended for several years into a single year. This strategy can be effective when all your itemized deductions, including the bunched gifts, exceed the standard deduction.
Retirement and Healthcare Savings Contributions
Retirement savings contributions increased as well. The new maximum contribution limit is $23,000. If you are age 50 or over, you can take advantage of the "catch-up" contribution of $7,500, for a total of $30,500. The new limits don't just mean increased savings; they also lower your taxable income. The same limits apply to 403(b) plans, many 457 plans, and the Thrift Savings Plan for federal government employees. IRA contribution limits have also increased to $7,000. The catch-up contribution for an IRA for those age 50+ is an additional $1,000.
Flexible health spending accounts can now accept contributions of up to $3,200 of pre-tax dollars to this type of account to pay for medical costs that aren't covered by insurance.
Health Savings Accounts (HSAs) have new maximum contributions, too. An individual can contribute up to $4,150, and the family contribution has risen to $8,300. The catch-up amount for those aged 50+ remains the same at $1,000. HSAs are "triple-tax-advantaged" because you contribute pre-tax dollars that lower your taxable income in the year you contribute, the accounts grow tax-free, and qualified withdrawals are not taxed. Be sure to review your eligibility for making contributions to an HSA.
Social Security Benefits and the Earnings Test Went Up – But So Did Taxes
Social security benefits increased by 3.2%, a more normal increase than the big numbers we've seen for the last two years. The maximum monthly benefit for claiming at your full retirement age (FRA) will be $3,822 in 2024.
Suppose you're working while collecting social security and under FRA. In that case, your earnings are subject to an earnings test limit, above which annual benefits are reduced by $1 for every $2 in income over the limit. That limit for 2024 is $22,320. Now, suppose you're working while collecting social security and have reached full retirement age. In that case, your earnings are still subject to an earnings limit, above which annual benefits are reduced by $1 for every $3 you are over the limit. That limit is $59,520 for 2024.
You may pay more next year if you still pay into the system. Social security taxes are 6.2% of income, up to a maximum earnings ceiling. The limit increased to $168,600 in 2023. This translates to a dollar amount of $8,400.
The Bottom Line for 2024 Tax Planning
Taking advantage of the silver lining of inflation by maximizing tax-advantaged savings and undertaking proactive tax-planning strategies can help you keep your financial planning on track.
Have something on your mind?
This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.
Pursuit Planning and Investments, LLC (“PPI”) is a registered investment advisor offering advisory services in the State of Oregon and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Past results do not guarantee future results. Please contact us at 971-803-5948 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from PPI with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website, www.planyourpursuit.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.
This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal the performance noted in this publication.
The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Pursuit Planning and Investments, LLC (referred to as “PPI”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
All opinions and estimates constitute PPI’s judgement as of the date of this communication and are subject to change without notice. PPI does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall PPI be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if PPI or a PPI authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.
Comments