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Navigating 2024 Tax Legislation: A Financial Advisor’s Guide to Key Updates and Proposed Changes

Michelle Riiska April 1, 2024

Capitol Building - Tax Legislation in Senate

In the dynamic realm of tax legislation, financial professionals must remain vigilant to navigate their clients’ tax obligations.

This blog post offers a concise overview of pivotal updates in tax laws for 2024. From IRS contribution limits to the Secure 2.0 Act and the Tax Cuts and Jobs Act’s potential expiration, we explore all the key developments. Additionally, we analyze the divergent tax policy visions of President Biden and former President Trump, providing valuable insights for financial planning strategies.

2024 IRS Contribution Limits Update: Key Points

The Internal Revenue Service (IRS) has announced increased contribution limits for most tax-advantaged retirement accounts in 2024. Let’s dive into the key points you need to know:

  1. IRA Catch-up Contributions: For individuals aged 50 and over, the catch-up contribution limit for Individual Retirement Accounts (IRAs) remains unchanged at $1,000 for 2024. However, there’s an exciting development to look forward to in 2025. These catch-up contributions will be indexed for cost-of-living adjustments, allowing you to save even more for your retirement.
  2. Catch-up Provision for Ages 60-63: Individuals aged 60 to 63 nearing retirement will benefit from a special catch-up provision starting in 2025. This provision allows for an additional contribution amount of either $10,000 or 150 percent of the regular catch-up amount–whichever is greater.
  3. Update for High-income Earners: For high earners whose income exceeds $145,000, starting in 2026 catch-up contributions will now need to be made as Roth contributions. This requirement ensures that individuals with higher incomes receive the same tax advantages while saving for retirement, aligning with overall tax planning strategies for your clients.

These updates offer opportunities to optimize savings for your clients, but many more changes must be on your radar.

Secure 2.0 Update: Boosting Retirement Planning Flexibility

Retirement planning just got more flexible and accessible with some updates to the Secure 2.0 Act. Let’s explore the key changes brought about by this legislation:

  1. No Required Minimum Distributions (RMDs) for Roth 401(k)s: Starting in 2024, individuals with Roth 401(k)s and similar retirement plans are exempt from the burden of Required Minimum Distributions (RMDs). This exemption eliminates the need to move funds to a Roth IRA to avoid required distributions upon reaching retirement age, giving Roth enthusiasts more flexibility in managing their retirement assets.
  2. Spousal RMD Strategy: Surviving spouses now have a valuable option when it comes to RMDs. They can elect to be treated as the employee for RMD purposes, inheriting the deceased spouse’s RMD schedule instead of having to complete a rollover. This strategy allows for a smoother transition and greater simplicity in managing retirement distributions. Discuss this option with your clients to ensure they make informed decisions regarding their retirement plans.
  3. Student Loan Payments Count Toward Employer Matching Contributions: Secure 2.0 introduces a significant benefit for young workers burdened by student loan debt. Qualified student loan payments can now be considered for employer-matching contributions in retirement plans. This provision offers a powerful incentive for individuals to make progress on their student loan repayment while simultaneously building their retirement savings.
  4. Penalty-free Withdrawals for Emergency Expenses: To address unforeseen emergencies, Secure 2.0 introduces a new provision allowing penalty-free withdrawals of up to $1,000 per year from retirement accounts. There’s a three-year repayment period, during which further penalty-free withdrawals cannot be made. This provision provides individuals with a safety net to tap into their retirement savings in times of urgent need, offering greater financial security.
  5. 529 Rollovers to Roth IRAs: Secure 2.0 unveils the potential for tax-efficient retirement planning through rollovers from unused 529 college savings plans to Roth IRAs. While this offers exciting opportunities, it’s important to note the complexities and limitations involved. For instance, there is a 15-year holding period for the 529 plan—but there is no guidance on whether or not changing the beneficiary restarts the 15 years. You may want to wait for further clarification from the IRS before exploring this avenue for clients.

These changes brought about by Secure 2.0 offer individuals more control, flexibility, and innovative options when it comes to retirement planning.

