Ten income and estate tax planning ideas for 2024

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 02/21/24

Whether it’s the possibility of higher tax rates in the future or recent policy changes impacting inherited retirement accounts, investors have a lot to consider when it comes to their personal financial situation.

Looking at the year ahead, individuals may want to explore opportunities to save more, reduce taxes, or transfer wealth more efficiently.

Here are 10 ideas for income and estate tax planning:

1. Consider Roth IRA conversions

A thoughtful strategy utilizing Roth conversions can be an effective way to hedge against higher taxes in the future. In fact, tax rates are scheduled to increase after 2025 when most of the current tax law provisions expire. Lower tax rates now may translate to a lower cost for converting, depending on individual circumstances.

2. Explore alternative ways to fund Roth accounts

Taxpayers at higher income levels are prohibited from contributing directly to Roth IRAs. For 2024, income phaseouts begin at $146,000 ($230,000 for married couples filing a joint return). Taxpayers may want to consider funding a non-deductible (i.e., after-tax) IRA and then subsequently converting to a Roth IRA. It’s important to understand the tax rules around this strategy as adverse tax consequences, referred to as the “pro rata” rule, may apply if the individual owns other pretax IRAs.

3. Maximize deductions in years when itemizing

With the large increase in the standard deduction under recent tax law changes, and the scale back of many popular deductions, fewer taxpayers itemize deductions on their tax returns. Some taxpayers may benefit by alternating between claiming the standard deduction some years and itemizing deductions other years. If possible it may make sense to “lump” as many deductions into those years when itemizing. For example, making larger charitable contributions in one year or accelerating deductible medical expenses.

4. Plan for the 10-year rule on inherited IRAs

Since most non-spouse beneficiaries will have to liquidate inherited IRAs within 10 years following the death of the account owner, it could mean a higher tax bill for those heirs. There may be strategies to transfer retirement savings in a tax-smart manner to the next generation. For example, consider leaving a greater share of retirement assets to heirs who are in lower tax brackets. Or, consider leaving other (non-retirement) assets to heirs who may benefit from a step-up in cost basis at death.

5. Review estate planning documents and strategies

The increase in the lifetime exclusion amount for gifts and estates ($13.61 million per individual in 2024) may have unintended consequences for some individuals and families with wealth under that threshold. They may think that they do not have to plan for their estates and fail to consider important documents such as a power of attorney, health care directives, or a strategy to avoid probate.

6. Plan for potential state death taxes

While much attention is focused on the federal estate tax, certain residents need to know that many states have estate or inheritance taxes. There are some states that are “decoupled” from the federal estate tax system. This means the state applies different tax rates or exemption amounts. A taxpayer may have net worth comfortably below the $13.61 million lifetime exclusion amount for federal taxes, but may be well above the exclusion amount for their particular state. This may include a strategy to make sure there are liquid funds available at death so the estate can meet state tax liabilities.

7. Develop a strategy for low cost-basis assets

Ensure stepped-up cost basis is maintained when property is transferred at death. For example, careful consideration should be made around lifetime gifts that may jeopardize a step-up in cost basis on property at death. In the case of a lifetime gift, the cost basis of the property generally carries over to the person receiving the gift.

8. Expand use of 529 accounts for education savings

529 college savings plans benefit from attractive tax advantages. Account earnings are free of federal income tax (for qualified education expenses), and a special gift tax exclusion allows you to elect to treat up to $90,000 of contributions as though those contributions had been made ratably over a five-year period. Qualified education expenses were expanded in recent years to include laptops, computers, and related technology. Families can also use up to $10,000 annually for K–12 tuition, or student loan payments. Consult with a tax professional when considering a distribution for certain expenses since there may be adverse state income tax consequences.

9. Consider the charitable rollover option if you are a retiree

IRA owners (age 70½ and older) may benefit from directing charitable gifts tax free from their IRA. Since most retirees claim the standard deduction, they will not benefit taxwise from making those charitable gifts unless they itemize deductions. For 2024, individuals may transfer up to $105,000 tax free from an IRA to a qualified charity.

10. Maximize the 20% deduction for qualified business income

The Tax Cuts and Jobs Act introduced a provision (Section 199A) that allows certain taxpayers to deduct 20% of qualified business income on their tax return. Business income from pass-through entities such as sole proprietorships, partnerships, LLCs, and S corps may qualify for this new deduction. This deduction may be limited depending on income level and the type of business so consult with a qualified tax professional.

Seek professional advice

Individuals may want to consult a qualified tax or legal professional and a financial advisor to discuss these strategies to prepare for the risk of higher taxes in the future. Personal circumstances vary widely, so it is critical to work with a professional who has knowledge of your specific goals and situation.