The stock market continues to defy expectations. Wall Street "experts" predicted that rising rates would cause another down year. Instead, corporate earnings have proven to be resilient, the jobs market is robust, and core inflation, despite volatile gas and food prices, is generally subsiding to normal levels. And stocks have done much better than many imagined.
Welcome to a look ahead to Q4 2023 as a part of your quarterly financial planning calendar. In this article, we'll cover what trends and topics you need to track as we hurtle towards the end of the year. We'll give you easy-to-follow tips in four areas:
- Financial planning education
- Long-term care insurance
- End-of-year tax planning
- Charitable giving strategies
IRS Limits Announced in October 2023
We might be preaching to the choir here, but October is Financial Planning Month. When the weather starts to get colder, it's always a good time to focus on education—and learning how to secure your financial future with a solid financial education is always time well spent.
To expand our financial planning repertoire, let's first focus on the IRS limits. Mid-October is when the IRS typically announces changes to tax brackets, 401(k) contribution limits, estate and gift tax thresholds, and Social Security payouts. These estimated adjustments could mean significant savings in your taxes in 2024, but only if you put a plan in place to take advantage of them. It's always a good idea to work with a knowledgeable financial advisor, CPA, or estate planning attorney, depending on the complexity of your financial situation.
Projected 2024 Tax Bracket Adjustments
Thanks to inflation, we've seen large jumps in tax bracket thresholds in the past couple of years. Bloomberg Tax & Accounting projects this year's numbers to be a robust 5.4% adjustment, which will push more taxpayer income into lower brackets, potentially reducing income tax bills.
According to the American Enterprise Institute, the highest bracket (37%) is expected to climb $37,450 for married couples filing jointly. For these couples, the bracket is expected to start at $731,200. For unmarried individuals, this bracket may start at $609,350.
Additionally, the standard deduction will also likely rise to $29,900 for couples filing jointly or $21,900 for head of household. These 2024 adjustments will affect your 2024 returns, to be filed in 2025.
Retirement Plan Updates for 2024
The maximum contribution amount for a Traditional or Roth IRA is also expected to increase to $7,000 in 2024, up from $6,500 this year. Similarly, the maximum contributions for 401(k) or similar employer-sponsored retirement plans are expected to rise from $22,500 this year to $23,000 in 2024.
News flash: According to upcoming changes to the SECURE Act 2.0, catch-up contributions for workers aged 50+ in 401(k), 403(b), and 457 plans and whose wages exceed $145,000 will be required to make any catch-up contributions to a Roth-type plan. This change not only impacts individual employees who aim to contribute more to their plans as they near retirement, but it also mandates that employers offer a Roth plan if they intend to continue allowing catch-up contributions.
Make sure you're aware of upcoming changes to retirement plans and contribution limits. Consider increasing your deferrals during your company's open enrollment season—but not if it puts your tax diversification targets out of balance.
On this topic, two points for corporate taxpayers:
- Bloomberg expects an increase in the wage limitation amount for the additional credit available to small employers to offset plan startup costs—from $100,000 to $140,000.
- If you've held off setting up a retirement plan for your employees due to perceived cost, this could be an attractive window of opportunity.
2024 Updates to Estate and Gift Taxes
Additionally, lifetime estate and gift-tax thresholds are expected to increase. Based on current inflation estimates, an individual's federal lifetime estate-tax exclusion amount may increase from $12.92 million in 2023 to $13.66 million in 2024 (or more than $27 million for couples).
The lifetime limit could rise in conjunction with the annual limit on tax-free gifts. In 2023, the limit is $17,000 per individual. In 2024, this number is estimated to rise to $18,000, and in 2025, it could rise to $19,000. This means you can increase gifts without triggering tax implications.
As a note, you can also make a direct payment of these amounts on behalf of another person for medical expenses or tuition without counting any of these payments toward the annual gift exclusion or lifetime estate tax exclusion.
Social Security COLA Updates for 2024
Our final category of limit updates pertains to Social Security. Social Security is likely to see an increase of around 3% in benefits payouts from mandated cost-of-living adjustments, down from the massive increase of 8.7% in 2023.
