Retirement Plan Contribution and Eligibility Limits for 2024 (Additional Updates)

Contributed by: Kelsey Arvai, CFP®, MBA

The Internal Revenue Service (IRS) announced how much individuals can contribute to their retirement accounts and updated figures for income eligibility limits. See this blog from earlier in the month for adjustments to contribution limits and income eligibility limits that are notable as you set your savings targets for the New Year. Below, you’ll find additional updates worth keeping in mind as well.

Saver’s Credit Income Limit (Retirement Savings Contributions Credit):

For low and moderate-income workers, it is $76,500 for married couples filing jointly (up from $73,000), $57,375 for heads of household (up from $54,750), and $38,250 for singles and married individuals filing separately (up from $36,500).

Additional changes made under SECURE 2.0: 

• The limitation on premiums paid concerning a qualifying longevity annuity contract is $200,000. For 2024, this limitation remains $200,000.

• Added an adjustment to the deductible limit on charitable distributions. For 2024, this limitation is increased to $105,000 (up from $100,000).

• Added a deductible limit for a one-time election to treat a distribution from an individual retirement account made directly by the trustee to a split-interest entity. For 2024, this limitation is increased to $53,000 (up from $50,000).

As we begin 2024, keep these updated figures on your radar when reviewing your retirement savings opportunities and updating your financial plan. As always, if you have any questions, feel free to contact our team! 

Have a Happy and Healthy New Year! 

Kelsey Arvai, CFP®, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

Any opinions are those of Kelsey Arvai, MBA, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Retirement Account Contribution and Eligibility Limits Increase in 2024

Contributed by: Robert Ingram, CFP®

The IRS recently announced next year's annual contribution limits for retirement plans and IRA accounts. Compared with the historically large increases to limits in 2023, 2024 brings relatively modest increases. However, the adjustments to contribution limits and income eligibility limits for some contributions are still notable as you set your savings targets for the New Year.  

Employer Retirement Plan Contribution Limits (401k, 403b, most 457 plans, and Thrift Saving)

• $23,000 annual employee elective deferral contribution limit (increases $500 from $22,500 in 2023)

• $7,500 extra "catch-up" contribution if age 50 and above (remains the same as in 2023)

• The total amount that can be contributed to a defined contribution plan, including all contribution types (e.g., employee deferrals, employer matching, and profit sharing), will be $69,000 or $76,500 if age 50 and above (increased from $66,000 or $73,500 for age 50+ in 2023)

Traditional, Roth, SIMPLE IRA Contribution Limits:

Traditional and Roth IRA

• $7,000 annual contribution limit (increases $500 from $6,500 in 2023)

• $1,000 "catch-up" contribution if age 50 and above (remains the same as in 2023)

Note: The annual limit applies to any combination of Traditional IRA and Roth IRA contributions. (i.e., you would not be able to contribute up to the maximum to a Traditional IRA and up to the maximum to a Roth IRA.)

SIMPLE IRA

• $16,000 annual contribution limit (increases $500 from $15,500 in 2023)

• $3,500 "catch-up" contribution if age 50 and above (remains the same as in 2023)

Traditional IRA Deductibility (income limits):

You may be able to deduct contributions to a Traditional IRA from your taxable income. Eligibility to do so depends on your tax filing status, whether you (or your spouse) is covered by an employer retirement plan, and your Modified Adjusted Gross Income (MAGI). The amount of a Traditional IRA contribution that is deductible is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range. For example,

Filing Single

• You are covered under an employer plan

• Partial deduction phase-out begins at $77,000 up to $87,000 (then above this no deduction) compared to 2023 (phase-out: $73,000 to $83,000)

Married filing jointly

• A spouse contributing to the IRA is covered under a plan

• Phase-out begins at $123,000 to $143,000 compared to 2032 (phase-out: $116,000 to $136,000) 
  

•  A spouse contributing is not covered by a plan, but the other spouse is covered under a plan

• Phase-out begins at $230,000 to $240,000 compared to 2022 (phase-out: $218,000 to $228,000) 

Roth IRA Contribution (income limits):

Similar to making tax-deductible contributions to a Traditional IRA, being eligible to contribute to a Roth IRA depends on your tax filing status and income. Your allowable contribution is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range. For 2024, the limits are as follows:

Filing Single

• Partial contribution phase-out begins at $146,000 to $161,000 compared to 2023 (phase-out: $138,000 to $153,000)

Married filing jointly

• Phase-out begins at $230,000 to $240,000 compared to 2023 (phase-out: $218,000 to $228,000)

If your MAGI is below the phase-out floor, you can contribute up to the maximum. Above the phase-out ceiling, you are ineligible for any partial contribution.

