With the clock ticking down to the New Year, individuals are taking stock of their finances and strategizing for the year to come. For High Earners Not Rich Yet, or HENRYs, it's especially important to maximize year-end tax planning before 2024. While these individuals enjoy solid income, their financial situations can be complicated by living costs, debt, and tax burdens. But there are several strategies they can use to potentially lower their 2024 tax bills.
One of the simplest and most effective moves? Maxing out retirement accounts. No one ever said saving for retirement has to be dull, yet it remains one of the smartest tricks up any financial advisor's sleeve. For 2024, you can contribute up to $23,000 to your 401(k), with the limit jumping to $30,500 if you’re over 50. For traditional IRAs, this means you could set aside $7,000 or $8,000 respectively. If you play your cards right, you could be sitting pretty come tax time.
Another tax-savvy strategy is the health savings account (HSA). If you’re enrolled in a high-deductible health plan, HSAs offer triple tax advantages. Contributions reduce your taxable income, the funds grow tax-free, and withdrawals for qualified medical expenses are untaxed. For 2024, individuals can contribute $4,150 to their HSAs, and families can cash in with up to $8,300. What’s more, if you’re over 65, you don’t even face taxes on non-medical withdrawals!
Perhaps more sophisticated is the backdoor Roth IRA conversion. HENRYs making high incomes often find it tough to invest directly due to contribution limits. But with this strategy, you can convert traditional IRA funds to Roth IRAn accounts. While you will pay taxes at the ordinary income rate during the conversion, the payoff down the line can be grand. Those investments could grow tax-free until it’s time to withdraw.
Thinking about family? You might also want to explore gifting strategies. Americans can give $18,000 to any one person annually without reporting it to the IRS. It might sound like just pocket change, but as the saying goes, every bit counts. And if you move appreciated stocks instead of cash? You could help lower capital gains tax burdens for recipients, making it even sweeter for both parties.
Philanthropy, too, can keep the taxman at bay. By donating appreciated securities instead of cash, HENRYs can leverage donor-advised funds, which allow them to contribute these assets for immediate tax deductions without having to rush to choose which charity to support. This way, your financial contributions can continue growing tax-free until you decide the right moment to distribute them to chosen nonprofits.
For over one million U.S. citizens living north of the border, managing tax obligations can be even more complex due to their investments straddling two tax systems. They must report their global income to both the IRS and the Canada Revenue Agency (CRA) and can sometimes feel stretched between the two. Therefore, year-end rush is more than just about personal finance—it's about maintaining compliance across borders.
U.S. citizens residing in Canada should be mindful of transaction timings, especially concerning capital gains. Holding investments for longer than one year can significantly reduce tax exposure, dropping from the marginal tax rate (which can be as high as 37 percent) to more appealing long-term capital gains rates, typically ranging from 15 to 20 percent.
New U.S. expats also need to track the adjusted cost base (ACB) of their investments, which adjusts to the fair market value when they first enter Canada. This can prevent unexpected tax liabilities from accruing on gains made before moving. Not managing this properly can lead to headaches down the line.
And let's not forget installment payments! Staying on top of deadlines is key to avoid nasty surprises from either tax authority. For example, Canadians making quarterly payments must settle up by December 15, which is just around the corner. Meanwhile, the IRS expects its payment by January 15, allowing for some leeway but still demanding attention.
On the estate planning front, those U.S. expats must navigate the intricacies of gift taxes. This year, the lifetime gift tax exemption stands at $13.61 million, but it's poised to drop down to $5 million come 2026. Making small tax-free gifts can help keep folks under the threshold and out of estate tax territory, especially as U.S. citizens can give annual gifts up to $18,000 without it counting against their lifetime limit. And for any family members caught up outside the U.S. tax system, there exists another exemption for foreign spouses, currently pegged at $185,000.
The end of the tax year beckons strategic planning on various fronts. There’s no denying the obstacles HENRYs and U.S. citizens abroad face, but 2024 could very much turn out to be plentiful if timely advice is heeded and beneficial moves are made now. A bit of careful planning today may lead to some hefty returns, leaving individuals not only financially secure but also feeling empowered when they file their taxes come April.
So as the daylight fades on 2023, take these insights and make them work for you. Remember, whether you're tightening expenses, prepping gifts, or maximizing savings, it's best to tackle these moves before the New Year bells ring.
