Tax Talk 2024: What the IRS Changes Mean for You

This episode of Wealth Builders delves into the recently announced IRS updates for the 2024 tax year, offering listeners an in-depth understanding of the new tax brackets, standard deductions, and retirement plan contribution limits. Designed to assist taxpayers in proactive financial planning, this episode breaks down complex tax changes into easily digestible insights.

Key Segments:

1. Understanding the Tax Bracket Inflation Adjustment:
   • Analysis of the 5.4% increase in tax brackets for 2024.
   • Discussion on how these adjustments may affect individual tax liabilities.
2. Navigating the Increased Standard Deductions:
   • Overview of the raised standard deductions to $29,200 for married couples and $14,600 for single filers.
   • Expert advice on whether to itemize deductions or opt for the standard deduction.
3. Maximizing Retirement Savings:
   • Insights into the increased IRA contribution limits, now at $7,000, and catch-up contributions for those aged 50+.
   • Strategies for leveraging workplace retirement accounts like 401(k)s.
4. Estate Planning with Updated Gift Tax Exclusion:
   • Explanation of the raised annual gift tax exclusion to $18,000.
   • Tips on estate planning and gifting strategies under the new rules.

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For more information on StatonWalsh please visit, StatonWalsh


This podcast is for informational purposes only. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. StatonWalsh and Founder’s Financial Securities do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

Ryan Staton is an Investment Advisor of, and securities offered through, Founders Financial Securities, LLCMember FINRA/SIPC and Registered Investment Advisor.

Devin Walsh is an Investment Advisor of, and securities offered through, Founders Financial Securities, LLCMember FINRA/SIPC and Registered Investment Advisor.

Check the background of this firm on http://brokercheck.finra.org/

Transcript

Speaker 1 (00:00):

This is Wealth Builders presented by StatonWalsh, a show designed to pull back the curtain of the financial industry and bring true transparency to the forefront of conversation on the show. We cover topics like financial education, current events, and interview business leaders and industry experts with the ultimate goal of helping listeners discover their own path to financial independence.

Devin Walsh (00:37):

Hello everyone and welcome to this week's episode of Wealth Builders. It's that time of year, right? It's Tax Talk 2024. I know you've all probably seen some news out there about IRS changes to contribution limits to tax bracket adjustments. So today we're just going to do a deep dive into it, what it means for you for your retirement accounts, whether it's gifting, whatever it may be. So let's dive right in, Ryan. Well,

Ryan Staton (01:06):

Taxes typically are not a super exciting topic, but we're

Devin Walsh (01:11):

Going to make it fun today.

Ryan Staton (01:12):

Always relevant this time of year, the IRS comes out with their adjustments for the next calendar year's tax limits. So I think the big bullet points for 2024 is that pretty substantial adjustment to various brackets, specifically on the income tax bracket front, a 5.4% adjustment for 2024 wages in a lot of ways have not matched inflation of late. And so why that's going to be important is that for some folks that are on the fringe of certain tax brackets that could be in a higher or lower tax bracket, that adjustment could mean the difference between paying for example, 12 and 22% at a federal level on certain money that you earn and income. So I think that it's interesting, these topics have gotten a lot of buzz recently. News is traveling fast these days and this stuff is more readily available. I've definitely seen more information out there on social media platforms about how these adjustments could affect taxation for folks, but the income tax bracket adjustment is probably the biggest news for most folks. The other stuff in terms of adjustments to certain limits on retirement plan contributions, those are pretty standard happen every year in some capacity, some years bigger than others, some years no adjustments at all. Obviously with the rate of inflation the past few years, a lot of these things are getting attention and also big bumps in comparison to years past.