Eligibility for contributions to retirement accounts like Roth IRA accounts also requires you to have earned income. If you have no earned income or your total MAGI makes you ineligible for regular annual Roth IRA contributions, other strategies such as Roth IRA Conversions could make sense in some situations to move money into a Roth. Roth Conversions can have different income tax implications, so you should consult with your planner and tax advisor when considering these strategies.

Going into the New Year, keep these updated figures on your radar as you implement your retirement savings opportunities and update your financial plan. As always, if you have any questions surrounding these changes, don't hesitate to contact us!

Have a happy and healthy holiday season!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Any opinions are those of Bob Ingram, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Capital Gains: 3 Ways to Avoid Buying a Tax Bill

Contributed by: Mallory Hunt

As you may be aware, when a mutual fund manager sells some of their holdings internally and realizes a gain, they are required to pass this gain on to their shareholders. More specifically, by law and design, registered investment companies are required to pay out 95% of their realized dividends and net capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. With that in mind, ‘tis the season!  

Many firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Whether or not a capital gains distribution is considered short-term or long-term does not depend on how long you, as the investor, have held the fund; instead, it depends on how long the management firm owned the securities that produced the gain. Investors who hold funds with capital gains distributions in taxable accounts must report them as taxable income even if the money is reinvested in additional fund shares. In tax-advantaged accounts such as IRAs or 401(k)s, capital gains distributions are irrelevant as investors are not required to pay taxes on them as long as no withdrawals are made.

It can be frustrating to know that you may even face a tax bill on a fund with a negative return for the year. There are several reasons why funds may sell holdings and generate capital gains, including but not limited to:

• Increased shareholder redemption activity during a down market. In order to fund these redemptions, funds may need to sell securities, which may, in turn, generate capital gains.

• To reinvest the proceeds in a more attractive opportunity. 

• Concerns about earnings growth (or if a stock has become fully valued in the manager’s opinion).

• Corporate mergers and acquisitions also may result in a taxable sale of shares in the company being acquired. 

Investors concerned about tax exposure may want to consider investing in more tax-efficient equity funds. Such funds tend to be managed to limit capital gain distributions, when possible, by keeping holdings turnover low and harvesting losses to offset realized gains.

Capital gains distributions are a double-edged sword. The good news? The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. Yay! The bad news is that the taxman wants to be paid. Boo! Do keep in mind that this is what you have us for, though. We are here to help manage around and alleviate the effect these capital gains distributions may have on you and your portfolio.

WHAT WE CAN DO TO MINIMIZE THE EFFECT OF CAPITAL GAINS DISTRIBUTIONS:

1. Be Conscientious

We exercise care when buying funds at the end of the year, which may mean holding off a couple of days or weeks to purchase a fund in your account in some cases. Why? We do this to avoid paying taxes on gains you didn’t earn. This also allows you to purchase shares at a lower NAV or Net Asset Value.

2. Harvest Losses

Throughout the year, we review accounts for potential loss harvesting opportunities (also known as Tax Loss Harvesting). Where available and when appropriate, we sell holdings we have identified with this potential to realize those losses and offset end of the year gain distributions from fund companies. *See our blog titled “Tax Loss Harvesting: The ‘Silver Lining’ in a Down Market” for more details on this strategy.

3. Be Strategic

We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date to avoid receiving a company’s dividend payment. Dividends are treated as income by the IRS.

As always, there is a balance to be struck between income tax and prudent investment management, and we are always here to help distinguish.

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

This material is being provided for information purposes only and is not a complete description of all available data necessary for making an investment decision, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, tax situation and time horizon before making any investment decision. Any opinions are those of Mallory Hunt and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional.

Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds before investing. The prospectus and summary prospectus contains this and other information about mutual funds. The prospectus and summary prospectus is available from your financial advisor and should be read carefully before investing.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Elements of a Roth Conversion

Contributed by: Kelsey Arvai, CFP®, MBA

We’ve just entered Autumn, and the new year is around the corner, making this the ideal time to consider a Roth Individual retirement account (IRA) conversion to save on future taxes. A Roth Conversion is a financial maneuver that allows you to convert funds from a Traditional Individual Retirement Account (IRA) or pre-tax funds into a Roth IRA or future tax-free funds. There are several important considerations and potential tax implications.

Stated another way, a Roth Conversion involves taking some or all the funds from your Traditional IRA and moving them into a Roth IRA.

Tax Impact: Before doing a Roth Conversion, it’s crucial to understand the tax implications. The amount you convert will be added to your taxable income for the year the conversion occurs. In other words, you’ll need to pay income taxes on the converted amount in the year of the conversion. It’s important to consider what tax bracket you are in. You could pay a large upfront federal and state tax bill depending on the conversion size.

