Patrick Horning is a sophisticated planning strategies attorney at Northwestern Mutual.
Although the pace of inflation may have slowed over the last year, the impact on consumer pocketbooks feels omnipresent. From the cost of a burger at your favorite local restaurant to the pain you feel at the pump, it sure feels like we’re paying more for many goods and services these days. And while it’s difficult to find something positive to say about inflation’s impact, each year the IRS reviews certain figures that are pegged to inflation and makes increases when appropriate.
These figures include the standard deduction, contribution limits for retirement plans, the annual gift tax exclusion amount, and others. But while we’ve grown accustomed to seeing these figures increase slowly over much of the last decade, for the second year in a row taxpayers will see larger than normal increases in select figures for 2024. These increases can create a financial planning opportunity for taxpayers who have the income and/or assets to take advantage of them.
Northwestern Mutual financial advisors build financial plans that can help minimize the impact of taxes over time. IRS limit increases can be a great opportunity to revisit your plan to ensure you’re taking full advantage of the opportunities available to you.
6 IRS Limit Increases That May Benefit Your Financial Plan
The following are six recently announced IRS limit increases that may provide you with a financial planning opportunity in 2024:
1. Standard deduction
The standard deduction is set to increase from $13,850 to $14,600 for single taxpayers in 2024, and from $27,700 to $29,200 for those who are married filing jointly (MFJ). For taxpayers aged 65 and older (or blind), these figures increase to $16,550 for individuals and $30,750 for those who are MFJ when one member of the couple meets the applicable requirements. If both members of the couple meet the applicable requirements, their joint deduction rises to $32,300.
For taxpayers who do not itemize (which, since the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, includes more taxpayers than before), the higher standard deduction potentially means less income subject to taxation. Speaking of the TCJA, it’s worth noting that the standard deduction was altered by one of the law’s many temporary provisions currently scheduled to expire at the end of 2025. Unless Congress intervenes, the standard deduction will be cut roughly in half at that time, meaning more taxpayers may itemize in the future.
2. Qualified plan contributions
The maximum deferral for qualified plans, including 401(k) and 403(b) accounts, is set to increase modestly from $22,500 to $23,000 in 2024. The catch-up contribution for those age 50 and older will remain flat at $7,500. As a result, high-income taxpayers who are already maxing out their contributions to qualified plans will be able to defer a slightly larger amount in 2024.
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3. IRA contributions
The maximum IRA contribution amount will increase from $6,500 to $7,000 in 2024 for both traditional and Roth accounts. That’s a 7.7 percent increase from 2023. While the IRA catch-up contribution of $1,000 for those age 50 and older does not increase in 2024, it likely will increase in 2025.
4. IRA phaseouts
Depending on your income level, you may not have had the ability to contribute the maximum IRA contribution amount in prior years. This is due to IRA phaseouts, which limit the ability of high-income earners to take advantage of these accounts. However, in 2024 IRA phaseouts will also increase, benefiting those with incomes that may now fall within or even below the new ranges.
5. The lifetime estate and gift tax exemption
Thanks to the lifetime estate and gift tax exemption, every taxpayer can pass a certain amount of money to anyone at death and/or during life without paying estate or gift tax. In 2023, the unified lifetime exemption is capped $12.92 million per taxpayer, but in 2024 it rises to $13.61 million.
For high-net-worth Americans, this means you can pass an extra $690,000 to your heirs over the course of your lifetime as a gift and/or via your estate without paying tax. If you are planning as a married couple, you qualify for two lifetime exemptions. For couples, the new IRS limit increases your exemption by $1.38 million, bringing your combined unified lifetime estate and gift tax exemption cap to $27.22 million in 2024.
If you have substantial wealth and have yet to take advantage of the lifetime estate and gift tax exemption, we can’t stress enough that now is the time to start planning. This exemption is scheduled to be cut in roughly half at the end of 2025, when many provisions of the TCJA are set to expire. If Congress fails to extend these higher exemption amounts, taxpayers failing to take advantage of the higher amounts could potentially miss out on a once-in-a-lifetime opportunity to transfer larger amounts tax-free.
Contact your Northwestern Mutual financial advisor for help navigating this change. Equipped with proprietary financial modeling software as well as access to a dedicated team of estate and tax planning experts, we’ve got the tools and expertise to help you capitalize on this use-it-or-lose-it opportunity.
6. The annual gift tax exclusion
Taxpayers can also give smaller amounts away each year without touching their lifetime estate and gift tax exemption. This is called the annual gift tax exclusion. In 2023, the annual gift tax exclusion is $17,000 per donor, per donee. In 2024, this number increases to $18,000.
While an extra $1,000 may not seem like a significant increase, consider the following hypothetical scenario. You and your spouse have four children, and you’re lucky enough to have a total of 10 grandchildren. Together you’ve built significant wealth, and your combined estate easily exceeds your collective estate and gift tax lifetime exemption of $27.22 million in 2024. To help reduce your taxable estate at death, you and your spouse have each been gifting the annual exclusion amount to every child and grandchild each year. In 2024, instead of being able to remove $476,000 ($34,000 for every child and grandchild because you are giving as a couple) from your taxable estate via gifts as you did in 2023, you’ll be able gift an extra $28,000 (for a total of $504,000) in 2024 thanks to the increase.
The Social Security Wage Base Increase
While several 2024 IRS limit increases create a financial and tax planning opportunity for Americans, it’s not all good news. It’s worth noting that the Social Security wage base (the maximum wage subject to Social Security tax each year) will also increase. In 2023, that figure is $160,200. It rises to $168,600 in 2024, meaning Social Security taxes will be owed on an additional $8,400 of income for some high-income earners in 2024.
Meet With Your Northwestern Mutual Financial Advisor Today
As the end of 2023 nears, it’s a great time to plan for the impact these 2024 IRS limit increases can have on your financial plan. Likewise, it’s also a great time to act on 2023 year-end tax strategies, which may include tax-loss harvesting and charitable gifting strategies, as many will pass when the clock strikes midnight on Dec. 31, 2023.
Your Northwestern Mutual financial advisor can help you design a financial plan that minimizes the impact of taxes. And by starting the conversation before year-end, you’ll be well positioned to explore the planning opportunities that are right for you this year and next.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.
As an attorney in Sophisticated Planning Strategies, I work with Northwestern Mutual financial advisors as they help clients achieve financial security.
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