Devin Walsh (02:51):

Real quick, Ryan, so the increase of 5.4% to the tax brackets, that seems like a fairly big jump, right? I mean that's pretty significant. Yeah, it's big compared to years past. What does that look

Ryan Staton (03:03):

Like? Yeah, so the IRS looks at factors like inflation, specifically when you look at a Measure CPI consumer price index, there's a lot of economic data out there that they utilize to make these decisions on what's a fair increase. And so typically tax brackets, social security contribution limits are getting some kind of, we'll call it a cost of living adjustment on an annual basis. And so 5.4 is definitely substantial. It's bigger than most. I mean typically we'll see something in recent history prior to obviously the hyperinflation that we saw over the past year or so, or 18 months. You'll typically see a couple percentage points here and there not 5.4%. And so I think that is significant like I mentioned because folks that are on those fringe of potentially being in a bracket or not, we don't know this for sure, but I think in a lot of cases when we look at wage data, people aren't getting 5.4% raises every year. And so that bump in theory could put people in a lower bracket just by default, which I think is important to note and that could create scenarios where there's some tax savings. It's not necessarily going to be huge for everyone, but the point being that your increase in income may or may not equate to what the increase in the reportable income tax brackets could be for this year, which I think is big in a lot of ways. But another reason to pay attention to these types of things,

Devin Walsh (04:40):

And I know one of the things that whenever these limits come out every year, people always look at the IRA contribution limits, the 4 0 1 K, four three B, then also the standard deduction. So I know that this year increased to 29,200 for married couples, which is up $1,500. That's pretty good. It's extra $1,500 there for the standard deduction, 14,600 for single filers, which is up about $750, so half obviously. So even there that's that's pretty good tax savings there. I'm talking about just the standard deduction

Ryan Staton (05:11):

And the move with Taxol changes to a standard deduction. I think the simplification of that for most filers, not itemizing deductions anymore, that in conjunction with the increase in the brackets that 5.4% increase. So if you look at it this way, the standard deduction, just to talk about that point briefly, that's essentially your, we'll call it a freebie in the air quotes from the IRS saying, if you take the standard deduction, you can reduce taxable income by this amount of money. And so that 29,200 for married filers or 14 six for single filers being up in the way that it is in combination with the fact that the tax brackets have also been bumped. So now you get a bigger deduction and you also have a higher threshold to break into a new federal tax bracket, for example. A combination of those two things could ultimately help create some additional savings where certain monies that are being taxed at a higher rate maybe now get taxed at a lesser rate. And so that's ultimately money in your pocket. So important to keep track of this stuff. Obviously for many people the standard deduction because of the increase in size of that element of the tax code has become kind of the standard in these cases

Devin Walsh (06:33):

And some of these tax savings. What can people do with those tax savings? So transition that now to IRA contribution limits just retirement plan contribution limits in general, most have went up this year, so for example, the IRA contribution limits have increased to $7,000 and then another catch up contribution on top of that a thousand dollars of your a thousand dollars if you're 50 or over. So you can use some of these tax savings to even start planning for your retirement and put away more money. Sure,

Ryan Staton (06:59):

Whether

Devin Walsh (07:00):

It's tax savings or not, you can still put that extra money

Ryan Staton (07:02):

Away. Those are all planning considerations. Obviously on a case by case basis as a client or an investor or someone that's just planning for their financial future, obviously any kind of money that you're saving could be utilized in many different ways. It could increase savings just in cash. You could utilize it to cap out or take advantage of some of these other savings limits that have increased, that may be money that's necessary for other expenses in your life. I mean, it's no secret the reason the 5.4% increase happened is because things are more expensive, inflation is happening. So I think in general, all of these increases have a good use for individual planners and investors and I think just figuring out how to best utilize this for yourself and do a little bit of tax planning for 2024, I think one of the things that gets most attention is we're getting to December 31st, let's get stuff done for 2023, but let's not neglect our planning for 2024 pre-plan where now our limits are higher for certain contributions.

