In response to rising inflation rates, the Internal Revenue Service (IRS) has recently adjusted deductions for tax year 2024.

This change is not expected to significantly impact the tax burdens of most Americans, as it is primarily aimed at ensuring that individuals remain in their current tax brackets when their income merely keeps pace with increased living expenses. The noteworthy adjustment for the 2024 tax year is the roughly 5% increase in the standard deduction for income tax filings.

Standard Deduction: The standard deduction, which allows taxpayers to deduct a certain amount from their income, will increase, For single taxpayers and married individuals filing separately, the standard deduction will rise to $14,600. For head of households and married couples filing jointly, it will increase to $21,900 and $29,200, respectively.

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Tax Rate Changes:  In the 2024 tax year, there will also be higher income thresholds for each tax bracket, granting Americans a "grace period" before additional income is subject to higher tax rates. For example, single filers with incomes over $100,525 and couples earning $201,050 will face a 24% tax rate in 2024, up from $95,375 and $190,750 in the previous year.

Contribution Limits:  Several other IRS thresholds have also been raised for the upcoming year, including contribution limits for tax-deferred retirement accounts, as well as limits for gifts and estate tax exemptions. For 2023, 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 $22,500, up from $20,500.   For 2024, the limits increased to $23,000, up from $22,500.  These upcoming 2024 changes could provide opportunities for taxpayers to reduce their tax liability in specific areas, according to experts.

Retirement Accounts: The 2024 adjustments for inflation create an opportunity for savers to contribute more to tax-deferred 401(k) accounts, potentially reducing their income tax liability. The IRS has raised contribution limits for 401(k)s by $500 to $23,000 in 2024, with a corresponding $500 increase for IRA contributions, raising them to $7,000.

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However, it's important to note that the contribution limits for "catch-up" contributions for older workers have not changed for 2024, remaining at $7,500 for 401(k)s and $1,000 for IRAs.

Catch Up Contributions:  Mentz advises individuals with higher incomes to consider making pretax catch-up contributions in 2023 while the opportunity is available, as it offers a more substantial tax advantage. To illustrate, suppose an employee contributes $6,000 as a catch-up contribution while in the 35% tax bracket. If they later withdraw this $6,000 during retirement when in the 15% tax bracket, they would have effectively saved $1,200 in taxes, according to his explanation.

Family Planning: For those planning to transfer wealth to the next generation, gifts of up to $18,000 will be tax-free in 2024, up from $17,000 in 2023. Additionally, the lifetime estate tax exemption will be $13.6 million, an increase from the previous $12.9 million.

Estate Planning Alert:  Wealthy taxpayers are advised to take advantage of these higher limits, as the Trump-era tax cut that doubled the federal estate tax exemption is set to expire in 2025, effectively halving the exemptions.

529 Education Plans:  Furthermore, annual contribution limits for 529 savings accounts, designed for a child's education, will increase by $1,000 to $18,000 in 2024. These contributions are considered gifts for federal tax purposes and do not count against the lifetime gift tax exemption.

Starting in 2024, 529 account holders will also have the option to transfer up to a lifetime limit of $35,000 to a Roth IRA for a beneficiary. This flexibility allows funds originally earmarked for college to be redirected toward retirement if the next generation alters their educational plans.
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