Planning for next year's tax brackets after the tweaks for inflation

Slight tweaks to federal income tax brackets and other inflation adjustments for next year could help clients take home or save a little bit more money in 2024, according to financial advisors.

The annual IRS protection against "bracket creep" unveiled a boost of 5.4% earlier this month to the seven levels of federal income tax in 2024, which is lower than last year's increase of more than 7%. Alongside the shifts to rules for retirement savings in 401(k) and individual retirement accounts and in other areas, the routine cost-of-living changes may start conversations between advisors, tax professionals and their clients about potential planning ideas for next year.

"Educate clients early and start running projections early in the year (or maybe even now)," Amy Irvine, the founder of Corning, New York-based Rooted Planning Group, said in an email. "Many of our clients are hearing that they may not get a raise at all, and for those that are, the raises are minimal. … The challenge on the capital-gain side is any mutual fund capital-gain distributions that might occur at the end of 2024, but you could plan for some strategies based on ranges."

Filers at risk of seeing their rates climb by eight percentage points to the 32% bracket from only 24% a year earlier will want to pay close attention to whether their income is over $182,101 as individuals or $364,201 for married couples in 2023, as well as the corresponding thresholds for 2024 at $191,950 for single filers and $383,900 for joint ones, according to James Bremis, a senior financial planner in the New York City office of Sentinel Group.  

"I have more detailed discussions with clients here, because this is where you see the largest jump in the marginal tax rate," Bremis said in an email. "If you have had to take calculated measures to stay in that lower bracket, these new adjustments could potentially give you some more flexibility with your tax strategy. They could potentially allow you to be more strategic with your deductions and savings/investment strategies when you have more room to manage the current year's tax liability."

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With the brackets rising, some clients may get larger paychecks after taxes in 2024 as their effective rates go down for bigger portions of their respective incomes. These are the federal income tax brackets for next year: 

• 10%: $0 to $11,600 (individuals or married filing separately); $0 to $23,200 (married filing jointly); $0 to $16,550 (heads of households)
• 12%: $11,600 to $47,150; $23,200 to $94,300; $16,550 to $63,100
• 22%: $47,150 to $100,525; $94,300 to $201,050; $63,100 to $100,500
• 24%: $100,525 to $191,950; $201,050 to $383,900; $100,500 to $191,950
• 32%: $191,950 to $243,725; $383,900 to $487,450; $191,950 to $243,700
• 35%: $243,725 to $609,350; $487,450 to $731,200; $243,700 to $609,350
• 37%: $609,350 or more; $731,200 or more; $609,350 or more

The numbers come from an analysis of the IRS guidance by the nonpartisan, nonprofit Tax Foundation. Besides the revisions to the brackets, the agency bumped up the standard deduction by $750 year over year to $14,600 for individuals, by $1,100 to $21,900 for heads of households and by $1,500 for spouses filing jointly to $29,200. The roughly 60 modifications for next year include differences in the alternative minimum tax, the earned income tax credit, the foreign earned income exclusion, the annual exclusion for gifts, adoption expense credits and health flexible spending arrangements.

Advisors and their clients may want to consider booking some capital losses early in 2024 in order to provide "some wiggle room" in the rest of the year, ramping up 401(k) and health savings account contributions to the maximum if they haven't already done so and, if the customers are Medicare beneficiaries, ensure that they understand whether they'll be subject to the "income-related monthly adjusted amount" surcharge, Irvine said.

"We use tax modeling software from Holistiplan, which allows us to model early in the year and then keep track through check-in points (mid-year, end of year) to monitor any changes in the model and make adjustments," she said. "The summary page this software generates is very helpful in educating clients on all the details."

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If clients believe their salary will increase by less than 5% in 2024, advisors could make the case for delaying potential deductions for charitable gifts or other possible itemizations "at least another year" as taxpayers wait to see which provisions of the Tax Cuts and Jobs Act will sunset at the end of 2025, Bremis said.

"We're in a favorable tax environment currently, and receiving the two largest inflation adjustments in tax brackets in the last 30 years only improves the current tax environment. If you weren't motivated to take action before the TCJA sunsets in 2025, this just added a little more incentive," he said. "If you have capital losses, you might want to wait if you're not pushed into that higher bracket. Wait until 2025 and beyond when some folks could potentially see their tax brackets go up by 9%. You might want to realize taxes now in other instances. If you've been considering Roth contributions or conversions, there's an incentive to do it in 2024. If you're in retirement, maybe you take a larger required minimum distribution if you have room before you're pushed into a higher bracket."