Each New Year brings with it some form of change, especially when it comes to taxes.

But let’s face it: with so much going on at the start of the year, who has time to keep up with all the tax changes, right?

Well, fortunately, I’ve been keeping an eye on some of the tax developments coming down the pike this year, so you don’t have to.

And what did I find?

Well, beyond the usual inflation adjustments to tax brackets, deductions, and contribution limits, there are few material changes to note in 2024.

Even so, constant gridlock over a seemingly never-ending budget deal on Capitol Hill, coupled with general elections later on in the year, could likely complicate Federal returns once again.

And while we don’t anticipate any meaningful tax legislation to pass in the current election cycle, certain portions of tax law are scheduled to sunset in the next couple of years, likely leading to higher taxes for many households.

So then, the big takeaway here is that while there are few legislative changes to worry about this year, there are still a few steps to consider today so you can take full advantage of tax changes now and into the future.

Check Your Opportunities for the Year

Alright, so as it concerns the 2024 calendar year, what are some of the changes that we should all be paying attention to when it comes to our taxes?

Well, to start, consider the annual indexing for inflation.

Now, as you know, the IRS annually makes adjustments to tax brackets, contribution, and deduction limits as a way to keep the tax system fair and relevant in an environment of rising prices.

And this year is no different.

Inflation Adjustments

Now, while we saw some notable cost of living adjustments given the high inflation rates in years past, the same can’t be said for the 2024 calendar year.

Even so, as far as tax brackets are concerned, while the marginal rates remain the same (10%, 12%, 22%, 24%, 32%, 35%, and 37%), there are still adjustments to the income thresholds that should be considered.

More specifically, for a married couple filing jointly, you can earn up to $383,900 and still remain in the 24% marginal bracket, which is an increase of around $20,000 from 2023.

The standard deduction is also getting an inflation adjustment this year, with married filing jointly households getting to claim $29,200 for 2024, compared to $27,700 in 2023.

Now, come tax time, you’ll want to pay close attention to this figure because it will help you determine whether you should itemize or just take the standard deduction.

Either way, it’s crucial to note that the 2024 adjustment won’t apply until you file your returns in April 2025, so the 2023 figure is still relevant when filing this year’s returns.

Adjustments to Retirement Savings

Alright, now shifting gears to retirement savings, the IRS also considers inflation when it comes to putting money away in your employer-sponsored plan or your IRA.

And this year, contribution limits for 401(k) plans and IRAs have increased by about $500.

What this means is that the contribution limits to your 401k rises to $23,000, from $22,500 in 2023.

At the same time, IRA contribution limits have moved up to $7,000 this year, from $6,500 and you still get that $1,000 catch-up contribution if you’re over the age of 50.

Either way, these increases allow you to save more for retirement in a tax-advantaged way, which is especially important in an environment of rising prices and household expenses.

Other Adjustments

Now, other tax adjustments worth noting for households in higher tax brackets include changes to the gift tax and AMT exemptions.

More specifically, the basic exclusion amount for the estate tax is now over $13,610,000. Now, keep in mind that this figure applies to taxes on money you leave behind after your pass.

For many individuals, this estate tax will not apply to their situation, and in those cases where it does, there are still legal means to mitigate the potential taxes before you pass away.

Along these same lines, the annual gift tax exclusion applies to the money you give away while you’re still alive and the IRS has updated that giving limit to $18,000, or $36,000 per couple, per recipient in 2024.

And finally, as far as the Alternative Minimum Tax, or AMT is concerned, the phaseout limit has moved higher this year by around $62,400 landing at $1,218,700.

Even if your salary is well below this limit you’ll want to pay close attention, especially if you received stock awards from your employer.

Indeed, this figure is crucial to watch if you plan to exercise stock options this year or anticipate any other big equity awards coming through in 2024 because it could mean paying higher taxes in certain situations.

Nevertheless, this year’s inflation adjustment gives you a little more breathing room when it comes to AMT, but it’s something to watch nonetheless.

