How often do you plan for your taxes? If the answer is “not too often,” you’re not alone.

With a new year comes new opportunities, and now is the perfect time to set a goal to pay closer attention to your taxes. Monitoring your tax situation more regularly can help ensure you’re on the right track and can help you avoid any surprises when it finally comes time to file your tax return.

Here are some considerations to help you plan and strategize for the upcoming year.

Inflation Adjustments for 2024

Every year, the tax code requires the Internal Revenue Service (IRS) to adjust dozens of tax provisions for inflation, benefiting millions of taxpayers. Some of these inflation-based adjustments affect income thresholds for individual tax brackets, as well as the standard deduction. There were several notable increases for 2024, including:

  • 401(k) contributions increased to $23,000
  • Health Savings Account contributions increased to $4,150 for self-only coverage and $8,300 for family coverage
  • Flexible Spending Account contributions increased to $3,200
  • The estate tax exemption increased to $13,610,000
  • The annual gift tax exclusion increased to $18,000

These increased thresholds can help you save more, and better plan for your future. As it’s still early in the year, now is the perfect time to make sure that you are taking advantage of these new limitations.

Roth IRA Conversions

With tax rates near historic lows, it may be time to consider a Roth IRA conversion. A Roth conversion allows you to transfer dollars from a traditional IRA to a Roth IRA, generally resulting in a taxable event. However, the benefits of a Roth IRA are significant because the earnings grow tax-free and future withdrawals can be taken out free of tax as well. Roth IRAs don’t have required minimum distributions, and these accounts can be passed down to heirs free of income tax.

Another conversion strategy to consider is the backdoor Roth IRA. This strategy allows taxpayers to fund a Roth IRA even if their income is too high and would otherwise be disqualified from making a direct Roth contribution. To complete a backdoor Roth conversion, you would first make a non-deductible IRA contribution to a traditional IRA. Once the traditional IRA is funded, you can transfer those funds to a Roth IRA. While there is no time limit as to when you must convert the funds, it is recommended that you transfer them as soon as possible to avoid any unintended tax consequences. There is one caveat with this strategy, known as the pro-rata rule. If you have any pre-tax dollars in a traditional IRA, the backdoor Roth IRA will likely result in a taxable event, because the converted amount will be taxed proportionally based on your pre- and post-tax percentages.

Charitable Planning

If you make charitable donations every year, consider bunching your contributions. Bunching involves consolidating the charitable contributions that you would typically make over multiple years into a single tax year. With the standard deduction at an all-time high, many taxpayers who make charitable donations won’t see a tax benefit because they no longer itemize deductions. Bunching your donations can help you exceed the standard deduction threshold and receive a larger tax benefit for your charitable contributions.

If you are considering bunching your contributions, but still want to support a charity each year, look into contributing to a donor-advised fund, which is a charitable investment account where contributions are generally eligible for an immediate tax deduction. The donor can then recommend grants be made from the donor-advised funds to charities over several years. Funding a donor-advised fund with highly-appreciated stock can also provide additional tax benefits aside from just a charitable deduction. With the stock market near its all-time high, a gift of appreciated stock can not only give you the benefit of an itemized deduction, but also can allow you to avoid paying capital gains taxes on any appreciation.

Potential Tax Law Changes?

Earlier this year, the House of Representatives passed a 2024 tax bill called “The Tax Relief for American Families and Workers Act of 2024.” This bill would expand the Child Tax Credit and restore some business tax deductions that expired over the past few years. These business provisions would impact bonus depreciation, qualifying research and development costs, and the small business expensing amount under IRC Section 179. Many of the provisions included in this bill would even be retroactive to earlier tax years.

The bipartisan tax bill has since stalled in the Senate and it is not clear how it will proceed or if there is enough support to pass the bill as it stands. If the bill were to become law, the IRS said it is prepared to automatically issue additional refunds for taxpayers affected by these law changes for the 2023 tax year.

Planning for the Year Ahead

As you work toward getting your tax return filed over these next few months, now is the perfect time to get started on planning the rest of the year. While everyone’s financial situation is unique, there could be a favorable tax strategy that for you. And if we’ve learned anything over the past few years, it’s that a lot can change in an instant, even the tax code. Prepare yourself as much as possible to help ensure you are taking advantage of any opportunity available to you.

Source: IRS.GOV

This is intended for informational purposes only and should not be construed as personalized investment or tax advice.

Author Joseph P. Marmorato Private Client Group Planner

Joe has been involved in the financial services industry since 2012. He is a member of the New Jersey Society of Certified Public Accountants and the American Institute of Certified Public Accountants, Tax Section.

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