Key Tax Documents and Tax-Planning Moves for 2024

Kirk Kreikemeier |
Categories
Tax Planning

 

 

Here is my updated blog post to help during this tax season.  Some have already gathered the necessary documents for their accountant while others are putting it off - for now.  This blog post is broken into three sections:

  1. High level overview of income types and the tax rates that apply
  2. Last minute tax planning moves for 2024 tax year – yes, still time for some
  3. Common tax documents to provide accountant and information contained

Please note this is not formal tax advice.  I am not an accountant, nor do I prepare tax returns.  But as a financial planner, I understand these topics very well and perform detailed tax planning for our clients during the year to give them more control and minimize the tax surprises now.  Reach out if that sounds appealing.

Section 1 - High level overview of income types and tax rates that apply

Income can be generated from many different sources.  Which tax form captures that income and whether related taxes are withheld during the year are summarized in the following table.

Income is classified into two major categories - ‘ordinary income’ or ‘capital gains’.  Note that ‘capital gains’ if held one year or less is taxed as ‘ordinary income’. There are further nuanced definitions of income that I won’t get into here.

Next a series of offsets are applied which can reduce the amount of income that is taxable.  Some common examples are listed but many rules govern whether a taxpayer qualifies – IRA/HSA contributions, student loan interest, self-employed FICA/QualPlans/Insurance, capital loss carry-forward, itemized or standard deduction, QBI, etc. The net amount after these offsets is called ‘taxable income’.  This is on Line 15 of Form 1040 for those following along at home.

Note this total ‘taxable income’ is misleading because different tax rates apply depending on the portion that is ‘ordinary income’ vs. ‘capital gains’ (technically just long-term).  The tables below summarize which marginal tax rate applies depending on income levels. There is an additional 3.8% Medicare tax applicable to ‘investment income’ which is a combination of both ordinary and capital gains.  Fun stuff!

Section 2 - Last-minute tax planning moves for 2024 Tax Year

Now that we clarified income types and which tax rates apply, you may be motivated to take action that could reduce ‘taxable income’.  Ideally you are doing this throughout the year when there are more options, but there is still time for a few contributions to qualified accounts that impact the 2024 tax year.  And while there is nothing directly you can do to change ‘capital gains’, by reducing ‘ordinary income’ you can possibly reduce the tax rate that applies to some of the ‘capital gains’ – even down to 0%!

IRA Contributions

  • Allowed to make 2024 tax year contributions up to tax filing deadline
  • Everyone with taxable compensation is allowed to contribute to an IRA
  • Spouses can rely on spouse’s income if not enough of own
  • Even if participate in employer’s 401k/403b, can still contribute to IRA provided enough taxable compensation on W2
  • However, the amount deductible for a Traditional IRA and if eligible for Roth IRA can be limited based on Modified Adjusted Gross Income and other factors
  • Depending on circumstances, a backdoor Roth may be attractive
  • Roth IRA activity won’t reduce taxable income this year but provides future benefits
  • Maximum contribution for 2024 tax year is lesser of eligible taxable compensation or $7,000; extra $1,000 catch-up if 50 or older
  • Many miss out on IRA contribution opportunities; call for help to get what is yours

Health Savings Account (HSA) Contributions

  • Allowed to make 2024 tax year contributions up to tax filing deadline
  • Anyone with a qualified High Deductible Health Plan (HDHP) is allowed to make tax-deductible contributions to an HSA, regardless of income
  • Check with insurance provider if your medical insurance is HDHP
  • Maximum contribution for 2024 tax year is $4,150 for single, $8,300 for family; $1,000 catch-up if 55 or older (not 50 like IRAs) and have own HSA account
  • If participate through work and payroll deduction but fell short of maximums, can contribute directly into HSA account – contact the HSA custodian

Employer-related Retirement Plan Contributions

  • While the employee-related contribution deadline has passed, employers can still make a tax-deductible contribution provided not a corporation (that has a 3/15 deadline)
  • If you own a business, depending on type of retirement plan you have (if any), may be eligible to make deductible contribution
  • Rules can get complicated depending on the plan and type of income so reach out to a professional for help

Section 3 - Common tax documents needed for accountant and information contained

W2

  • Wages and compensation received from employer along with tax withholdings already paid for the tax year
  • Any tax-deductible 401k/403b, Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) contributions made via payroll are netted out of “box 1” wages but are not broken out
  • If you have company stock options or grants be careful; look for additional documents

