It is crucial for individuals to engage in strategic tax planning with their financial advisors, particularly considering the upcoming changes to the standard deduction and tax brackets for the year 2024. Yes, I said for the 2024 tax year.1 You know how much we believe in planning ahead, and tax considerations can have a significant impact on overall financial planning. These tax modifications, affecting filers who do not itemize their deductions, will only be reflected in the tax returns filed in early 2025.
The good news is that the IRS has elevated the thresholds for its seven tax brackets by 5.4% in 2024. This adjustment implies that a single person can now earn up to $609,350 before facing taxation at the highest rate of 37 percent. Understanding and leveraging these changes can significantly impact your tax liability—especially if you’re straddling the two top brackets.
The “Upside” of Inflation
In the context of the broader economic landscape, the Federal Reserve’s efforts to mitigate inflation have influenced recent adjustments in the consumer price index (CPI), which is intricately linked to tax changes. Despite some success in curbing inflation, the index continues to rise, albeit at a slower pace. Meanwhile, the IRS already routinely adjusts various figures in the tax code to account for inflation.
Estate planning considerations are also paramount, given the rise in the estate tax threshold. Estates valued under $13.61 million are now exempt from taxes, up from $12.92 million in 2023. Similarly, the gift tax threshold has increased to $18,000, allowing for larger tax-free gifts.
In light of these changes, collaborating with a financial advisor becomes more than advantageous, it’s basically a must. A skilled advisor can help you navigate the complexities of the shifting tax landscape, identify opportunities for tax savings, and ensure that your financial strategies align with the current regulatory environment. This proactive approach to tax planning is essential for optimizing financial outcomes and minimizing tax burdens.
What’s the Difference?
To cut to the chase, we will only be focusing on the brackets starting at the 24% level. Here is a quick rundown of each of the brackets, highlighting some important differences.
24% Tax Bracket:
For 2024, the lower income threshold for single filers in the 24% tax bracket is $100,525. In 2023, the lower limit for this bracket was $95,375. This represents an increase in the threshold by $5,150. For married couples filing jointly, the lower limit in 2024 is $201,050, up from $190,750 in 2023. This is an increase of $10,300.
32% Tax Bracket:
Single filers in 2024 will enter the 32% bracket with incomes over $191,950. In 2023, this threshold was $182,100, marking an increase of $9,850. For married couples filing jointly, the threshold for 2024 is $383,900, compared to $364,200 in 2023. This reflects an increase of $19,700.
35% Tax Bracket:
In 2024, the 35% tax bracket starts at $243,725 for single filers, an increase from $231,250 in 2023. This change represents an increase of $12,475. For married couples filing jointly, the threshold for entering the 35% bracket in 2024 is $487,450, up from $462,500 in 2023, indicating a rise of $24,950.
37% Tax Bracket:
The highest tax bracket, at 37%, will apply to single filers with incomes greater than $609,350 in 2024, up from $578,125 in 2023. This is an increase of $31,225. For married couples filing jointly, the income level for this bracket moves to incomes greater than $731,200 in 2024, compared to $693,750 in 2023. This marks an increase of $37,450.
Changes at the Top
The adjustments to the 37% tax bracket for the tax year 2024 have important implications for financial and retirement planning, especially for high-income earners. Here’s an expanded view focusing on this top tax bracket, looking at some implications from various standpoints:
Implications for Financial Planning:
Income Timing and Tax Management: High earners near the threshold of the 37% bracket should be strategic about the timing of income realization. This might include deferring income or bonuses into a different year, or strategically planning the sale of assets, such as stocks or property, to manage the taxable income within a favorable bracket.
Investment Strategy Review: Given the high tax rate at this bracket, it becomes crucial to review investment portfolios for tax efficiency. This may involve focusing on growth-oriented investments that generate fewer taxable events or considering tax-exempt investments, like certain bonds.
Charitable Contributions and Donor-Advised Funds: Maximizing charitable contributions can provide significant tax deductions, helping to lower taxable income. Donor-advised funds or setting up charitable trusts can be effective ways to manage tax liabilities while fulfilling philanthropic goals.
Implications for Retirement Planning:
Roth IRA Considerations: While Roth contributions are taxed upfront, withdrawals during retirement are tax-free, potentially offering tax benefits for those who expect to be in a high tax bracket in the future.
Retirement Withdrawal Strategies: For retirees in this tax bracket, planning the withdrawal order from various retirement accounts (taxable, tax-deferred, and tax-free) becomes crucial. Balancing withdrawals to stay within a lower tax bracket while ensuring sufficient income can be a complex but vital task.
Estate Planning and Gifting: This might include making use of the increased gift tax exclusions or setting up trusts to manage how wealth is passed on, potentially reducing the overall tax burden for beneficiaries.
The Takeaway
It’s important for individuals in every tax bracket to pay attention to IRS changes early and often. For those in the higher brackets, especially when financial moves can sometimes help push them into a lower bracket, this is doubly important. Work closely with financial and tax professionals to understand the full impact of these changes and to develop strategies that align with your overall financial goals and retirement plans.
Sources:
1 https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
IRS Announces New 2024 Income Tax Brackets: Your advisor can help leverage these changes to impact your tax liabilities. Copyright © 2023 FMeX. All rights reserved. Distributed by Financial Media Exchange.
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