Smart Tax Moves for 2024

January 15, 2024

As we kick off a new tax year, here are some smart tax moves to consider making, as well as some moves you will want to avoid making.

Be Mindful of AGI

While Adjusted Gross Income (AGI) is an oft-overlooked line item on your tax return, it is the basis for many financial decisions. 

  • IRA Caps. There are income limits, determined by AGI, on direct contributions to traditional and Roth IRAs.
  • Medical. Medical expense deductions are based on a threshold of 7.5% of AGI.
  • Surtax. There is a 3.8% surtax on Net Investment Income from capital gains, interest and dividends, which kicks in at an AGI over $250,000 for a married couple who files jointly.
  • What To Do. Consider municipal bonds, as well as retirement plan contributions, as ways to reduce taxable income. Or delay selling an appreciated security or property until the following tax year.

Low Income Years Can Be Good

Normally, low-income years are viewed as “all bad news”.  Not so fast.  If you recently retired, or are headed back to school, or your bonus income took a big dip one year, there are tax-savvy moves you can consider making.

  • Convert. Convert part of a traditional IRA to a Roth IRA, or contribute to a Roth IRA up to your limit (assuming you are eligible).
  • Sell Now. Sell appreciated assets (e.g. stock); if your income is low enough, the tax bill on capital gains could be $0.

When Life Happens

That sad day, unfortunately, will happen for all of us. If you experience the sudden loss of a loved one, (or if your spouse is terminally ill), there are probably topics that should be considered:

  • Accelerate Income. For example, Roth IRA Conversion, realizing capital gains, or other strategies to increase taxable income. While filing taxes jointly, your marginal tax rates may have an advantage over single filing rates, so increasing income may make sense. Also, there may be higher deductible medical expenses for one tax year, allowing room for more taxable income without substantially increasing your tax burden.
  • Step Up. “Step-up” the cost basis on assets, such as a house or securities. This results in far lower future capital gains, in some cases.

Keep Records of Home Improvements

  • Keep Your Receipts. If you own your home, it will be sold at some point. If you keep records of all capital improvements, the capital-gains taxes can be minimized, if you keep records of all expenses.

Donate to Charities from IRAs

  • QCDs. If you’re over 70 ½ years of age, owners of traditional IRAs can make Qualified Charitable Distributions (QCDs) to their favorite charities. These QCDs still qualify for the standard tax deduction, aren’t taxed if transferred directly to the charity, and don’t change AGI (i.e. no additional taxes and no impact on Medicare premiums).

Don’t Underpay Taxes As You Go

Now that interest rates are higher than just a few years ago, you can get stung with an 8% per annum underpayment penalty on your income taxes. 

  • Proper Withholding. Make sure you’re deducting enough from your payroll or making appropriate quarterly estimates (if you own your own business or have substantial 1099 payouts).

While nobody likes to “give the government a loan” by overpaying taxes during the year; make sure you make appropriate payroll deductions or quarterly estimated payments (needs to be at least 90% of the final tax bill to avoid penalties).