Tax Relief for American Families and Workers Act Update

The Tax Relief for American Families and Workers Act is currently under debate in the Senate, with many provisions included that could greatly impact individuals and businesses.

Here are some key points to keep in mind:

  1. Child Tax Credit Increase: The act aims to increase the refundable portion of the child tax credit and adjust the entire credit amount based on inflation. The credit would also give taxpayers the option to choose to base it on either 2023 or 2024 income levels. If approved, this would be a significant boost for families and a step towards addressing child poverty.
  2. Immediate Deductions for Research and Development Costs: R&D costs could be deducted immediately, rather than spread out over several years.
  3. Increased Access to Affordable Housing: The act includes provisions aimed at increasing access to affordable housing by raising the allocation for the Low Income Housing Tax Credit and facilitating eligibility for the credit.
  4. Debate Over Budget Impact: While some studies suggest the overall impact of the Act would be revenue-neutral by 2025, others raise concerns over its potential long-term budget effects. It’s important to watch for fluctuations year-to-year, as well as the potential impact on taxes for different income levels.
  5. Small Tax Cuts for Most Americans: Recent studies suggest that the Act would provide a small tax cut for most Americans, with the poorest fifth of taxpayers seeing an average cut of $140 and the wealthiest fifth seeing an average cut of $110. While the impact on individual taxpayers may be small, the potential benefits for families and businesses could be meaningful.

Keep an eye out for more updates and informative content as we continue to follow the developments of the Tax Relief for American Families and Workers Act.

The Tax Cuts and Jobs Act: What Happens If It Expires?

As the Tax Cuts and Jobs Act (TCJA) is set to expire at the end of 2025, it’s essential to be aware of potential tax hikes and plan accordingly. Some important considerations include:

  1. Tax Rates Likely to Increase: Most tax brackets are expected to face higher rates once the TCJA expires. It’s important to prepare for potential rate changes and understand how they may impact your tax situation.
  2. Standard Deduction Changes: The higher standard deduction provided by the TCJA incentivized many individuals to forgo itemizing deductions. However, with a potentially reduced standard deduction in the future, itemizing could become more common.
  3. SALT Deduction Cap Relief: There is a possibility that the $10,000 cap on state and local tax (SALT) deductions imposed by the TCJA could be eliminated. This would be particularly advantageous for residents of high-tax states who could benefit from increased deductions.
  4. Increased Mortgage Interest Deduction: Under the expired TCJA provisions, the current deduction limit for mortgage interest on loans up to $750,000 could revert to $1 million. This change would primarily benefit homeowners in high-cost-of-living areas.
  5. Return of Miscellaneous Deductions: Several deductions, such as unreimbursed work expenses, legal fees, and investment fees, which are currently suspended, might return. However, they would be subject to a new two percent of adjusted gross income (AGI) threshold.

To minimize the impact of these potential tax hikes, proactive tax planning strategies can be implemented, including:

  1. Timing Deductions: Strategically timing deductions like charitable gifts can help maximize their benefits in light of potential changes in tax laws.
  2. Roth Conversions: For individuals who anticipate being in a higher tax bracket in the future, converting traditional retirement accounts to Roth accounts may be a valuable strategy.
  3. Maximizing Retirement Savings: Encourage clients to maximize contributions to retirement accounts and Health Savings Accounts (HSAs) to reduce their taxable income.
  4. Charitable Giving: Taking advantage of the current higher AGI limit for deductions, clients can consider donating to charity. Depending on their tax situation, delaying charitable gifts until they are in a higher tax bracket may also be beneficial.

For high-net-worth clients, specific estate planning considerations should be taken into account, including:

  1. Lower Estate Tax Exemption: The current estate tax exemption is expected to decrease significantly. It would be prudent to review estate plans and potentially utilize gifting strategies to leverage the benefits of the current exemption levels.
  2. Grandfathered Exemption Amount: Gifts and transfers made between 2018-2025 under the TCJA provisions are protected by the current, higher exemption amount.
  3. Lifetime Gifting Strategies: Utilizing the annual gift tax exclusion of $18,000 per person and making use of irrevocable trusts can help gradually transfer assets out of an estate.
  4. Income-producing Asset Transfers: Strategically transferring income-producing assets to family members can potentially reduce the taxable estate.
  5. Reduced Charitable Deduction Limit: The current 60 percent of AGI limit for charitable deductions will revert to 50 percent upon expiration of the TCJA.