How to Prepare

Alright, so now that you know that many inflation-related tax changes are coming down the pike, what can you do to prepare for the year ahead?

Well, you can start by taking some time to get familiar with your income tax brackets.

Remember, the US tax system is progressive.

It’s like the government has given you buckets ranging in size to fill as you bring in more income.

And so, each bucket you fill is taxed at a certain rate, starting with the smallest bucket and rising to the largest.

Now, as you earn money throughout the year, you fill the first bucket, then the next and so on.

And so, the tax you pay on each bucket is what we call your “marginal tax bracket.”

So then, with the IRS’s inflation adjustments this year, the size of each bucket is bigger this year.

And this is a good thing!

And why’s that?

Well, it’s because now you have more room to fill each bucket.

More specifically, this could be an opportune time to consider whether certain financial strategies, like realizing capital gains on a low-cost basis, concentrated stock positions, or converting a traditional IRA to a Roth IRA, could be a tax-efficient move.

Now, as far as the standard deduction is concerned, here again the 2023 rules apply for this year’s return. Either way, you’ll still want to evaluate whether it makes more sense for you to take the standard deduction or to itemize.

And how do you go about doing this?

Well, you might be better off taking the standard deduction if your itemizable deductions are close to the standard deduction limit.

On the other hand, taking standardized deduction might make less sense than itemizing if you’re in a higher tax bracket, have completed a great deal of charitable giving, or have had significant medical expenses.

Now, when it comes to your retirement savings, the higher contribution limits for 401(k) plans and IRAs offer a chance to sock away a modestly higher amount into your qualified accounts in the year ahead.

So then, if your budget allows, consider increasing your contributions to these accounts because doing so can help you build your nest egg faster through pre-tax growth while reducing your taxable income for the year.

And this could potentially lead to some marginal tax savings.

Finally, if you’re a W2 employee and anticipate the vesting of your stock awards or changes in your financial situation in 2024, then you may want to consider adjusting your tax withholding for the year ahead or making estimated tax payments.

This approach will allow you to avoid underpayment penalties and deal with the hassle of coming up with cash to pay taxes next year.

Beware Capitol Hill Gridlock

Alright, so as we continue to look ahead to potential tax events into the coming year, another thing to keep an eye on is gridlock on Capitol Hill.

And at this point, you might be thinking to yourself that gridlock is nothing to worry about now, so why should we be concerned at all in the future, right?

Well, that’s because when Congress faces delays in passing spending bills or undergoes periods of dysfunction, it can directly affect the IRS’s ability to carry out its duties effectively.

And one of the critical issues arising from congressional gridlock is the IRS’s struggle with managing a backlog of paperwork, including the processing of tax returns and related documents.

Now, as you’ll likely recall, this backlog started becoming more pronounced in 2020 as the pandemic disrupted the IRS’s usual operations and was further complicated by budget cuts, a shrinking workforce, and outdated technology that the IRS has been grappling with for years.

As a result of these challenges, taxpayers have experienced significant delays in receiving refunds.

And, at the same time, the IRS has faced challenges in responding to taxpayer letters and phone calls.

So then, another government shutdown could likely throw a wrench into IRS operations for the coming year, assuming that Congress can’t settle on a budget deal in the weeks ahead.

At the same time, last year’s budget gridlock led to a cash shortfall at Treasury, resulting in the administration’s use of extraordinary measures to fund operations, which included delaying refunds for some high earners.

Get Your Taxes in Order

So then, in light of the recent challenges facing the IRS, including delays due to budget constraints and operational issues, it’s crucial now more than ever to file your returns promptly and, at the same time, ensure you’re not overpaying taxes in the year ahead.

That’s why, as tax season kicks off, filing your returns early can save you headaches down the road, especially considering the delays the IRS has experienced in processing returns.

Early filing also means your return enters the queue sooner, potentially leading to an earlier processing of your refund or allowing you to get ahead of any potential review issues that might arise.