SSA-1099

  • Social Security benefits received for the tax year
  • Shows gross Social Security benefits before Medicare premiums or taxes (if any) are withheld
  • The amount taxable depends on ‘provisional income’ definition; can be as low as 0% or as high as 85%

1099-NEC or MISC

  • Income received in excess of $600 from non-employer sources

1099 Consolidated

  • Related to non-qualified investment accounts; will not receive one for IRAs
  • Taxable income related to securities held and or traded in particular account
    • Dividend income – both qualified (taxed like long-term gains) and ordinary
    • Interest income – both taxable and tax-exempt (like Muni’s)
    • Capital gains – both short-term (< 1 year taxed liked ordinary) and long-term
  • Pay close attention to items classified as ‘non-covered’ and make sure cost basis correct

1099-R

  • Gross distribution and any tax withholdings from all types of IRAs (including inherited) and 401k accounts
  • Will receive separate form from each account where withdrawal occurred
  • Contains an IRS distribution code which determines how treated on tax return
  • If you are over Required Minimum Distribution (RMD) age and have a Traditional or 401k account you should have one!
  • Few key things to note:
    • “Direct transfer” between qualified accounts generates 1099-R but not taxable
    • Withdrawal from Traditional IRA for Roth conversion may say ‘taxable’ but in some circumstances, some or all may not be taxable using Form 8606
    • Any Qualified Charitable Distribution (QCD) DO NOT SHOW ON 1099-R; YOU MUST KEEP TRACK AND TELL YOUR ACCOUNTANT (custodian can’t verify each charity nor monitor $105k max across all IRAs - $108k max for ’25)

Form 5498

  • Contributions, transfers and conversions coming into IRA accounts
  • Because contributions allowed up to tax filing (see later), form not available until May
  • Use year-end and latest monthly account statements to show contributions by tax year
  • Note some contributions in a given calendar year may apply to previous tax year
  • Everyone with taxable compensation (and spouses) are allowed to contribute to an IRA (even if participate in 401k/3b) but the amount that is deductible and whether eligible for direct Roth is based upon Modified Adjusted Gross Income
  • Many miss out on IRA contribution opportunities; call for help to get what is yours

Form 1099-SA

  • Gross distribution from Health Savings Account (HSA)
  • Provided distribution to cover a qualified medical expense, not taxable
  • You must keep track of cumulative qualified medical expenses and withdrawals
  • Unlike IRAs, you will NOT receive this form for HSA-to-HSA transfer

Form 5498-SA

  • Similar to 5498 for IRAs but this applies to contributions (not transfers) into Health Savings Accounts (HSAs)
  • Rely on statements until May and be sure to watch which tax-year contributions apply

Donor Advised Fund (DAF) Contributions

  • Typically available on annual DAF account summary statement
  • Full value deductible in year of contribution; no deduction when later distribute to different charities
  • Cash contribution or if donated securities, the market value on date of contribution to the DAF PROVIDED IN LONG-TERM GAIN STATUS
  • There is no tax-related form for withdrawals since full deduction when contribute

Form 1099-Q

  • Gross distribution from qualified education savings account like a 529
  • You must keep track of qualified educational expenses – either from school or other
  • The school should issue 1098-T showing tuition expense; you must handle other qualified expenses like room/board if living off-campus or computer equipment, etc.

 529 Plan Contributions

  • Not aware of a form but rely on statements to show contributions into the plan
  • Unlike IRAs, these must be done by 12/31 of a given tax year for most states
  • There is no Federal Tax deduction but some states allow state deduction, up to limits
  • Another example where many people miss out on these tax benefits; call if need help

Digital Assets’ related income – including gains from sales

  • All taxpayers required a Yes/No at top of Form 1040 if involved with digital assets
  • Read the instructions carefully… but in general…
  • If buying and selling related to a security done in regular brokerage account the gain/loss would be captured on 1099
  • However, if held digital assets directly and bought and sold, check with that custodian

There is one “tax” that is not reported to the IRS which is a good thing for parents with a sweet tooth - it is the Candy / Ice Cream tax from their child’s serving.  Watch out kids!

 

Have questions? Reach out! We're happy to help.

 

Posted by Kirk, a fee-only financial advisor who looks at your complete financial picture through the lens of a multi-disciplined, credentialed professional. www.pvwealthmgt.com