Considering estate planning tools like Credit Shelter Trusts, Bypass Trusts, Spousal Lifetime Access Trusts (SLATs), and Grantor Retained Annuity Trusts (GRATs) can further assist in minimizing estate taxes.

Please keep in mind that the information provided is based on the current understanding of the TCJA and the potential changes. It’s always wise to stay updated on any developments and consult with a professional for personalized advice.

Navigating Tax Policy Visions from Biden and Trump

President Biden’s Proposals

President Biden advocates for a series of changes aimed at reshaping corporate and individual taxation:

  1. Corporate Tax Increase: Biden proposes raising the corporate income tax rate to 28 percent, up from the current 21 percent.
  2. Net Investment Income Taxation: He suggests introducing net investment income taxation for passive income, potentially impacting investors.
  3. Permanent Excess Business Loss Limitation: Biden is considering making the excess business loss limitation permanent, which could alter tax strategies for businesses.
  4. Executive Compensation Deductibility: Further deductibility of executive compensation is on the agenda, potentially affecting compensation structures.
  5. Capital Gains Taxation: Biden aims to tax long-term capital gains and qualified dividends as ordinary income for individuals earning above one million dollars, and at death for estates valued above $5M.
  6. 1031 Exchanges and Carried Interest: He discusses potential changes to 1031 exchanges and proposes taxing carried interest, affecting real estate investors and private equity.
  7. Individual Income Rate and Billionaire Minimum Tax: Biden suggests considering an increase in the top individual income rate to about 39.6 percent and a billionaire minimum income tax targeting the wealthiest Americans.

Donald Trump’s Tax Proposals:

Trump focuses on building upon the Tax Cuts and Jobs Act while exploring additional measures:

  1. Permanent Tax Cuts: Trump prioritizes making the provisions of the Tax Cuts and Jobs Act permanent, aiming for stability in tax policy.
  2. Corporate Tax Reduction: He considers reducing the corporate tax rate from 28 percent to 21 percent, aiming to maintain competitiveness.
  3. Taxing Private University Endowments: Trump explores the possibility of taxing private university endowments, potentially affecting higher education finances.
  4. Tariffs: Trump discusses implementing tariffs, including a universal baseline tariff on all imports and a 60 percent tariff specifically on imports from China.

These proposals underscore the divergent approaches of the two candidates and their potential impact on businesses, individuals, and global trade dynamics.

Navigating the Complexities: Ensuring Expert Guidance in 2024’s Tax Landscape

The 2024 tax landscape presents financial professionals with a complex array of legislative changes and potential scenarios. From IRS contribution limits to landmark bills like the Secure 2.0 Act, staying informed is paramount. Remaining informed and adaptable ensures you can expertly guide your clients through the intricacies of tax legislation with confidence and clarity.

To continue learning more on this topic, watch our webinar now available on-demand 2024 Tax Legislation Insights, Proposals, and eMoney Analysis. My colleague Zac Gates and I break down these major tax updates and take things a step further by demonstrating how you can model some of these scenarios for clients.

DISCLAIMER: The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.

Image of Michelle Riiska
About the Author

Michelle joined eMoney over four years ago after working for an RIA where she first became acquainted with eMoney as a user of the software. She started her career at eMoney as a Customer Service Representative, which allowed her to use the skills she obtained as a Communications Major/Sociology Minor at Hawaii Pacific University to gain a great understanding of how our users utilize the software, and the questions clients may need answered through technology. She has since moved on to working with the Financial Planning Group where she works on escalated cases and participates in industry research. Michelle recently obtained the ChFC® marks and is looking to obtain her CFP designation. You can find her being overly enthusiastic about tax legislation in webinars, fishing the Elizabeth River, or coming up with new recipes that rival both the complexity and unpredictability of cryptocurrency.

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