Take Advantage of New IRS Rules

February 22, 2024 by Laurie Kramer, CFP®
Tax information. West Financial Services.

I personally don’t believe in New Year resolutions – I think you can start doing something new, different, or better at any time that is right for you! Having said that, the beginning of the year is a great time to get a jump on managing your taxes. Taking advantage of new IRS rules and limit adjustments for 2024 starts now. We highlight a few of the new limits and rules here, but you can also find them at https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024.

First, know your threshold: each tax bracket has a higher income threshold in 2024.

Marginal rates for 2024 are:
37% for incomes over $609,350 ($731,200 for married couples filing jointly)
35% for incomes over $243,725 ($487,450 for married couples filing jointly)
32% for incomes over $191,950 ($383,900 for married couples filing jointly)
24% for incomes over $100,525 ($201,050 for married couples filing jointly)
22% for incomes over $47,150 ($94,300 for married couples filing jointly)
12% for incomes over $11,600 ($23,200 for married couples filing jointly)
10% for incomes at or less than $11,600 ($23,200 for married couples filing jointly)

It is important to know your marginal tax bracket so that you can manage taxable income during the year, potentially maximizing your current bracket, but also with an eye towards avoiding the next higher bracket. For example, if you are single and your gross income is $230,000, your mission is to find ways to decrease your taxable income under $191,950, therefore pushing you into 32% tax bracket from 35%. One of the easiest and most effective way to bring down your taxable income is to take full advantage of pre-tax retirement and health savings contributions. 

About those pre-tax contributions, you should be aware of any new limits in 2024 and make the necessary payroll adjustments. The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements (FSA) increases to $3,200 in 2024, and $4,150 ($8,300 for family) for a health savings account (HSA). Contribution limits to 401(k)s and IRAs have increased by $500 to $23,000 and $7,500 respectively. Note that the “catch-up” contributions for those 50 and older did not increase, remaining at $7,500 for 401(k)s and $1,000 for IRAs. 

In the scenario above for a single taxpayer whose gross income is projected to be $230,000 in 2024, maximizing the health savings and 401(k) contributions can bring down federal taxable wages to $202,850. If the single taxpayer in this scenario is over 50, and maximizes the “catch-up” contribution, federal taxable wages drop to $195,350. Of course, this strategy also benefits the taxpayer by bolstering tax deferred retirement savings (especially if your employer matches contributions). In addition, if the taxpayer also does not use the health savings contributions under a high deductible heath plan, they too can grow tax deferred and can be used in retirement. Distributions from a health savings account in retirement are tax free if used for qualified medical purposes. 

Note that the time to make adjustments to certain payroll deduction-type contributions, such as FSA, dependent care FSA, and HSA, is during open enrollment. So, put a reminder on your calendar today! However, if you experience a life event (birth, death, marriage, divorce, loss of job) during the year, you can possibly revisit both insurance coverage and pre-tax contributions to these plans.

Of course, now the taxpayer needs to add back in taxable interest, dividends, etc. but deductions and credits also need to be evaluated. The standard deduction for married couples filing jointly for tax year 2024 has increased $1,500 to $29,200. For single taxpayers and married individuals filing separately, the standard deduction has risen to $14,600 for 2024. For heads of households, the standard deduction is $21,900 for tax year 2024. Of course, evaluating the benefit of itemizing your deductions in lieu of the standard deduction is important. Reviewing this with your accountant for 2023 should help give you direction for what to expect in 2024. And remember, gifts to charity are part of the itemized deductions, so you can fulfill any philanthropic inclination and potentially benefit your tax situation.

These are just a few simple ways to start! As you dive deeper into your financial plan, there are certainly a variety of planning strategies that may be beneficial for you, such as tax loss harvesting within your investment portfolio, or charitable giving via a donor advised fund. 2023 is in the rear-view mirror, but 2024 lies ahead. We are here to help you with your planning needs, just give us a call.

Meet Laurie Kramer, CFP® »

Read the February 2024 Financial Planning Focus:





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