Tax Law Changes 2024: How Will They Affect You
As we usher in a New Year, we also ring in several tax changes that will impact tax preparation and tax planning for 2024. Taxpayers should be mindful of how the new updates could impact their personal taxes and try to be proactive with tax planning throughout 2024 to lessen their tax liability and maximize after-tax income.
Below is a short recap of some of the 2024 tax changes.
Income Tax Changes
The IRS increased the Standard Deduction in 2024. The Standard Deduction is a specific dollar amount that the IRS lets you subtract from your adjusted gross income to lower the amount of income you are taxed on. The 2024 Standard Deduction is increasing by 5.4% to $14,600 for single filers and those married filing separately, and $29,200 for married filing jointly, and $21,900 for heads of households.
The IRS is also adjusting income tax brackets for 2024. The new brackets will increase each marginal tax bracket by 5.4% to adjust for inflation. If a taxpayer expects their taxable income to be consistent with last year, it could result in a net pay increase in 2024 (the actual result will depend on withholdings for the year). In 2024, the IRS changed tax withholding tables; these tables are used to determine how much money employers should withhold from employee wages for Federal taxes. Taxpayers receiving income through payroll should be mindful of this change.
Retirement Account Changes
The 2024 tax updates will also allow individuals to contribute more into retirement accounts and potentially help reduce taxable income.
The 401(k) contribution limit increased by $500 to $23,000. Contributions for IRAs will also increase by $500 to $7,000. For those age 50 and over with earned income, they can contribute an additional $7,500 into their 401(k) plans and $1,000 into their IRAs as catch-up contributions.
Taxpayers should be mindful of the IRS income ranges used to determine income qualifications to make deductible contributions to Traditional IRAs and direct Roth IRA contributions.
HSA and FSA Changes
For those eligible to contribute to Health Savings Accounts (HSA) or Flexible Savings Accounts (FSA), the IRS will allow you to stash more into these accounts this year.
In 2024, the IRS HSA contribution limit will reach a record amount with individuals able to contribute up to $4,150 and families able to contribute up to $8,300. These amounts are about 7% higher than 2023.
For those taxpayers eligible for catchup contributions, an additional $1,000 can be contributed.
For those with FSAs, the maximum individual contribution limit is $3,200 or $6,400 for a household for 2024. For those with cafeteria plans that allow the carryover of unused amounts, the 2024 max carryover amount is $640.
Good news for the more than 60 million Social Security beneficiaries, as they will see increased benefits at the start of 2024. Social Security recipients will see a 3.2% Cost of Living Adjustment (COLA) increase in 2024.
Also, of note, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $168,600.
For those considering taking Social Security early and getting another job, the 2024 earned income limit increased to $22,320. The Social Security Administration will deduct $1 from Social Security benefits for each $2 earned over $22,320. The earnings limit for those workers reaching full retirement age in 2024 increased to $59,520. The Social Security Administration will deduct $1 from Social Security benefits for each $3 earned over $59,520.
There is no earnings limit for workers who are of full retirement age or older for the entire year.
Readers thinking of taking Social Security should know you can claim as early as 62 and as late as 70. For many, full retirement age is around 67. If one does claim Social Security early, they can expect a permanent reduction of benefits. The earlier one claims Social Security, the greater the benefit reduction. Claiming Social Security at 62 can translate to nearly a 30% reduction in benefits versus waiting to claim at full retirement age.
The SECURE Act 2.0 allowed 529 account owners to rollover unused 529 balances into a Roth IRA. Starting in 2024, 529 accounts will be allowed to transfer up to a lifetime limit of $35,000 to a Roth IRA for a beneficiary. This can include the account owner if they name themselves as a beneficiary. This can be helpful if the child does not use the 529 account balance.
Gifting & Estate Planning
Those planning to gift money this year will be able to take advantage of a higher annual gift exclusion limit. The 2024 annual gift exclusion limit will increase to $18,000, which is up $1,000 over last year.
For those looking to transfer wealth, the lifetime estate tax exemption will increase to $13.6 million in 2024, up from $12.9 million last year.
State Tax Changes
Tax changes are not isolated at the Federal level. This year, over 30 states are making changes to their tax laws. According to the Tax Foundation, 17 states are cutting individual or corporate tax, and a few states are cutting both. The Tax Foundation has observed substantial tax reforms over the past several years, including tax rate reductions and tax cuts as states came out of the pandemic.
For a summary of tax changes by state, see the link below:
For those interested in tax planning strategies for 2024 or would like help seeing how the new updates could impact their taxes, please reach out to the team at Insight Wealth Strategies.
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Insight Wealth Strategies, LLC (IWS) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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