Tax Strategy

Take Control of Tax Planning in 2024

Take Control of Tax Planning in 2024
Jacob DuBose
March 7, 2024

Continuing from my previous post I'd like to delve into the topic of taxes and tax planning. As you gather your documents for filing your 2023 taxes, here are some essential points to keep in mind:

Possible Changes to the Child Tax Credit (CTC). But, don’t wait to file

The IRS is monitoring pending legislation that could impact aspects of the Child Tax Credit (CTC). Several adjustments to the CTC introduced by the American Rescue Plan Act of 2021 have lapsed. Nevertheless, the IRS is vigilantly tracking Congressional deliberations on the CTC. Should Congress modify the CTC criteria, the IRS will automatically update filings for eligible taxpayers, eliminating the need for additional action from them.

E-mailing your tax documents

Avoid emailing your financial statements to family or your tax advisor. Instead, utilize a secure document center with encryption for storing documents. This could be an app supported by your tax preparer or the document center on the Savvy secure dashboard. Safeguarding and organizing your most sensitive information is crucial.

Don’t forget to compile your 1099 INT’s

If you've been stashing your cash in a high-yield savings account, chances are you've received a 1099 INT notice from your bank. If you just switched over last year, it's time to check your account for the 1099 INT form (banks typically use this to report interest payments). Banks have a minimum reporting threshold for the interest earned known as de minimis amount, set at $10.00. Essentially, if you earned less than $10 in interest, the bank isn't obligated to report it to you. For those who heeded advice and upgraded to a better rate, expect a higher amount to report this year.

1099(k)’s for 2024

1099-K forms were introduced to track electronic cash transfers between different parties. For instance, when you hire an Arborist and pay them through an app, the app provider reports this payment on your 1099-K form. However, not all transactions are service-related. For instance, if you cover a dinner bill and receive cash from other guests to reimburse you, this doesn't typically trigger a 1099-K from the app service unless the total amounts processed are above a certain threshold. Although the current reporting threshold is set at $20,000, there's a proposal to lower it to $600 in the future. While categorizing these transfers for tax purposes is manageable, it's important to be mindful of this additional reporting obligation.

Filing or Filing an extension

Failing to file taxes incurs a steep penalty - starting at 5% monthly, capping at 25% after 5 months. The IRS website details this calculation precisely. Remember: file by April 15th, or seek an extension. Note, an extension to file doesn’t change owed amounts. To qualify, you must demonstrate an attempt to calculate taxes due and make a payment. The final reckoning occurs in October with the standard extension expiration. If you owe money that you are unable to pay, an installment plan can be established (subject to potential qualifications). But, you’ll want to be proactive to the point where you can show that you were aware of the deadlines, calculated the taxes due, paid the taxes due (or set up a plan to do so) and met the final deadline to get the final return submitted before the October 15th deadline. Since your filings account for any taxable activity that happened last year, tax filing time is a great time to think about tax planning items for this year. Next tax year you’ll be doing this whole thing over again.

Here are some ways to take control over your experience with tax planning:

Tax Refund

If you're receiving a sizable tax refund, consider adjusting your tax payments throughout the year with a W4P form. The extra taxes refunded at year-end stem from overpaying the government based on your estimated tax liability. Given current high interest rates, it's more beneficial to have that money working for you in a high-yield savings account. Alternatively, you could redirect the surplus towards recalculating contributions to savings vehicles like your employer-sponsored 401(k), IRA, health savings account (“HSA”), or state-sponsored 529 plan, depending on your circumstances. Each option carries unique tax advantages and impacts on your future financial goals. Consult your financial advisor to devise a strategic financial plan tailored to your needs. The government lacks insight into your personal aspirations, making professional advice essential for future planning. By aligning your finances effectively, your money can yield greater returns. While some find comfort in overestimating and withholding taxes as a safety net, others view it as a means of enforced savings for those struggling with budgeting. Tailoring financial strategies to your specific situation and preferences is critical for financial success.

Required Minimum Distributions

 – If you have/ will have required minimum distributions (“RMDs”) in 2024 and are charitably inclined you could have the amounts you give to charity come out of the accounts subject to RMDs. RMDs determine the mandatory withdrawal from a retirement account upon reaching a specific age to address tax obligations. Interestingly, distributions directed straight to a qualified charity from a retirement account remain untaxed, yet contribute to the overall withdrawal obligation. To optimize this, consider initiating your qualified charitable distributions first before arranging the remaining funds for personal use (and subsequent taxation). The sequence in which distributions are made is crucial. If you withdraw the RMD amounts initially and follow up with a Qualified Charitable Distribution (“QCD”) later in the year, the impact differs. It's worth noting that intricate rules apply, such as caps and age-related nuances, which are best explored with a tax advisor.

Pay yourself first

As I mentioned, if you have plans for the future, pay toward those goals first. In particular, Employer Sponsored Retirement Plans. Contributions to these plans allow you to reduce your taxable income (regardless of how much you make) and help fund your future retirement. If a High Deductible Health plan is available and works for you, saving into an HSA can allow you to save aggressively for health costs in the future with substantial tax incentives built in. Tax incentives for state sponsored college savings plans exist too (not to mention state subsidies and matching programs). The point? You can deliberately save toward your goals while reducing your taxes at the same time. Ask your advisor to expand on all of these topics and others like, pulling forward pre-tax retirement money to a Roth to pay taxes when it is most favorable to you and possibly restructuring your retirement income in a tax sensitive way.

We trust your tax filing season is devoid of unnecessary stress (or, heaven forbid, surprises). Engaging in tax planning this year will greatly contribute to a smooth and strategically advantageous tax journey in the future.