So again, that’s why it’s essential to verify that your withholdings are dialed in appropriately to ensure that you’re paying no more tax than necessary and to avoid giving Uncle Sam an interest-free loan with your money.

Stay Ahead of Future Tax Changes and Act Now

Alright, so now that you’ve considered inflation adjustments and Capitol Hill uncertainties, the final point you’ll likely want to keep an eye on in the year ahead is potential long-term tax changes taking effect in the next few years.

And one of those changes that you’ll want to focus on is the upcoming sunsetting of specific provisions of the Tax Cuts and Jobs Act (TCJA).

Now, as you’ll likely recall, the Tax Cuts and Jobs Act was passed by Congress in 2017 and offered sweeping, you guessed it, tax cuts for households and businesses alike.

Now, these benefits included doubling the standard deduction and estate tax exclusion, a bump to child tax credits, and a reduction in the corporate tax rate, among some of the changes introduced.

But, these cuts were supposed to be temporary.

So then, unless Congress acts, some of the provisions of this law are expected to sunset, or go away, starting in 2026.

And so, what does this mean for you?

Preparing for TCJA Sunset

Well, the expiration of these provisions will likely lead to higher tax rates for many individuals, given a decline in the standard deduction, changes in eligibility for certain tax credits, and a reduction in estate and gift tax exemptions.

That’s why understanding the impending sunset of the Tax Cuts and Jobs Act should be a crucial component of your financial planning process this year and next.

So then, as this legislation nears its expiration, what can you do to prepare for higher taxes?

Well, there are several strategies you should consider to optimize your tax situation.

First, start by realizing income now, when tax rates might be lower.

You can do this by taking a look at your current income levels and tax brackets and pay attention to opportunities to max out those buckets.

That’s because, given the potential for increased tax rates down the road, you may want to accelerate income into the present years, where tax rates are currently lower.

And how do you go about doing this?

Well, this could involve strategies like converting traditional IRAs to Roth IRAs, which means paying taxes now but also avoiding higher taxes and offering tax-free growth and withdrawals later on down the road.

Indeed, with future higher tax rates, contributing to Roth accounts, where you pay taxes now and not later, could be beneficial, depending on your current situation.

Another point to consider when it comes to current and future tax brackets is capital gains.

That’s because, if you hold assets that have notably appreciated (like your concentrated employer stock), then it might make sense to realize some of these gains now, under the lower tax rates.

This strategy, known as tax-gain harvesting, can be especially effective if you’re currently in a lower tax bracket now and expect it to move higher in the future.

And finally, as you plan for the upcoming year, it’s crucial to consider estate planning before the TCJA expires at the end of 2025.

Now, as noted earlier, the TCJA led to a significant, albeit temporary, increase in the federal gift and estate tax exemption. This move offers a rare opportunity to protect a larger portion of your and your family’s wealth from future taxes.

Nevertheless, this exemption is set to revert to about $5 million, adjusted for inflation, after 2025.

That’s why utilizing estate planning strategies like Dynasty Trusts, Spousal Lifetime Access Trusts (SLATs), and others can help lock in these higher exemption rates.

Preparing for Tax Changes in the Year Ahead

Either way, when it comes down to it, it’s clear that change, especially when it comes to taxes, is inevitable in the year ahead.

So then, while the usual inflation adjustments to tax brackets, deductions, and contribution limits appear relatively stable for 2024, the fact is that political gridlock and the upcoming general elections suggest that the federal tax filing process could face a number of hiccups along the way.

And while no major tax legislation is expected to pass ahead of this current election season, it’s nevertheless crucial to remember that certain tax laws are scheduled to sunset, potentially leading to higher taxes for some in the near future.

That’s why the key takeaway here is that even though 2024 might not bring many new tax changes, it’s still crucial to be proactive about old tax changes going away.

And so, by understanding and planning for these changes now, you can position yourself to make the most of the current and future tax environment, which will ultimately take you one step closer to becoming the master of your own financial independence journey.