Important tax changes for 2024
Important tax changes for 2024
Every year, there are changes to laws that affect our taxes. In our January newsletter, we outlined the new 2024 tax brackets which are adjusted annually based upon inflation factors. If your taxable income (gross income less deductions) is exactly the same in 2024 as it was in 2023, your tax bill will be lower in 2024!
2024 also brings higher allowable contributions to retirement accounts. The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, is increased to $23,000, up from $22,500. The catch-up contribution limit for employees aged 50 and over in the plans remains $7,500 for 2024.
The limit on annual contributions to an IRA increased to $7,000, up from $6,500. The IRA catch-up contribution limit for individuals aged 50 and over was amended under the SECURE Act 2.0 of 2022 to include an annual cost‑of‑living adjustment in future years but remains $1,000 for 2024.
The early part of the year is the best time to reevaluate increasing your savings rate. Because additional contributions to savings would be spread out over more months, the decreases to your monthly cash flow are less noticeable. Thus, if you adjust your contributions in January, the effect on your cash flow will be half as much as it would be if you had waited until July to start contributing.
The early part of the year is the best time to reevaluate increasing your savings rate. Because additional contributions to savings would be spread out over more months, the decreases to your monthly cash flow are less noticeable.
Another regularly scheduled change to note for 2024 is higher exemption amounts for gift and estate taxes. The new lifetime exemption allows a person to gift while living or leave as a bequest up to $13,610,000 without owing any federal gift or estate tax, assuming no taxable gifts were made previously. (The gift and estate tax exemption is unlimited for transfers to a spouse or charity.) Further, each person can give up to $18,000 each to as many recipients as they like in 2024, via the annual gift tax exclusion.
New breaks for older taxpayers
The SECURE Act 2.0 included a provision to raise the limit annually on Qualified Charitable Distributions (QCDs) from IRAs for persons over age 70 ½. These increases begin in 2024 with the limit now up to $105,000 per eligible taxpayer. Around 90% of households do not itemize deductions on their tax returns, making QCDs the best way for most eligible taxpayers to get a tax break for donations to charity.
Another new provision for those over age 73 and subject to Required Minimum Distributions (RMDs) is the removal of the need to take Required Minimum Distributions from Roth 401(k) accounts. Prior to 2024, those of RMD age had to take funds from Roth 401(k)s even though RMDs are not required for Roth IRAs. That odd inconsistency is now gone.
New provisions for savers
Roth employer contributions to retirement plans like 401(k)s are now permitted. Before 2024, employer contributions such as company matching funds were made on a pre-tax (tax deductible) basis and were taxable when distributed. It is now permissible to offer employees an election to have employer contributions put in a Roth 401(k) account. These Roth contributions would be considered taxable income in the year received, but distributions would be tax-free ultimately if all requirements are met.
Also related to contributions by an employer is a new provision which allows employers to make matching contribution to a 401(k) not based on how much the worker contributes to the 401(k) plan, but based on what the worker pays toward student loan debt. The employer gets a tax break, while the worker gets funds in a retirement plan while paying down student loan debt.
Both the employer Roth contribution and the student loan offset may be useful to some workers, but you should not expect to be able to utilize these provisions soon. Neither tool is mandatory and to implement, plan documents must be modified and proper record keeping and administrative functions must be set up. Recognizing this, the Internal Revenue Service has already delayed the implementation of some mandatory provisions until 2026.
New access to retirement plans
One goal of SECURE 2.0 was to make it easier for more people to participate in retirement plans. In the past, plans could require employees to work at least 1,000 hours per year to be eligible. Under the new law, employees that work 500 hours for two consecutive years must be allowed to make employee deferrals (contributions) into the employer’s plan.
Qualified retirement plans have tax benefits to encourage savings, but they also include restrictions to encourage the savings to remain in the plan until retirement. These restrictions include a 10% penalty for distributions made prior to age 59½ and a limited number of ways to access funds while working.
New ways to access funds while working are now allowed. One allows employees to put up to $2,500 in a designated account for unexpected expenses. Another is the ability to tap a plan for up to $1,000 for an emergency. When such funds are taken out, the 10% penalty is waived. Neither of these new provisions are mandatory so again employers must choose to modify their plans to provide this access to employees. Given the added administrative complexity, we expect to see few plans adopt these provisions.
New use for unused 529 plans
Another SECURE 2.0 feature that will be mentioned often in the media is a new option for unused funds in Section 529 college savings plans. These funds can be transferred tax-free to a Roth IRA for the beneficiary subject to several restrictions. The biggest of these perhaps is the need for the 529 plan account to have been open for 15 years. Once the IRS issues more guidance about the 529 to Roth IRA rollover, we will write further on the topic to address the many unanswered questions. Nonetheless, this tactic is an intriguing new option for families that do not spend all of the funds in a 529 plan on college.
More tax changes coming
The tax code is an ever-changing, highly complex beast. Several SECURE 2.0 tax changes will come into being over the next several years. Further, unless Congress takes action before 2026, the current tax brackets, standard and itemized deductions, and the estate tax exemption will all revert to the structure in place in 2017. No doubt, we will cover these changes in future writings. Regardless of what is to come, rest assured, we’ll be here to help make sense of it all and help you apply it to your individual tax situation.