(08:10):

Certain things have changed. You may or may not know at this point. For example, if you're getting a raise next year, cost of living adjustment, you may know what that is. You may not matching that up with, I'm putting X percent in my 4 0 1 K at my job. Well, now is that percentage, if you're already maxing out for example, are you going to continue to do that at that percentage or do you need to increase or decrease your percentages to make them more appropriate for whatever the limits are? So are you turning 50 next year? Now you have access to a catch up contribution in retirement accounts. That's

Devin Walsh (08:42):

Significant. So the 4 0 1 K four three being 4 57 plan limits increased to $23,000, but over 50 there's a $7,500 catch up contribution. So if you're behind the eight ball and plan for retirement or if you're doing great, I mean that's a significant amount of money in the tax deferred basis that we can put away for 50 or over. I mean that's over $30,000 a year.

Ryan Staton (09:03):

Yeah, yeah. There's a reason why it's called a catch up contribution. Obviously it is designed to help those who have not for a myriad of reasons, have not felt like they've done enough there. They have a little bit of extra wiggle room to put more money away. There's obviously some tax savings component to that as well if you do it on a pre-tax basis. There are all kinds of considerations with new legislation secure 2.0, for example, if anyone's heard that term, there's some things about retirement plan contributions that could potentially change, especially with the catchup contribution. But for the purposes of the tax talk today, definitely want to, if you have the ability to do that or have a need for saving more money, that catchup contribution is a hundred percent available for people as of today and should be utilized accordingly if it's appropriate.

Devin Walsh (09:56):

Something that we get questions about all the time for a lot of our younger successful clients, Roth ira. So what is the phase out and what does that look like now going into 2024 for Roth IRAs for whether you're single or you're married, filing jointly for Roth IRA be able to contribute to a Roth IRA?

Ryan Staton (10:17):

Yeah, so for a single filer on the Roth, IRA side a pretty big adjustment in terms of where the phase out is in 2020, there's a phase out range. So

Devin Walsh (10:30):

You say 146,000 to 161,000 I think

Ryan Staton (10:34):

There, correct, yeah. And so that's for single filers or head of household filing status. And so that range, the phase out range essentially means you have your full 7,000 if you make under that as a single filer for a joint filer, it's 230 to two 40 is that same range that we just referenced. If you make under that amount, 7,000 is readily available for you to defer into that account. Roth again is after tax money goes into the account is considered tax deferred and when distributed in retirement is tax free. So there are income limitations to that in an IRA setting differing from a 4 0 1 K, which some have Roth provisions. There's no income limitation to that that's planned by plan specific, but keeping an eye on those income levels, those are adjusted gross income or AGI for short tested. So when you look at how much money you're making on your tax return, you want to reference adjusted gross income and make sure that if you are above that limit that you're working with your tax professional or your financial professional to ensure that you're not contributing to an account when you're not technically eligible to do so or if you are eligible, but you can only contribute a lesser amount that you don't exceed that.

(11:52):

So a lot of different rules here that you have to follow, be aware,

Devin Walsh (11:57):

Think about that of rule real quick, Ryan, that's something that's a good point. So a lot of people want to know if they have a Roth 4 0 1 K provision at work or traditional 4 0 1 K, what are the rules around also contributing to their own personal Roth RA or traditional IRA?

Ryan Staton (12:12):

Yeah, so the rules between the two, so there are aggregate limits on an annual basis, so how much money an investor can contribute to these types of accounts on an annual basis. And so when you look at Roth at work versus Roth on an individual basis, I think the big consideration is always going to be income level. If you exceed the level of income allowed based on the IRS published limits here for phase outs and then complete phase out, if you exceed that and you're not going to get below that limit and you do have a Roth 4 0 1 K available through your job, that's ultimately going to be your, I would say the most seamless way for you to get money into a Roth IRA. If you were in the camp of, I don't want to put pre-tax money away, I want to maximize my Roth contributions and you are under those limits, you are going to have an employee deferral limit on an annual basis with your plan, you're also going to have that $7,000 limit.

