Isn't That Rich Podcast

As we usher in 2024, it's essential to stay updated on the latest tax laws and how they may impact your financial planning. This year brings several significant changes across various areas, including energy credits, estate tax exclusions, inherited IRAs, and 529 plan rollovers. Understanding these updates can help you make informed decisions, potentially save money, and ensure that your financial strategies are aligned with the current tax landscape.

Energy-Efficient Home Improvements: Expanded Credits and New Opportunities

One of the most noteworthy updates for 2024 involves the expansion of energy credits for homeowners. Historically, energy credits were limited, offering a one-time $500 credit for making energy-efficient improvements like installing new windows, doors, or insulation. However, the new tax laws have significantly enhanced these benefits, making it more attractive to invest in energy-efficient upgrades.

Starting in 2024, homeowners can now take advantage of an annual $1,200 credit for qualified energy-efficient improvements. This means you can spread out your investments over multiple years, continuously improving your home’s energy efficiency while maximizing your tax savings each year. The credit covers 30% of the cost of qualifying improvements, up to the $1,200 limit. For example, if you replace windows and doors with more energy-efficient options, you can claim a portion of that cost as a credit on your tax return, reducing your overall tax liability.

Additionally, the tax laws have introduced a new $150 credit for conducting a home energy audit. This audit, performed by a certified professional, assesses your home's energy usage and identifies areas where efficiency can be improved. By starting with an energy audit, you can prioritize the most impactful improvements, ensuring that your investments yield both energy savings and tax benefits.

Electric Vehicles: Tax Credits and Considerations

Electric vehicles (EVs) continue to grow in popularity, and the 2024 tax laws reflect this trend by offering substantial credits for purchasing qualifying EVs. However, it's important to note that not all electric vehicles qualify for these credits, and the amount you can claim depends on several factors, including the vehicle's price and battery capacity.

For new EVs, the maximum tax credit is $7,500, but the vehicle's manufacturer’s suggested retail price (MSRP) must not exceed $80,000 for SUVs, vans, and pickups, or $55,000 for cars. This rule encourages consumers to consider more moderately priced EVs, which can make the tax credit more accessible to a broader audience.

There’s also a provision for used electric vehicles, which offers a tax credit for purchases made through a licensed dealer, provided the vehicle is priced under $25,000. This makes EV ownership more attainable for those looking to buy second-hand, while still benefiting from the associated tax incentives.

A crucial detail to remember is that the credit for new EVs can be applied at the point of sale, reducing the amount you need to finance or pay out of pocket. However, if your total tax liability at the end of the year is less than the credit you received, you may need to repay the difference to the IRS. This makes it essential to have a good understanding of your typical tax situation before making a purchase, to avoid any unexpected tax bills.

Estate Tax Exclusion: A Looming Reduction

Estate planning has always been a complex area of tax law, and 2024 introduces changes that make it even more crucial to have a well-thought-out strategy. Currently, the estate tax exclusion allows individuals to transfer up to $12.92 million (or $25.84 million for married couples) without incurring federal estate taxes. However, this exclusion is set to decrease significantly in 2026, dropping to $5 million per individual.

This reduction means that more estates will be subject to federal estate taxes, potentially impacting families with substantial assets, including real estate, investments, and business interests. For those who anticipate their estates may exceed the new $5 million threshold, now is the time to explore strategies for minimizing estate taxes, such as gifting assets during your lifetime, setting up trusts, or other estate planning tools.

Importantly, there is an "anti-clawback" provision in the new laws, which protects gifts made under the current higher exclusion from being pulled back into the estate and taxed if the exclusion amount decreases in 2026. To take advantage of this, any planned gifts should be completed before the end of 2025, ensuring they are fully realized under the more favorable exclusion limits.

Inherited IRAs: The End of the Stretch IRA

Inherited IRAs have also seen significant changes with the elimination of the "stretch IRA." Previously, non-spousal beneficiaries could take required minimum distributions (RMDs) from inherited IRAs over their lifetimes, allowing the funds to grow tax-deferred for many years. Under the new rules, however, non-spousal beneficiaries must now withdraw all funds from the inherited IRA within ten years of the original owner’s death.

This change can accelerate the tax burden on beneficiaries, potentially pushing them into higher tax brackets, depending on the amount inherited and their other income. To mitigate this, beneficiaries might consider strategies such as spreading out distributions over the ten-year period to manage their tax liability more effectively.

The RMD age has also been adjusted, increasing from 72 to 73 in 2023, with plans to further increase it to 75 by 2033. This gives retirees more flexibility in managing their retirement funds before mandatory withdrawals begin, allowing for potentially more growth and planning opportunities.

529 Plan Rollovers: A New Option for Excess Funds

529 plans are a popular choice for saving for college, offering tax-free growth and withdrawals for qualified education expenses. However, what happens if your child receives a scholarship or doesn’t use all the funds? The 2024 tax laws provide a new option: rolling over unused 529 plan funds into a Roth IRA for the plan’s beneficiary.

This new provision allows up to $35,000 to be rolled over from a 529 plan to a Roth IRA, with an annual limit of $6,500. This can be a great way to repurpose excess college savings, giving your child a head start on retirement savings. However, there are conditions: the 529 plan must have been in existence for at least 15 years, and contributions made in the last five years cannot be rolled over.

This rollover option not only helps avoid penalties for non-educational withdrawals but also leverages the benefits of Roth IRAs, where the funds can grow tax-free, and distributions are also tax-free in retirement.

Strategic Planning for 2024 and Beyond

As with any significant tax changes, the key to maximizing your benefits lies in careful planning and consultation with a knowledgeable tax advisor. The updates for 2024 offer numerous opportunities for tax savings, particularly in energy efficiency improvements, electric vehicle purchases, and estate planning. However, they also come with complexities that require a thorough understanding of how they apply to your specific situation.

Whether you're considering making home improvements, purchasing an electric vehicle, or planning for the future transfer of your estate, staying informed and proactive can help you navigate the evolving tax landscape and make the most of the opportunities available.

Remember, tax laws are subject to change, and what applies today may not apply tomorrow. By staying up-to-date and seeking expert advice, you can ensure that your financial strategies are not only compliant but also optimized for the best possible outcomes in 2024 and beyond.