2024 Is An Important Year for Tax Payers

There’s plenty to focus on in 2024 — economic uncertainty, ongoing conflicts around the world, inflation, interest rates, a contentious presidential election…

But for many, 2024 will likely slip by without them realizing the importance this year could have on their lifetime tax liability.

Tax Cuts & Jobs Act (TCJA) Sunsets Next Year

The tax reform put in place by the Trump Administration drastically changed the tax code and created opportunities to lower lifetime tax liabilities for middle-income and upper-income households.

But it wasn’t a permanent law. In order to get the law passed, the TCJA included a sunset provision for 2025. And when the sunset arrives the tax code reverts back to the 2016 code and the TCJA tax strategies fade into the…well…sunset.


A Second Biden Term Could Increase Taxes on households earning over $118,000 per year

If President Biden is re-elected, his proposed budget would increase taxes on households in the top 40% of income based on an analysis by the Tax Policy Center. While higher-income households will see larger increases in taxes, U.S. Census data shows the tax increases will impact households earning more than $118,000 per year.

Raising Investment Taxes

While the increasing taxes through the tax brackets will be a part of the plan, tax increases will likely hit investment portfolios hard. The proposal eliminates the preferential treatment for capital gains taxes. While this would greatly increase taxes on investment portfolios for all income levels, lower-income households are less likely to be impacted as fewer of them own taxable investments.

The removal of capital gains rates would set the tax rates at the marginal income tax rate — significantly higher than the current capital gains rates.

The proposal also would increase Net Investment Income Tax and expand the number of households subject to the tax.

Additionally, high-income taxpayers could face limits to their retirement contributions and lose the ability to convert after-tax money into a Roth in certain circumstances.

 

Some Strategies Expire When The 2017 Tax Cuts & Jobs Act Sunsets

Inside this guide from Purposeful Strategic Partners, you’ll discover:

  • The costly “domino effect” caused by changes to tax laws (and what to do)

  • Specific tax savings to tap BEFORE income tax rates jump

  • The tax bundling strategy used by high income earners

What Can You Do?

If your household makes more than $118,000 per year, 2024 may be an important tax planning year for you. Understanding how the changes in the tax code will impact you and considering moves you can make now to minimize your tax liability are key. Discuss tax strategies with your CPA or financial advisors and ask for specific recommendations based on your current and projected tax liabilities.

Purposeful Strategic Partners also has a guide for tax planning strategies for 2024, which may be helpful. An excerpt form the guide is below.

[Excerpt] STRATEGY #2: Prepare Your Portfolio for Expiring Tax Cuts

Have you checked for embedded capital gains in your investments? If not, you may want to consider taking action now before the tax hammer gets even heavier.

Harvesting embedded capital gains now could be beneficial if capital gains lose their favorable tax treatment in the near future. This would lock in the tax under a favorable tax regime where most will pay 15% and the top rate is 20% rather than at the significantly higher marginal income tax rates — a proposal the Biden Administration is considering.

The loss of capital gains treatment would be a significant increase for investors, and the top tax rate could rise to nearly 40%... just about double the current highest capital gains rate.

Taxes are a significant drag on your investment investment portfolio's returns. Properly managing the portfolio's tax liabilities may be more important than picking the right investments. 

Critical questions to ask yourself include:

  • Is my portfolio positioned well for current (and future) tax consequences?

  • Should I consider accelerating realizing capital gains taxes now while rates are lower?

  • Do I need to make some investment changes to my portfolio to improve tax efficiency?

  • Is it worth freeing up some cash to make purchases I’ve been considering?

  • Am I in touch with a financial professional who understand tax implications and can consult with me about my capital gains exposure?