How the 2024 cost-of-living adjustment numbers affect your year-end tax planning – part two

2024 cost-of-living adjustment

The IRS released the 2024 cost-of-living adjustments for over 60 tax provisions recently. Though not as much as in the previous year, several amounts will grow over 2023 as inflation moderates slightly this year compared to last. Remember to account for these 2024 modifications when you apply your 2023 year-end tax preparation and estate planning techniques.

Remember that the chained consumer price index, or C-CPI-U, is used to compute annual inflation adjustments under the Tax Cuts and Jobs Act (TCJA). Compared to the prior use of the consumer price index, this results in a slower rate of increase in tax bracket thresholds, the standard deduction, some exemptions, and other statistics. This could eventually push taxpayers into higher tax brackets and reduce the value of different deductions. The C-CPI-U is now a significant element of the TCJA permanently.

Education and child-related tax breaks

In 2024, the maximum advantages of particular education and childcare breaks will not change. However, the cap on most of these deductions is the taxpayer’s modified adjusted gross income (MAGI). Partial breaks are available to taxpayers whose MAGIs fall within the applicable phaseout range. There will no longer be breaks for taxpayers whose MAGIs are higher than the upper limit of the range.

Depending on the break, the MAGI phaseout ranges will either largely stay the same or slightly rise in 2024. For instance:

  • American Opportunity Credit. The MAGI value used by joint filers to calculate the reduction in the American Opportunity Credit is not increased for inflation for tax years starting after December 31, 2020. The phaseout gradually eliminates this credit for taxpayers whose MAGI exceeds $80,000 ($160,000 for combined returns). Each qualified student may receive up to $2,500 in credits.
  • Lifetime Learning Credit. The MAGI value used by joint filers to calculate the reduction in the Lifetime Learning credit is not inflation-adjusted for tax years starting after December 31, 2020. The phaseout also gradually eliminates this credit for taxpayers whose MAGI exceeds $80,000 ($160,000 for combined returns). For each tax return, the maximum credit is $2,000.
  • Adoption Credit. In 2024, the phaseout range will rise by $12,920 for qualified taxpayers who adopt a child. The range for joint, head-of-household, and single filers will be $252,150–$292,150. In 2024, the maximum credit will rise by $860 to $16,810.

(Note: Generally, married couples filing separately do not receive these credits.)

These are just a few tax benefits for education and children you can be eligible for. Remember that your child may be able to claim a tax break on their return if your MAGI is too high for you to qualify for one for your child’s schooling.

Gift tax and estate planning

The generation-skipping transfer (GST) tax exemption and the unified gift and estate tax exemption are subject to yearly adjustments for inflation. Therefore, the amount will increase to $13.61 million in 2024 from $12.92 million in 2023.

In 2024, the annual gift tax exemption will rise to $18,000, a $1,000 increase.

Retirement plans

In 2024, almost all retirement plan-related caps will rise. Therefore, if you have already contributed the maximum amount permitted, you may have a few options to grow your retirement savings, depending on your plan type.

Types of limitation 2023 limit 2024 limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $22,500 $23,000
Annual benefit limit for defined benefit plans $265,000 $275,000
Contributions to defined contribution plans $66,000 $69,000
Contributions to SIMPLEs $15,500 $16,000
Contributions to traditional and Roth IRAs $6,500 $7,000
“Catch-up” contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans for those age 50 and older $7,500 $7,500
Catch-up contributions to SIMPLEs $3,500 $3,500
Catch-up contributions to IRAs $1,000 $1,000
Compensation for benefit purposes for qualified plans and SEPs $330,000 $345,000
Minimum compensation for SEP coverage $750 $750
Highly compensated employee threshold $150,000 $155,000

Depending on your MAGI, your ability to benefit from IRAs may be limited or eliminated. Thankfully, the MAGI phaseout range restrictions on IRAs will all rise in 2024:

Traditional IRAs. When it comes to the deductibility of contributions, the MAGI phaseout ranges apply to taxpayers (or their spouses) who take part in employer-sponsored retirement plans:

  • The phaseout range for married taxpayers filing jointly varies for each spouse according to whether they are members of an employer-sponsored plan.
    • A participating spouse’s 2024 phaseout range limits will rise by $7,000 to $123,000–$143,000.
    • The 2024 phaseout range restrictions for a spouse who chooses not to participate will rise by $12,000 to $230,000–$240,000.
  • The 2024 phaseout range limitations for head-of-household and single taxpayers enrolled in employer-sponsored plans will rise by $4,000 to $77,000–$87,000.

Contributions to an IRA may only be partially deductible by taxpayers whose MAGIs fall within the required range; taxpayers whose MAGIs exceed that range are not eligible to deduct any contributions.

However, taxpayers may make nondeductible conventional IRA contributions even with a lower deduction or none at all. The 2024 contribution cap of $7,000 (less any Roth IRA contributions) and any relevant $1,000 catch-up remain in effect. Suppose your MAGI prevents you from contributing to a Roth IRA or the total amount allowed. In that case, you may still benefit from nondeductible conventional IRA contributions.

Roth IRAs. Your capacity to contribute to a Roth IRA is unaffected by whether or not you participate in an employer-sponsored plan. Still, you may not be able to make contributions within MAGI limits.

  • The 2024 phaseout range limits for married taxpayers filing jointly will rise by $12,000 to $230,000–$240,000.
  • The 2024 phaseout range limitations for head-of-household and single taxpayers will increase by $8,000 to $146,000–$161,000.

If your MAGI is within the applicable range, you can contribute somewhat; if it is above the range, you cannot.

(Note: Phaseout ranges for traditional and Roth IRAs are significantly lower for married taxpayers filing separately.)

Tax and estate planning for 2024

You may receive some tax relief the next year because many of the 2024 cost-of-living adjustment levels are moving upward. Furthermore, you can increase your retirement savings because of specific constraints associated with retirement plans that are also growing. Check out the first blog post in this two-part series for more information on individual income taxes and the alternative minimum tax. Please contact our RRBB advisors if you have any questions about the most effective tax-saving tactics in light of the 2024 figures. We would gladly assist with your tax, retirement, and estate planning.

© 2023


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