(13:14):

You just want to make sure that collectively across all contributions and all types of accounts retirement related, that you do not exceed the aggregate limit for those accounts on an annual basis. And so that's something that is going to be important to track. It's also, it gets kind of complicated to track, which is why working with a qualified tax professional or somebody in the financial services industry that can help you with that to keep track of those things. I'm always in the camp of less complication. Keep it simple, keep it straightforward all about that tax code is complicated enough as it is. So you just want to make sure that you're tracking those contributions across various accounts and if you are maxing out any kind of contribution to your 4 0 1 K at work that any additional contributions to other accounts are properly recorded and have the appropriate tax status.

Devin Walsh (14:06):

What are some of the penalties for something like that? Or if somebody contributes to max out, we see a lot of time, a lot of higher compensated individuals will, they will no longer say June or July halfway through the year, they've already maxed out their 4 0 1 kss. I'm start an IRA now. So what are the penalties for that?

Ryan Staton (14:26):

Yeah, so if you over contribute or make excess contributions to let's say a 4 0 1 K at your work, most record keepers or financial institutions have kind of guardrails in place. Payroll systems will recognize this and will either reallocate those contributions or cut them off potentially. But if you do over contribute, you are going to have to make a corrective distribution from the plan that's going to be subject. If you do it on a pre-tax basis, it's going to be subject to income taxes. So you obviously can't defer that if it's not allowed to stay in the plan. On an IRA basis, there is an excise tax associated with an over contribution. Off the top of my head I believe that's 6% of that contribution. Plus if you put the money in, you take it out, that corrective distribution can be subject to penalties and any taxes appropriate based on the tax status of the account.

(15:20):

So it can get really messy, really sticky. You could put a dollar in and end up filtering that dollar down to pennies on the dollar if you don't track this appropriately. A lot of times institutions, especially if you're doing your own IRA contributions with a discount brokerage or any large institutional company out there, a lot of it's so if you have accounts in other places, they're not going to track that. They're not going to do anything to cross-reference that. It's going to be up to you to keep track of those things. And so when you go to file your taxes a tax time, if you use ACPA or some kind of tax preparation software, it's going to recognize that, hey, based on the information you've given us, you've done something wrong here and so now here's what you're going to have to do to correct that, which will ultimately incur some kind of tax or penalty associated with

Devin Walsh (16:12):

It. So definitely if you're listening, definitely keep track of all the different accounts that you have and make sure to talk to your tax professional, your advisor if that's something that might happen to you this year. And one last thing I'd like to focus on today, Ryan, is the gift tax kind of joining in taxes and estate planning and wealth transfer altogether. So I know the new gift tax exclusion for this year is 18,000 up from 17,000 last year. And also know that the state tax is going to be sunset in here in the next few years. So I think this is something that's really important. A lot of people don't fully understand and there's a lot of opportunities here for parents to gift to their children, grandchildren, whoever it may be in using things like their lifetime exclusion or just the annual exclusion. Can you touch on that

Ryan Staton (16:59):

A little bit? Yeah, so gift and estate tax is probably one of the most misunderstood when we communicate with clients about what their options are, how they can utilize it. I'll skip to the end in what you mentioned. The Tax Cuts and Jobs Act of 2017 made some adjustments in areas such as qualified business incomes, QBI, there were some changes to some other deductions, standard deductions, a lot of other stuff that happened with that. But one of the biggest was the change to the estate tax law. So at the time, the limit for a married couple was somewhere in the 11 plus million dollars range of total available, excuse me, estate tax exemption. So essentially if you died and you had a net worth greater than that, you would be subject to an additional tax on top of any other taxes that were owed. That law changed and now that number is north of 23 million.

(17:59):

That law sunsets at the end of 2025, January 26, the rules will revert back to the previous laws limits adjusted for inflation. So just back of the napkin math, maybe somewhere between 13, 14 million, something in that range that will be published at the time obviously. But essentially for those that are higher net worth individuals, this is a big consideration. You own a business, you have other assets that are subject to estate taxes that are within your estate. You're now losing a pretty big exemption from that. And so there's some ultimately going to be some strategy around how to maximize that, maybe using some of it before it's sunsets, using some of those credits to gift in your lifetime. So there are ways where you can avoid taxation, get money out of your estate, do some things there on a gift tax basis. So gift taxes are not exclusive to high net worth individuals.

