The end of the year is weeks away. To improve your tax picture for 2024, act now.
It’s still too early to make tax moves based on the November elections and their effect on tax cuts expiring at the end of 2025. But other year-end tax planning for 2024 is possible—and important.
In particular, higher interest rates have significantly raised penalties for underpaying taxes to Uncle Sam for 2024. Many heirs of traditional IRAs also need to plan multiyear withdrawal strategies now that the Internal Revenue Service has issued definitive guidance for these accounts.
As usual, most moves to reduce 2024 taxes need to be completed by Dec. 31, and the clock is ticking. Here are several to know about.
Check your withholding and estimated taxes.
The penalty on income-tax underpayments for the first three quarters of 2024 is a steep 8%, and the fourth-quarter rate will likely be 7%. That’s well above the 3% rate of a few years ago, and the increase has already cost taxpayers billions in higher interest costs.
To avoid underpayment penalties, filers must pay at least 90% of the tax they owe well before the April due date. The deadline is Dec. 31 for employees and others who have taxes withheld, and it’s Jan. 15, 2025, for filers paying quarterly estimated taxes.
So it’s important to evaluate paycheck withholding or quarterly payments for this year, especially if you’ve had uneven income or received a windfall like a bonus or a large capital gain. The Internal Revenue Service has posted a calculator to help employees determine withholding.
If you need to pay more, try to raise withholding rather than make a direct payment to the IRS. Withholding can reduce underpayment penalties on income earned earlier in the year, while a quarterly payment usually won’t. Employees can raise withholding through their paychecks, while retirees often opt to raise it on taxable IRA payouts.
Taxpayers can also bypass these penalties by paying an amount equal to either 100% or 110% of their 2023 taxes. The 100% threshold applies mostly to filers with adjusted gross income of $150,000 or less, while the 110% threshold applies to those with more. This can be done either through withholding or a direct payment to the IRS.
But remember: For filers paying estimated taxes, the safe harbors apply per quarter. So it’s too late to avoid underpayment penalties for 2024’s first three quarters, except through higher withholding. However, making a payment to the IRS now will stop the interest clock.
A final note to taxpayers living in 34 states with federally declared disaster areas this year: The IRS has extended tax deadlines for these areas that could lower underpayment penalties.
Plan withdrawals from inherited traditional IRAs
This year the IRS clarified when many heirs of traditional IRAs must take payouts from them. Heirs should plan carefully and consider taking more than the minimum.
In late 2019, Congress decided that most nonspouse heirs of traditional and Roth IRAs should drain the accounts within 10 years if the original owner died in 2020 or later. But the new law didn’t specify whether heirs of traditional IRAs must take required minimum distributions, or RMDs, for years one through nine.
Standard deduction or itemized?
Filers can reduce taxable income either by a fixed amount—the standard deduction—or by listing individual deductions for mortgage interest, state and local taxes, charitable donations, medical expenses and other eligible costs on Schedule A.
Before the 2017 tax overhaul nearly doubled the standard deduction, about 30% of filers itemized. Now less than 10% do, although that’s still about 15 million filers.
For 2024, the standard deduction is $29,200 for married joint filers and $14,600 for singles. For 2025, it will be $30,000 and $15,000, respectively. Filers age 65 and older each get at least $1,500 more for 2024 and at least $1,600 more for 2025.
Some taxpayers switch from standard to itemized in different years to maximize overall deductions. If so, it can make sense to “bunch” deductions either by accelerating or delaying them into years when you’ll itemize.
See full Wall Street Journal Article - https://www.wsj.com/personal-finance/taxes/2024-taxes-ira-rules-fbd713ee?st=wo6ZpV&reflink=article_email_share
Tracking #655155