An Overview of Tax Changes in 2024
By Marisa Heiden, CFP®, ChSNC®
As it does annually, the Internal Revenue Service (IRS) announced 2024 updates, including adjusting figures for inflation. Below are notable updates.
401(k) and 403(b) Contribution Limits
Employees can make contributions of $23,000, up from $22,500 in 2023. Those aged 50 and older can make “catch-up contributions” of $7,500, bringing the total employee contribution limit to $30,500. The total of all employee and employer contributions made to employer plans is capped at $69,000 ($76,500 if over 50).
Mandatory Roth Catch-Up Contributions for High Earners Delayed to 2026
The Secure Act 2.0, which was passed at the end of 2022, stated that beginning in 2024, high-wage earners (earnings above $145,000) would not be able to make pre-tax catch-up contributions to their employer retirement plan. Instead, high-earners’ catch-up contributions could only be after-tax Roth contributions. However, the IRS announced this provision would be delayed until 2026.
IRA and Roth IRA Contribution Limits
The limit on annual IRA contributions (both traditional and Roth) has increased to $7,000 for 2024, up from $6,500 in 2023. Individuals aged 50 and over may contribute an additional $1,000.
Annual Gift Tax Exclusion
The annual gift exclusion will increase by $1,000 to $18,000 per person. The gift exclusion is the maximum amount a person can gift to another without filing a gift tax return and having the gift count toward their lifetime gift and estate tax exemption (see next section).
Estate Tax Exemption Increases, But Will Sunset After 2025
The gift and estate tax exemption limit, above which estates are subject to estate tax, will increase in 2024. Estates valued at or below $13.6 million for single individuals and $27.2 million for married couples will be exempt from estate tax, up from $12.9 million and $25.8 million respectively in 2023.
The 2017 Tax Cuts and Jobs Act, which nearly doubled the exemption amount, will sunset after 2025. Unless there are legislative changes, beginning January 1, 2026, the estate exemption amount will revert to approximately $7 million.
HSAs and FSAs: Healthcare Savings Accounts
The Flexible Spending Account (FSA) contribution limit will be $3,200 in 2024. The Health Savings Account (HSA) contribution limit will be $4,150 for self-coverage and $8,300 for family coverage. Those age 55 and older can make an additional $1,000 catch-up contribution to an HSA.
HSAs and FSAs are both ways to pay for qualified medical expenses with pre-tax dollars. FSAs are an employer-sponsored account, and unused funds are generally forfeited at the end of the plan year. HSAs require a high-deductible health plan (HDHP), but unused HSA balances roll over each year.
Standard Deduction and Income Tax Brackets
For the 2024 tax year, the standard deduction will increase across various filing statuses. Single filers’ standard deduction will increase by $750 to $14,600. Married filing jointly filers’ deduction will increase by $1,500 to $29,200.
The IRS, mindful of "bracket creep," increases tax brackets’ income thresholds annually. These tweaks are aimed at preventing taxpayers from being pushed into higher tax brackets due to cost-of-living wage increases. In 2024, tax bracket thresholds will increase by about 5.4%. For example, married filers can now have up to $94,300 of taxable income and remain in the 12% bracket, compared to $89,450 in 2023.
Social Security COLA
Social Security benefits will increase 3.2% in 2024. This annual cost-of-living adjustment (COLA) helps Social Security benefits keep pace with inflation. After two large boosts in recent years – a 5.9% increase in 2022 and 8.7% in 2023 – the most recent Social Security COLA reflects moderating inflation.
Conclusion
If you have any questions or would like to discuss how these changes affect you, please reach out to your advisor.