(18:59):

This is anyone. So that adjustment up to an $18,000 limit, which a thousand dollars increase from 17,000 in 2023, that basically means that you can free and clear, give anyone per person $18,000 without any reporting tax implications. How gift taxes usually work is the person making the gift would have to pay some form of tax associated with that gift. And so now with that limit, you have $18,000. So if you're a parent giving to a child, grandchildren, whoever it may be, another relative, a friend, family member, it doesn't really matter that 18,000 per person. So 36,000 for a married couple is readily available. And so that's just money that you could gift during your lifetime without having to worry about taxes. If you wanted to gift more than that, there are some rules that you would have to follow, some reporting that would have to be done.

(19:57):

There are some ways around that in using some of that credit, that 23 million that I mentioned or doing a one-time larger gift to folks using a five-year exemption rule. So again, tons of moving parts there, but if you want to just give money to someone if it's greater than $18,000, you just want to be mindful that there are potentially some tax consequences to that. If it's less than that, you're free to gift as you see fit. And obviously if you're married or offering those gifts to multiple people, it's not a total gift on behalf of the person making the gift. It's per person that is receiving the

Devin Walsh (20:37):

Gift. Is that just cash gifts? What if, for example, a parent buys a car or gives a car of the value of 30,000 bucks?

Ryan Staton (20:45):

Yeah, so I mean typically you're going to look at gifting money or assets kind of in the same fashion. There are some exceptions to that rule, but ultimately, yeah, I would say that all of those gifts are things that you're going to want, want to keep track of value and report accordingly.

Devin Walsh (21:05):

And how do you report that? Is it something on the tax forms every

Ryan Staton (21:08):

Year? Yeah, so there's a gift tax form and I am trying to remember the number off the top of my head. You didn't

Devin Walsh (21:16):

Read that last

Ryan Staton (21:16):

Night? No, I know a lot. I have a lot of numbers in my brain, but that's one, I don't want to say the wrong number, but I have an idea of what it is. But there is a gift tax form. So when you go to file your taxes annually, you're going to file that gift tax, essentially part of your tax return saying I made a gift to this person for this amount, if it's reportable and then it'll, it will be calculated based on whatever rule that it's falling under. So if you're using it under the exemption, nothing really reportable there. If you're above that limit and you're making a pretty large gift, then you're going to, and the exception, one of the exceptions of this, this is not gifts to charity, these are not gifts to nonprofit organizations. We're not talking about gifting for those types of purposes. This is I just want to give money something a parent wants to give a child money to help them buy a house or to buy something or wants to gift money to grandchildren for educational purposes or things like that. This is not nonprofit raising money for a good cause, types of gifts. This is just gifting to family members, friends, extended folks are not who do not have nonprofit status.

Devin Walsh (22:32):

That's good information. Well, we talked a lot about a lot of numbers today, strategy. So the key thing to focus on going to 2024 is to know these numbers. Be prepared, set a strategy going into 2024 and always talk to your tax professionals and your advisors. Obviously we here at State and Wash always here to help out answering questions you may have. So once again, we thank you for taking the time, listening to Wealth Builders today. Make sure to like and subscribe, share the episode and please reach out if you have any questions for us. And that's the end of tax talk 2024. Hopefully we'll have some more enjoyable conversations and fun rather than just talking about taxes. But there are some positives from this. I save more money retirement making money. So nothing wrong with that. Not all bad in this episode.

Ryan Staton (23:16):

Knowledge, knowledge is power. So the tax code is very long and complicated, but the more better off you'll be. So take a look in the show notes too for some quick hit items of things to review and change and I appreciate it. It was

Devin Walsh (23:31):

Brian will continue to read tax code every night for all your benefits.

Ryan Staton (23:35):

I will get that gift tax form number I promise for next

Devin Walsh (23:37):

Time. Thanks everyone. Have a great week.