Preparing for the 2024 Tax Season

There are many tax uncertainties to consider as we face the end of 2024. Chief among them is whether proposals from the presidential candidates will affect our taxes; new legislation may be enacted this year, or changes may occur that will be retroactive.

However, in any year, core tax planning strategies relative to income and deductions remain helpful:

  • Postponing income into the next tax year and accelerating deductions into this one

  • Bunching itemized deductions into one tax year and taking the standard deduction in alternate years

  • Carefully reviewing investments at year end for possible offset of capital gains and losses

  • Maximizing qualified contributions to any kind of retirement plan

New in 2024

There are a few changes we already know about for 2024 that will affect our taxes.

First, the IRS limits for retirement plans warrant review. In 2024, the limits are as follows:

  • Employees who participate in 401(k) or 403(b) plans, most 457 plans, or the federal government's Thrift Savings Plan can contribute up to $23,000 per year. The catch-up contribution for employees aged 50 and over is $7,500.

  • The limit for annual individual contributions to an IRA is $7,000. The catch-up contribution for individuals aged 50 and over is $1,000.

  • SIMPLE IRA contributions are capped at $16,000, with a catch-up contribution for employees aged 50 and over of $3,500.

  • The limit for contributions to SEP IRAs (including SARSEPs created before 1997) is the lesser of either 25% of the employee's compensation or $69,000. Elective salary deferrals and catch-up contributions are not permitted in SEP plans.

It is also important to be aware of SECURE 2.0 Act provisions that became effective this year. These include:

  • Beneficiaries of certain 529 college savings plans can roll over the money in their account to a Roth IRA. The lifetime rollover maximum is $35,000.

  • Employers can match the amount of employees' student loan payments by putting an equivalent amount into the employee's 401(k), 403(b), 457(b) or SIMPLE IRA.

  • There are no longer required minimum distributions for employer-based Roth IRAs.

  • Exemptions under the early withdrawal penalty rule of 10% were expanded to include withdrawals for individuals facing terminal illness, victims of domestic abuse, and disaster-relief situations.

Last, certain provisions of the Inflation Reduction Act became effective in 2024, including:

  • The Clean Vehicle Credit Transfer: Consumers can now transfer the federal clean vehicle tax credit (up to $7,500 for new vehicles) to car dealers, thus reducing the sale price of qualifying clean-air vehicles.

  • The Zero-Emission Nuclear Power Production Credit: This offers up to $15 per megawatt-hour for electricity produced by existing nuclear plants, provided they meet labor standards, helping to support the competitiveness of nuclear power against other energy sources.

Taxation of Hybrid and Remote Workers

In the hybrid and remote work landscape, it is important to understand that different states have different tax policies. Here are two general rules that need to be considered:

  • Income can be taxed in the states where you live and the state where you work, though some states have reciprocity provisions to mitigate the effects of this double taxation.

  • Many states have a 183 days rule, meaning that if you live more than half the year in the state, that state may consider you a resident and tax your total income.

If you are living and working outside the U.S., there are other rules governing how your income is taxed. This means you need to understand how you will be affected by federal and state taxes as well as taxes in the country where you reside.

Some Sunsetting Provisions

Unless Congress acts to extend them, a number of Tax Cuts and Jobs Act provisions will expire on December 31, 2025. For example, the gift and estate tax exemption will go back to $5 million for individuals ($10 million for married couples), which was the rate in 2017, although the exact amount will be adjusted for inflation. For high net worth individuals, reviewing estate plans now can prevent costly problems later. Some popular strategies are moving assets out of your estate by forming donor-advised funds, creating irrevocable trusts and/or making annual exclusion gifts to individuals.

Presidential Influence

The upcoming presidential election brings uncertainty to several key aspects of tax policy. Here are some areas of concern:

  • Will the TCJA be extended?

  • What will happen to income tax rates?

  • Will the Child Tax Credit be expanded?

  • Will tips continue to be taxed?

  • What will happen with the capital gains tax rate?

  • Will the estate tax exemption remain the same?

There are many other variables as well. As always, to ascertain and respond well to your own situation, consult with us.

TaxArpita Joshi