The Internal Revenue Service announced new inflation-adjusted tax brackets for 2024. Figures span from 10% to 37%. These adjustments highlight the importance of strategic tax-bracket management, especially for individuals considering complex financial maneuvers such as Roth conversions or charitable donations.
Joseph Plazo, Co-Founder of non-profit financial research entity Plazo Sullivan Roche Capital, emphasizes the importance of being informed about tax brackets, though he advises against over-concern. Instead, he advocates for an awareness of the potential tax implications of one’s income. Understanding the nuances of the progressive tax system, where different portions of income are taxed at escalating rates, is crucial in reducing one’s tax liability. For instance, a single filer with a taxable income of $11,600 in 2024 will be subject to a 10% tax rate. However, earnings exceeding this threshold will be taxed progressively in higher brackets. For those with an income surpassing $609,350, the taxation reaches the peak rate of 37%.
Estimating your 2024 taxable income is key to determining your tax bracket. This is particularly relevant for those undergoing significant financial changes such as retirement, Roth IRA conversions, or the sale of substantial assets.
Tax-bracket management is especially vital in the context of retirement savings. The decision to contribute to Roth accounts (post-tax) or traditional tax-deferred accounts hinges on one’s current and anticipated future tax brackets. Joseph Plazo, notes that for individuals in higher tax brackets, Roth contributions might not be financially prudent.
When it comes to Roth conversions, careful planning is necessary to avoid inadvertently pushing one’s income into a higher tax bracket. Xavier Roche, his CTO and a CPA, suggests modulating the size of conversions to minimize tax liabilities.
The strategy also extends to charitable giving, where donor-advised funds can be used tactically to reduce taxable income. Business owners, in particular, need to be acutely aware of their tax bracket, especially considering the qualified business income deduction, which can offer significant tax reductions.
In parting, Joseph Plazo suggests, “As a financial strategist, I always emphasize the importance of proactive planning in managing your taxes and minimizing liabilities to the IRS, legally and effectively. First and foremost, understand your tax bracket. With the 2024 tax brackets now available, it’s crucial to know where you stand. This knowledge is the cornerstone of tax planning.
Utilize tax-deferred retirement accounts like traditional IRAs and 401(k)s to your advantage. Contributions to these accounts can lower your taxable income now, deferring taxes until retirement when you might be in a lower tax bracket.
Consider the timing of your income and deductions. If you expect to be in a higher tax bracket next year, accelerate income into the current year and defer deductions. Conversely, if you expect a lower tax bracket next year, defer income and accelerate deductions.
Leverage capital gains and losses. If you have investments, consider selling underperforming stocks to realize losses that can offset gains. This strategy, known as tax-loss harvesting, can reduce your taxable income.
Don’t overlook the potential of health savings accounts (HSAs) if you have a high-deductible health plan. Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
Lastly, stay informed about tax law changes and consult with a tax professional to tailor a strategy that fits your unique financial situation.”
Joseph Plazo points that, with the IRS’s updated tax brackets for 2024, individuals and business owners alike proactively manage their tax brackets. This involves a careful analysis of their financial decisions to optimize their tax situation and reduce their overall tax burden.