As was the case in 2023, 2024 has so far not produced significant tax legislation impacting year-end tax planning. However, it continues to be impacted by tax legislation enacted in prior years, including the Tax Cuts and Jobs Act, SECURE 2.0, and the Inflation Reduction Act. Those pieces of legislation included deferred effective dates, some of which become effective in 2024, and/or sunset and phase-out dates that can also impact tax planning in 2024.
Inflation adjustments
Like every year, many of the dollar amounts associated with tax provisions are adjusted for inflation. As the inflation rate has declined over the last couple of years, the inflation adjustments for 2024 are somewhat smaller than they were for 2022 and 2023.
- Tax brackets: The continued inflation adjustments to the tax brackets will result in reduced taxes on taxable incomes that are at the same level as in 2023.
- Standard deduction: The significantly increased standard deduction from the Tax Cuts and Jobs Act continues to be adjusted for inflation for 2024 to $14,600 for single filers, $21,900 for head of household filers, and $29,200 for joint filers. This will continue to make the standard deduction more attractive to many taxpayers than itemizing deductions. This simplifies tax return preparation for taxpayers claiming the standard deduction, but may also affect taxpayer behavior since taxpayers claiming the standard deduction no longer get a tax benefit from activities such as charitable giving and home ownership.
- Estate and gift tax unified credit: The significantly increased unified credit from the Tax Cuts and Jobs Act continues to be adjusted for inflation in 2024 to $13,610,000.
- Retirement plans: Inflation adjustments for 2024 to retirement provisions include IRA contribution limits to $7,000 from $6,500, with the catch-up amount remaining $1,000. Limits for 401(k) plan contributions increased to $23,000 for 2024, with a limit of $30,500 for those age 50 and over.
Tax Cuts and Jobs Act
The individual provisions of the Tax Cuts and Jobs Act currently expire after 2025. They therefore remain effective for 2024 and 2025. However, some of the expiring provisions may warrant tax planning for 2024 and 2025. If the standard deduction is significantly reduced, taxpayers may consider taking steps to postpone charitable contributions until 2026 when itemized deductions are likely to be more beneficial.
Wealthier taxpayers facing a halving of the unified credit in 2026 may wish to consider gifts in 2024 and 2025 to reduce the taxable estate before 2026. The Supreme Court's decision this year in Connelly holding that a contractual obligation to redeem a deceased shareholder's shares at fair market value is not necessarily a liability that reduces the corporation's value for federal estate tax purposes warrants a review, and perhaps restructuring of buy-sell agreements, with even the Supreme Court suggesting the use of cross-purchase agreements between shareholders.
Many of the business provisions of the Tax Cuts and Jobs Act were made permanent. A few, however, have already expired or are phasing out. These include the full expensing of research and experimental costs, the limits on deduction of business interest, and bonus depreciation. Congress has made efforts to restore these provisions in legislation that has passed the House but has so far failed to pass the Senate. Restoration of these provisions was tied to an increase in the Child Tax Credit. For 2024, therefore, these provisions remain in their phase-out status and have not yet been restored. The legislative proposals would have restored them retroactively; however, as time passes, it is not clear that retroactive restoration would be retained.
SECURE 2.0
SECURE 2.0 made many retirement-related changes to the Tax Code, with many phased in over a period of years, including 2024. It added several new provisions for penalty-free distributions from retirement accounts. In addition to terminal illnesses and qualified disasters effective for 2023, it also added, effective for 2024, penalty-free withdrawals up to $1,000 for emergency expenses and withdrawals of the lesser of $10,000 or 50% of the account value in cases of domestic abuse.
The law also added a provision for employer 401(k) matching of employee student loan payments, and made several enhancements to SIMPLE plans, several of which became effective for 2024. Effective 2024 and later, 529 plan beneficiaries can roll over an aggregate of $35,000 in excess funds to a Roth IRA, and starting in 2024, employers without a retirement plan are entitled to a tax break for starter 401(k) plans or 403(b) safe harbor plans.
The act had required beneficiaries of inherited IRAs who were not eligible designated beneficiaries such as spouses to take distributions within 10 years of the IRA owner's death. The IRS later clarified that, if the IRA owner had started required minimum distributions before death, the beneficiary was required to take the distributions ratably over the 10-year period rather than at the end of the 10-year period. Since many taxpayers and tax practitioners had not anticipated the ratable distribution requirement, the IRS agreed to waive penalties for failure to make required minimum distributions in 2022 and 2023 and has now also waived penalties for failure to make required minimum distributions in 2024 for IRA owners who died in 2023.
Starting in 2024, required minimum distributions are no longer required from designated Roth accounts.
Inflation Reduction Act
Many of the provisions of the Inflation Reduction Act, enacted in 2022, have delayed effective dates. Provisions becoming effective for 2024 include:
- Clean vehicle credit transfer: The rules for transfer to a dealer of the clean vehicle credit apply to vehicles placed in service after Dec. 31, 2023.
- Zero-emission nuclear power: The new zero-emission nuclear power production credit applies to electricity produced and sold after Dec. 31, 2023.
Digital asset reporting
The expansion of broker reporting of digital asset transactions on Form 1099-B and the new Form 1099-DA has been proposed and delayed for several years. Currently, the reporting rules for Form 1099-DA do not apply until 2025 and the requirement for cost-basis reporting until 2026.
Third-party reporting
The requirement for third-party payment processor reporting has also been delayed for a few years. For 2024, reporting on Form 1099-K is required if the taxpayer receives $5,000 or more. Under current law, this is still scheduled to phase down to $600, although proposals have been made in Congress to increase the reporting limit.
Summary
In addition to these tax law changes effective for 2024, the usual tax planning strategies remain in effect. These include postponing income and accelerating deductions; bunching itemized deductions every other year and taking the standard deduction in the off year; year-end review of investments for possible offset of capital gains and losses; and maximizing charitable contributions and qualified retirement plan contributions. Proposals from the presidential candidates, even if some are eventually enacted, are not likely to have a direct impact on 2024 tax returns.
