Key items were adjusted for inflation. Here’s a quick summary:
The IRS regularly updates rules and guidance that impact individuals and businesses, especially regarding taxes and retirement savings. Key updates were announced in November of 2023 for tax year 2024, and it’s time to start filing those returns. The most significant changes are those surrounding cost-of-living adjustments for retirement plans, as well as inflation adjustments for various tax provisions. Here’s what you need to know about these changes and how they might affect your financial strategy.
Retirement Savings Adjustments
The IRS updated contribution limits for retirement plans, such as 401(k)s, IRAs, and other tax-advantaged accounts. These adjustments are based on inflation rates and are designed to allow individuals to save more as living costs increase.
Key Updates for 2024:
- 401(k), 403(b), and 457(b) Plans: The elective deferral limit increases from $22,500 to $23,000. Individuals aged 50 and over can make catch-up contributions of an additional $7,500, bringing their total contribution limit to $30,500 for the year.
- IRA Contribution Limits: The limit for traditional and Roth IRAs rises to $7,000, up from $6,500 in 2023. The catch-up contribution for individuals aged 50 and older remains at $1,000, bringing the total to $8,000.
- SIMPLE (Savings Incentive Match Plan for Employees Individual Retirement Account) Retirement Plans: Contribution limits for SIMPLE IRAs and SIMPLE 401(k) plans increase to $16,000, up from $15,500 in 2023. Employees age 50 and older can make additional catch-up contributions of $3,500, bringing their total limits to $19,500.
- Highly Compensated Employees: The compensation threshold for determining highly compensated employees (HCEs) rises to $155,000, up from $150,000.
What It Means for You
The higher limits provide an opportunity to boost retirement savings, which can lower taxable income and strengthen long-term financial security. Employers should review plan documents and payroll systems to ensure compliance with these new limits. Employees should consider adjusting their contribution rates to take full advantage of the increased allowances.
Revenue Procedure 2024-40: Inflation Adjustments for Tax Provisions
Inflation adjustments were made for a number of tax provisions. These include updates to tax brackets, standard deductions, and other critical thresholds that determine how much income is taxed or exempted.
Key Adjustments for 2024
Standard Deduction:
- For single filers, the standard deduction is $14,600, an increase of $750 from 2023.
- For married couples filing jointly, it rises to $29,000, up from $27,700 in 2023.
- Tax Brackets: Each income threshold for tax brackets has been adjusted upwards for tax year 2024. For instance, the top 37% tax rate now applies to income over $609,351 for individuals and $731,201 for married couples filing jointly.
- Gift and Estate Tax Exclusions: The annual gift tax exclusion rises to $18,000, up from $17,000. This allows an individual to give up to $18,000 to any number of people without triggering gift tax reporting. Married couples can give $36,000.
- The estate tax exclusion increases to $13,610,000, an increase of $690,000 from 2023. This means a married couple can shield a total of $27.22 million without paying federal estate or gift tax. That’s a generous legacy, if you can manage it!
Your Tax Planning
These inflation adjustments help shield more income from taxation and provide opportunities for strategic financial planning. For instance, increasing the annual gift tax exclusion allows individuals to transfer wealth to loved ones more efficiently. Similarly, higher income thresholds may reduce overall tax liability for some taxpayers.
Practical Steps for Tax and Retirement Planning
To take full advantage of these changes, consider these steps:
For Individuals:
- Maximize Contributions: Adjust contributions to 401(k)s, IRAs, or other plans to meet the new limits.
- Review Withholding: Ensure your tax withholding aligns with the adjusted brackets to avoid underpayment or overpayment.
- Plan Charitable Giving: Use the increased standard deduction strategically for charitable contributions or other deductions.
For Businesses and Employers:
- Update Payroll Systems: Reflect the new contribution limits and tax thresholds in your payroll processes.
- Educate Employees: Inform your workforce about these changes and encourage participation in retirement plans.
- Review Benefits Packages: Ensure your retirement and benefits offerings remain competitive and compliant.
The Big Picture
These changes underscore the importance of adapting financial plans to reflect changing economic conditions. Whether you’re saving for retirement, managing your tax liability, or running a business, these adjustments present opportunities to improve your financial outcomes.
Questions? Give Us a Call.
Changes like these can seem complex. Having a trusted advisor on your side can help you with your tax and retirement strategies and ensure your compliance with evolving regulations. The tax pros at our firm specialize in helping individuals and businesses optimize their financial strategies. From tax planning to retirement savings, our team provides personalized guidance tailored to your needs. Contact us today for help.