They say hindsight is 20/20, but tax planning shouldn’t simply be based on what has worked in the past. Upcoming life changes and external factors such as tax policy developments also deserve attention and may offer money-saving opportunities. With that in mind, here are several of the most important tax-planning considerations and deadlines to remember as we move into 2024.
IRS Inflation Adjustments
The IRS makes inflation adjustments annually, and the increases have two purposes:
- To prevent tax bracket creep for those whose income keeps pace with inflation.
- To limit government revenue increases resulting from inflation.
Since the 1980s, the adjustment amounts have stayed within relatively predictable ranges. However, as inflation soared between 2021 and 2022, the 2023 adjustments represented the sharpest increase in nearly four decades. Even so, many families still had less inflation-adjusted net income going into 2023. Fortunately, inflationary pressures are easing. For the 12-month period through September 2023, inflation increased 3.7%, reflecting a significant decline from 7.8% during the previous period. However, when it comes to inflation and taxes, many planning strategies remain unchanged as we head into 2024.
For a more detailed breakdown of these adjustments, download our 2024 Tax Guide.
2024 Tax Planning Considerations
In 2017, the Tax Cuts and Jobs Act significantly increased the standard deduction amounts, making it unnecessary for many taxpayers to itemize. If this is the case for you, then strategically managing adjustable below-the-line deductions (charitable contributions, payments of state and local taxes, medical expenses, etc.) to maximize itemization may not be necessary. It also highlights the importance of effectively managing above-the-line deductions, which can be taken regardless of whether someone uses the standard deduction or itemizes. These include deductions for items such as a traditional IRA or HSA contributions, student loan interest and self-employed retirement contributions, among others.
It’s important to review whether the new tax brackets will give you enough room to remain in the bracket you were in for 2023 or whether adjustments should be made. By reviewing this early in the year, you can determine whether additional tax-reduction strategies could further reduce income so that you remain in the same bracket.
Long-Term Capital Gains Brackets
Long-term capital gains on investments receive advantageous tax treatment that you may benefit from. Proper planning can reveal opportunities and help prevent the following undesirable consequences:
- Unless necessary, hold appreciated investment assets for at least a year before selling. Doing so earlier will result in them being taxed at ordinary income rates, which are higher than capital gains rates.
- Consider whether you may be subject to an additional net investment income tax (NIIT) of 3.8%. This tax impacts investment income for single filers with modified adjusted income (MAGI) exceeding $200,000, and joint filers with MAGI exceeding $250,000. If this is a possibility for you, your advisor and tax professional can help review the consequences in more depth.
- Account for asset location in your overall investment asset tax planning. If you have investment accounts with different types of tax treatment (e.g., taxable, tax-deferred and tax-free), strategically placing certain investments in certain accounts can help you significantly reduce the long-term impact of taxes on your portfolio.
It’s important to maximize available tax-advantaged options, such as retirement accounts and HSA plans. As previously mentioned, contributions to many of these accounts are eligible for an above-the-line deduction that taxpayers can take whether they itemize or not. Not only do they help save on tax payments today, but they also provide ongoing tax benefits in the form of tax deferral. Planning early can allow you to spread those contributions out over the year as opposed to potential last-minute large sums to help reduce taxes.
It is also advantageous to take a long-term view of tax deferral. It can be tempting to defer as much as possible to lower taxes today. But doing so could have adverse effects on tax payments in the future. The tax consequences for when the money is distributed should be considered. The decision to pay more taxes today could even come in the form of making non-deductible Roth IRA contributions (for those who qualify), or by converting tax-deferred accounts into a Roth IRA to allow for tax-free growth.
Other Inflation Adjustments
This article only outlines some of the key items that were adjusted for inflation. Depending on your situation, you may want to explore others, such as the foreign earned income exclusion, gift tax exclusion or qualified adoption expenses. To ensure you are taking full advantage of the opportunities available, speak with your financial advisor to discuss which inflation adjustments would be most relevant to your circumstances as you begin tax planning for 2024.
Matt Nelson is a Resources Manager for Buckingham Strategic Partners.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Individuals should speak with a qualified tax professional based on their own circumstances. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-23-6516