Year-End Tax Changes To Make

Year-End Tax Changes To Make

As we gear up for 2024, it’s time to get your taxes sorted out in time for the filing deadline on April 15. Tax planning can be overwhelming, especially because the rules are always changing. Three things to be aware of when filing your taxes include the implications of Roth conversions, yearly inflation adjustments, and changes to Form 1099K. Being proactive about these recent changes will help you achieve your long-term financial goals.

Be Careful with Roth Conversions

Roth conversions are a focal point for many. Unlike traditional IRAs, where contributions are tax-deductible but withdrawals are taxed, Roth IRAs operate on the inverse principle. Contributions are made with after-tax dollars, but withdrawals, under certain conditions, are tax-free. This feature makes Roth IRAs attractive if you anticipate a higher tax rate in retirement or want to create a tax-free income stream later in life.

However, the decision to convert traditional IRA funds into a Roth IRA should not be taken lightly. It involves carefully analyzing current and future tax implications. Don’t rush into conversions based solely on the allure of tax-free retirement income. After all, if you convert a tax-deductible account like a 401(k) to a Roth IRA, you’ll face a substantial tax bill. Therefore, it’s wise to spread out the conversion over a couple of years to avoid a big hit all at once.

The Evolution of 529 Plans

Long recognized for the benefits of their educational savings, 529 plans have recently undergone significant enhancements. These plans allow for tax-advantaged college education savings, with the added flexibility of changing beneficiaries.

A groundbreaking update to 529 plans now permits the rollover of funds into Roth IRAs for the beneficiary. This new feature opens a pathway to kick-start retirement savings for younger family members. The strategic option warrants consideration, especially for those with residual balances in their 529 plans after completing college. While this change may potentially compound savings across generations, don’t forget to research the limits and conditions attached to 529 plans.

Inflation Adjustments

The IRS periodically adjusts tax brackets to reflect inflation rates. For 2024, each tax bracket is projected to increase by about 5 percent, preventing taxpayers from paying more in taxes due to nominal salary adjustments that don’t actually translate to increased purchasing power. This adjustment lets you keep a bit more of your earnings for a slight buffer against inflation’s pinch on your wallet.

The Impact on the Standard Deduction and Retirement Contributions

Besides tax bracket adjustments, the standard deduction is also set to increase, offering additional relief to taxpayers. For married couples filing jointly, the standard deduction jumps to $29,200 in 2024, up from $27,700 in 2023. For single filers, the increase goes to $14,600 from $13,850.

Retirement savings accounts will see a boost in contribution limits as well. The limit for contributions to 401(k)s and 403(b)s will rise to $23,000, up from $22,500. The catch-up limit for people aged 50 and above remains at $7,500. Simple IRAs, SEP IRAs, and traditional IRAs have also seen normal adjustments in their contribution limits.

Gift Exclusions and Charitable Contributions

The annual gift exclusion amount is set to rise to $18,000 in 2024. This increase allows individuals and couples to give more generously to family members or others without triggering gift tax consequences. For those inclined toward charitable giving, the qualified charitable distribution limit will increase for the first time in years by $5,000 to $105,000 in 2024.

What You Need to Know About Form 1099-K Reporting Thresholds

Recent developments regarding Form 1099-K, which reports payments received through credit card transactions and third-party networks, could make tax filing more complex for individuals and businesses. Historically, the 1099-K form was something taxpayers only encountered after selling items over $20,000 or conducting more than 200 individual transactions per year.

However, new legislation aimed at tightening the reporting requirements has proposed lowering the threshold dramatically to just $600. This adjustment means that more people than ever—from those selling an old couch on Facebook Marketplace to individuals splitting dinner bills via Venmo—might find this tax form in their mailbox.

Delayed Implementation and What It Means for You

While initially set to take effect in 2022, the implementation of the new $600 threshold has been delayed another year. This delay offers a temporary reprieve, but the change is coming, with expectations to move forward with a $5,000 threshold for the upcoming tax year before potentially revisiting the $600 mark.

Now’s the time to prepare for the impending 1099K adjustments, especially if you frequently sell personal goods, split expenses among friends, or navigate business transactions through platforms like eBay, Airbnb, or Venmo. Start by keeping meticulous records so you can prove when you’ve sold personal items at a loss or received reimbursements through payment apps. These transactions don’t count as taxable income, but they could mistakenly be flagged as such. Thankfully, with proper documentation, you can clarify this with the IRS and avoid an unfair tax bill.

Get More Tax Planning Help

Whether you need advice about Roth conversions, retirement contributions, or Venmo transactions, Nelson Financial Planning is here for you. Tax preparation is just one of many financial services we can assist you with. Since opening our firm in 1984, we’ve seen it all, and we’re confident we can help you navigate this tax season while keeping more money in your wallet.

Ready to change your life with a successful financial plan that provides peace of mind for the future? Contact our office for more information.