If you're already collecting benefits or are approaching the time to decide when to start taking benefits, you may want to speak to a financial advisor about how the COLA updates could impact your financial plan.
Financial Trends for November 2023: Long-Term Care & EOY Tax Planning
These days, every month seems to have some sort of "national financial holiday" significance. November happens to be National Long-Term Care Awareness Month.
Decoding Long-Term Care Insurance
Approximately 60% of us will need help with activities like getting dressed, driving, and preparing meals at some point in our lives. Considering the possibility of long-term care is a foundational element of financial planning. This means designing a plan that will provide funding for when you're no longer able to care for yourself. And to achieve that, many of us look towards Long-Term Care (LTC) insurance.
Here are five things you might not know about LTC:
- By 2050, it's projected that at least 27 million Americans will need LTC.
- Alzheimer's disease is the biggest contributor to the elderly needing LTC.
- Only 2.2% of the U.S. population has LTC insurance.
- Medicare only pays for the first 20 days of staying in a nursing home.
- The average cost of a nursing care facility is $93,075 per year for a semi-private room and $105,850 for a private room.
Speak with your financial advisor to see how LTC insurance can fit into your plan.
End-of-Year Tax Planning for 2023
November is also an excellent time to finalize your end-of-year tax planning strategy so you aren't scrambling in December:
- Maximize contributions to tax-deferred accounts, such as a Traditional IRA, 401(k), health savings account (HSA), SIMPLE IRA, Solo 401(k), or SEP, to directly reduce your tax burden this year.
- Explore a tax-loss harvesting strategy to offset capital gains and potentially avoid paying the Net Investment Income Tax (NIIT).
- Accelerate any tax deductions by prepaying state income or property taxes if you're itemizing deductions. You can also consider optimizing your charitable donations (which we'll cover later).
If you have a lower income year than normal, you can also consider a Roth conversion. Roth conversions can be used to "fill up" your tax bracket while avoiding crossing the threshold into the next frame. By paying taxes on your retirement contributions today, you can take advantage of your lower-income year.
To finalize your end-of-year tax plan, you can also explore more strategies with your financial advisor, such as a Net Unrealized Appreciation (NUA) strategy or portfolio rebalancing, depending on your specific circumstances.
December 2023: Making the Most of Your Generosity
Sharing abundance with others is a powerful way to express your gratitude and support the causes near to your heart. When approaching your giving strategy, there are several methods to consider that can suit your financial needs while paying it forward:
- Giving cash: The most straightforward way to gift is by giving cash. If you're giving to family members, you need to consider the lifetime estate and gift tax implications we mentioned earlier. Keep in mind that lifetime exemptions are higher than they have ever been. Unless Congress intervenes, the current laws could expire as early as 2026, which could affect your future charitable giving plans.
- Giving to charity: You can give cash to charities and still claim a deduction; just make sure you get a receipt from the organization or some other proof. For any gifts over $250, you must obtain an acknowledgment in writing in order to qualify for a deduction.
- Giving individual securities: The past decade has seen a significant appreciation in securities. As a result, many investors have unrealized long-term capital gains. If you have such securities, you can donate the stock to a non-profit and avoid paying capital gains on any interest that has accrued. The charity won't pay capital gains tax either. But if you're thinking about gifting stocks that have lost value, it may be smarter to sell them yourself, harvest the tax loss, and then donate the resulting cash.
Thoughtful gifting can benefit both the giver and the recipient. Whether through cash, securities, or other means, taking the time to plan your gifts can optimize their value to everyone involved.
Make Your Planning Calendar Work for You
There's so much "noise" in the market. We always advise our clients to control what they can control and pass on everything else. By adhering to a well-designed plan, you can remove a lot of the stress from your decision-making.
Taking the first steps toward a disciplined financial plan might seem daunting, but it's a pivotal move for creating a long-term financial foundation—no matter the time of year. If you're ready to take the first steps towards financial freedom, reach out and schedule a free, no-obligation introductory meeting to tailor a financial plan to your unique needs. Your future deserves the care and commitment our advisors deliver—schedule your meeting today!
Editor’s Note: The above article is based on the October 1, 2023 episode of the “Your Money” radio show, hosted by Peg Webb and Bruce Helmer.