MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab.
It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.
This is the last episode of our current season and the last episode for 2024. I'm covering two things today.
The first is to give you some important tax updates that you need to be aware of for this year. The second is to give you some year-end moves you should consider when it comes to your tax planning.
Let's start with some updates on tax policy.
The first change is that the IRS has made slight adjustments to the income tax brackets for 2024. There are still seven tax rates, but the income ranges for each bracket have shifted to account for inflation. This means, depending on your bracket, you could see a shift in your tax bill.
I'm not going to read to you all the tax brackets, but it is useful to check them and see where you land. We'll have a link to the table in our show notes.
The next change is in the standard deduction. That went up in 2024.
For single filers or married couples filing separately, it's now $14,600.
If you're the head of a household, the standard deduction is $21,900.
Finally, if you're filing jointly as a married couple, your standard deduction is $29,200.
These numbers matter because, for many people, it's better to take the standard deduction than it is to itemize your deductions. It makes sense, though, to look at both methods and see which one gives you a better result.
I want to move on to retirement accounts, but before I do that, it's worth mentioning that, for 2024, most of the rules for itemized deductions are staying the same.
The $10,000 cap on state and local taxes is still in place, and the mortgage interest deduction limit is $750,000 for most new homebuyers. I say "most" because if your mortgage predates December 2017, you're still grandfathered in for up to $1 million.
Medical expenses that exceed 7.5% of your income are still deductible, so if you have significant medical expenses this year, that could make a difference come tax time.
Now for tax-advantaged retirement accounts. For 2024, the contribution limits for retirement accounts have increased.
You can now put $7,000 into a traditional or Roth IRA, plus a $1,000 catch-up if you're 50 or older.
For 401(k) plans, the contribution limit is now $23,000, and if you're over 50, you can contribute an extra $7,500.
The sooner you start contributing, the better, and if you're able to max out these accounts, it's a great way to save for the future and lower your taxable income today.
One last item, and that is to pay attention to RMDs.
If you're 73 or older, don't forget to withdraw required minimum distributions from your retirement accounts. If you miss your RMD window, you'll face a hefty 25% penalty, so be sure to withdraw the required amount before the end of the year, unless it's your first RMD, in which case you have until April 2025 to take it.
I've got as few more odds and ends related to tax policy, and then we can move on to year-end tax strategies.
If you're part of a high-deductible health plan, good news—the contribution limits for HSAs have increased. You can now contribute $4,150 as an individual or $8,300 for a family.
And if you're 55 or older, you can set aside an additional $1,000.
These accounts offer a triple tax benefit—contributions are tax-deductible, your earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
So if you haven't maxed out your HSA contributions for 2024, now's the time to do it.
If you have kids, the Child Tax Credit for 2024 remains at $2,000 per child under 17.
However, there's a phase-out for higher earners. If you're married filing jointly, the phase-out starts at $400,000 in income, and for single filers, it's $200,000.
So if you're eligible, this could be a great opportunity to reduce your tax bill.
Now, for those who earn a bit more, you might be familiar with the alternative minimum tax, or AMT.
In 2024, the exemption has increased to $85,700 for single filers and $133,300 for married couples filing jointly.
If your income is higher than the phase-out thresholds, your AMT exemption could start to shrink, so it's a good idea to keep track of your earnings and tax liabilities to avoid any surprises.
If you're thinking about passing on wealth, the estate and gift tax exemption has increased to $13.61 million for 2024. However, this exemption will be halved in 2026 unless Congress makes changes, so if you're in the process of estate planning, now might be a good time to take action.
Moving on from general updates around policy, I'd like to share a few tax-moves you might consider using to optimize your own tax strategy.
The first is contributing to a traditional IRA. If you qualify, contributing to a traditional IRA can reduce your taxable income for 2024 and potentially move you into a lower tax bracket. You have until Tax Day in 2025 to contribute for this tax year.
If you're a small-business owner or self-employed, you may qualify for a traditional or Roth IRA, but a Simplified Employee Pension, also known as a SEP IRA, could allow for greater savings.
Thanks to the SECURE 2.0 Act, contributions can be made with pre-tax or after-tax dollars. In 2024, self-employed individuals can contribute up to 20% of net income or $69,000, whichever is less.
The second is to look at maxing out your HSA, if you have one. If you haven't hit the maximum contribution for 2024 yet, now is the time.
In fact, many HSA holders don't realize they have until Tax Day to contribute toward their 2024 maximum, which is $4,150 for individuals and $8,300 for families. Those over 55 can add another $1,000 to those accounts.
Finally, even if you typically take the standard deduction, don't be too quick to rule out itemizing. Single filers can opt for a $14,600 deduction or $29,200 for married couples filing jointly.
But for those itemizing, keep in mind that you might be able to deduct your mortgage interest, as well as your property, state, local, and even sales tax paid in 2024. So those of you who live in a state with no or lower income tax, sales tax might get you a bigger tax break than the state and local tax deduction.
I know this has been a packed episode. By that I mean I've been sharing a lot of what can feel like random dollar amounts, contribution limits, and other tax rules.
But before I wrap up, here are six questions to ask yourself to see where your tax prep stands and what steps you might have left available for a more tax-efficient strategy.
Number one: What are my withholdings and estimated tax payments?
Remember, it might seem savvy to over-withhold and boost your expectations for a larger return, but a better approach is to withhold or prepay just enough to match your expected tax obligation.
Number two: Have I maximized my retirement account contributions?
We've already touched on traditional IRAs, but don't forget about your 401(k) or Roth IRA, if you have them.
Number 3: Do I need to take required minimum distributions, or RMDs?
If you're 73 or older and must take RMDs from your retirement accounts, you have until the end of the calendar year. Be sure to prepare for what those distributions might do to your tax bill.
Number four: What is the cost basis of my investments?
Before you sell any investments, know your cost basis and the capital gain or loss you'll realize from the sale. Optimizing the timing and amount of your investment gains and losses, also known as tax-loss harvesting, can help you save on taxes.
Number five: Are my investments tax-efficient?
Different holdings can be more or less ideal within different allocations.
For example, a standard taxable account might be best-suited for your tax-efficient investments.
Whereas assets you plan to hold for the short term tend to work better in tax-advantaged accounts like 401(k)s or IRAs, and Roth accounts tend to make sense for assets you expect will appreciate the most over the longest amount of time.
Number six: Have I maximized my charitable contributions?
For the charitably inclined, consider concentrating your donations into a single year to maximize your itemized deduction.
If you plan on giving a long-term stock to a charity, you might want to donate the asset directly to the charity for a potentially better deduction
If the charity doesn't accept appreciated assets, investigate donor-advised funds. You can find a link in the show notes to learn more about them.
That's it for this episode, this season, and this year of Financial Decoder. As always, it's been a pleasure bringing you all of the learning and insights we've shared this year.
For those that would like to access resources and references to all the tax numbers and details from today's episode, you can find helpful links and articles in the show notes, as well as the transcript.
If you'd like to hear more from me, you can follow me on my LinkedIn page or on X @MarkRiepe, M-A-R-K-R-I-E-P-E. If you like the show, we would be grateful for a rating or review on Apple Podcasts, or comment on the show if you listen to it via Spotify.
We always like new listeners, so if you know someone who might like the show, please tell them about it and how they can follow us for free in their favorite podcasting app.
Have a great holiday season, and we'll be back with a fresh season of topics for you in the new year. Thanks for listening.
For important disclosures, see the show notes and schwab.com/FinancialDecoder.
