As the 2024 year-end approaches, it’s a great time to review your finances and make adjustments to optimize your tax situation, retirement savings, charitable giving, and more. Here are essential financial and tax planning considerations to help you make the most of 2024 and set yourself up for a stronger financial future.
1. Tax Planning and Income Management
- Bracket Management: Review your income to understand where you stand in the tax brackets. For example:
- If your taxable income is below USD$191,950 (USD$383,900 for married filing jointly), you’re in the 24% tax bracket or lower. But be aware that any increase could push you into the 32% bracket.
- If your income is over USD$518,900 (USD$583,750 for married filing jointly), your long-term capital gains rate rises to 20%.
- Net Investment Income Tax (NIIT): If your Modified Adjusted Gross Income (MAGI) exceeds USD$200,000 (USD$250,000 for married couples), you may be subject to the 3.8% NIIT. Managing income to stay below this threshold can help reduce your tax liability.
- Medicare IRMAA Surcharges: Higher-income taxpayers may face increased premiums for Medicare Parts B and D. Avoiding or reducing surcharges involves strategically managing your MAGI by deferring income or maximizing deductions.
2. Retirement Account Contributions and Required Minimum Distributions (RMDs)
- Maximize Contributions: Contribute the maximum to retirement accounts before the year ends:
- The 401(k) limit is USD$23,000, with a USD$7,500 catch-up for those 50 or older.
- For IRAs, the maximum is USD$7,500 if you’re 50 or older.
- Roth vs. Traditional: If you expect your income to increase in the future, consider Roth contributions or Roth conversions that allow for tax-free withdrawals in retirement. If income is expected to decrease in the future, traditional contributions may be more tax-effective.
- Required Minimum Distributions (RMDs): Ensure all RMDs are taken before December 31st to avoid penalties. Aggregation rules differ depending on account type:
- RMDs from multiple IRAs can be combined, but inherited IRAs require separate RMDs.
- RMDs from employer plans must be calculated separately.
3. Charitable Giving Strategies
- Tax-Efficient Contributions: Consider gifting appreciated securities rather than cash, as this avoids capital gains tax and provides a full charitable deduction.
- Qualified Charitable Distributions (QCDs): If you’re over age 70½, QCDs allow direct transfers from your IRA to a qualified charity, counting toward your RMD without increasing taxable income.
- Bunching Donations: If you usually take the standard deduction, you might benefit from “bunching” contributions to exceed the itemization threshold. Donor-advised funds can also help group donations into a single year, allowing for itemization when it’s most beneficial.
4. Investment and Capital Gains Planning
- Tax-Loss Harvesting: If you have unrealized losses in taxable accounts, consider realizing these losses to offset gains. You can offset up to USD$3,000 against ordinary income if losses exceed gains.
- Capital Gain Distributions: Many mutual funds make capital gain distributions toward the end of the year. Review holdings to understand potential tax impacts and consider selling high-gain investments to offset distributions. Include any anticipated distributions in your 2024 tax estimate to ensure there are no tax surprises.
5. Business Owners: Qualified Business Income Deduction and Retirement Planning
- Qualified Business Income (QBI) Deduction: Pass-through business owners should ensure they’re eligible for the QBI deduction. Income limits and business structure affect eligibility, so review the “Am I Eligible for a QBI Deduction?” flowchart.
- Retirement Plans for Small Businesses: Setting up a Solo 401(k) or SEP IRA may allow for significant contributions and tax deductions. Remember, many retirement plans must be established by year-end, although some can be funded up to the tax-filing deadline.
6. Maximize Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)
- HSA Contributions: For those with high-deductible health plans, HSA contributions are tax-deductible, and growth is tax-free if used for medical expenses. Contribution limits are USD$4,150 for individuals and USD$8,300 for families, with an additional USD$1,000 catch-up for those over 55.
- Use FSA Balances: Check to see if you have remaining FSA funds and is so, plan to use them before the end of the year. Some employers offer a grace period or limited rollover, but unspent funds may have to be forfeited.
7. Estate and Gift Planning
- Annual Gifting: You can gift up to USD$18,000 per recipient per year without incurring gift tax. Consider using this exemption for family members, especially if you’re building a tax-efficient wealth transfer strategy.
- 529 Plans: Contributions to 529 education savings accounts are an effective way to help with education costs and reduce estate tax exposure. In 2024, you can contribute up to USD$90,000 per beneficiary (five-year lump-sum gifting) without being subject to gift tax.
8. Year-End Cash Flow Planning
- Flexible Spending Account (FSA): Check your FSA balance and deadlines. You may have to forfeit unused FSA funds unless your employer offers a grace period or rollover.
- Health Insurance Deductibles: If you’ve met your health insurance deductible, consider scheduling additional medical procedures or appointments before the end of the year to maximize your insurance benefits before the deductible resets.
9. Other Key Considerations
- Life Changes: Review your finances if you’ve experienced major life changes, such as marriage, divorce, a new child, or the death of a loved one. These changes may impact your tax filing status, retirement beneficiaries, and estate plan.
- College Financial Aid Planning: For families with children nearing college, reducing income during specific years can increase eligibility for financial aid.
- New Tax Laws: Be aware of upcoming tax law changes that might affect your financial plan, as well as any adjustments in 2025 that could impact your investment and tax strategies.
By proactively addressing these year-end financial considerations, you can optimize your tax situation, enhance your financial strategy, and establish a strong foundation for the year ahead. Meeting with a financial advisor or tax professional can provide personalized insights to make the most of these opportunities. To discuss your unique situation with a qualified cross-border financial planner, please contact Cardinal Point.