Additionally, when your adjusted gross income is boosted, you might pay higher Medicare Part B and Part D premiums or lose eligibility for other tax breaks, depending on your situation.

Future Tax Benefits: The primary benefit of a Roth Conversion is that once the money is in the Roth IRA, future qualified withdrawals (including earnings) are tax-free. Tax-free withdrawals are especially advantageous if you expect your tax rate in retirement to be higher. Typically, a partial or full Roth Conversion is more attractive in lower-earning years because there could be a smaller upfront tax liability. It may be beneficial for you to lock in lower rates now before they sunset in 2026 (the highest federal income tax bracket rate may move from 37% to 39.6% unless there are changes from Congress).

Timing: It’s important to consider your financial situation and whether you have the cash on hand to pay the taxes. If you choose to pay taxes from the converted fund, you may erode the long-term benefits of the conversion. A longer investing timeline is preferred because there’s more time for tax-free growth to offset the upfront cost of the conversion. Remember the five-year rule, which requires investors to wait five years before withdrawing converted balances without incurring a 10% penalty, with the timeline starting on January 1st of the year of the conversion. Without proper planning, you could deplete your savings or trigger an IRS penalty, so working with your Financial Advisor and Tax Advisor is essential. Contact us if you have questions or want to check if this strategy is a good fit!

Kelsey Arvai, CFP®, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

Opinions expressed in the attached article are those of Kelsey Arvai, MBA, CFP®, and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

Don’t Fall Victim to the Widow’s Penalty!

Contributed by: Nick Defenthaler, CFP®, RICP®

Several years ago, after starting a new relationship with a newly widowed client, I received a confused phone call from her. She had received communication from Medicare that her Part B & D premiums would be significantly increasing for the year. To make matters worse, she also noticed when filing her most recent tax return that she was now in a much higher tax bracket. What happened? Now that her husband was deceased, she was receiving less in Social Security and taking fewer withdrawals from her retirement accounts. Her total income had decreased, so why would she have to pay more tax and Medicare premiums? Unfortunately, she was a victim of what’s known as the “widow’s penalty.”

Less Income and More Taxes – What Gives?

Simply put, the widow’s penalty is when a surviving spouse ends up paying more taxes on less income after the death of their spouse. This happens when a widow or widower starts filing as a single filer the year after their spouse’s death.

When the first spouse dies, the surviving spouse typically sees a reduction in income. While the surviving spouse will continue to receive the greater of the two social security benefits, they will no longer receive the lower benefit. Additionally, they will lose any other income tied only to the deceased spouse, such as employment income, single-life annuity payments, or pensions with reduced or no survivor benefits. Depending on how much income was tied to the deceased spouse, the surviving spouse’s fixed income could see a sizeable decrease.

At the same time, the surviving spouse starts receiving less income, and they find themselves subject to higher taxes.

With some unique exceptions, the surviving spouse is required to start filing taxes as single instead of as married filing jointly in the year following their spouse’s death. In 2023, that means they will hit the 22% bracket at only $44,725 in income. Married filers do not reach the 22% bracket until they have more than $95,375 in income. Unfortunately, even if income remains the same, widowed tax filers will inevitably pay higher tax rates on this same income level. 

Tax brackets are not the only place surviving spouses are penalized. Like the client in my story above, many surviving spouses see their Medicare premiums increase even though their income has decreased because of how the income-related monthly adjusted amount (IRMAA) is calculated (click HERE to visit our dedicated Medicare resource page). Specifically, single filers with a modified adjusted gross income of more than $97,000 are required to pay a surcharge on their Medicare premiums, whereas there is no surcharge until a couple who is married filing jointly reaches $194,000 of income. This means that a couple could have an income of $120,000 and not be subjected to the Medicare IRMAA surcharge, but if the surviving spouse has an income of $100,000, their premium will increase by almost $1,000 per year. In this same example, the widow would now be in the 22% bracket (as compared to the 12% bracket with $120k of income filing jointly) and be paying $3,600 more in federal tax!

Proactive Planning

Short of remarrying, there is no way to avoid the widow’s penalty. However, if your spouse has recently passed away, there may be some steps you can take to minimize your total tax liability.

For most widows, the year their spouse dies will be the last year they will be allowed to use the higher married filing jointly tax brackets. In some cases, it can make sense to strategically realize income during the year of death to minimize the surviving spouse’s lifetime tax bill. A surviving spouse might do this by converting savings from a Traditional IRA to a Roth IRA while they are still subject to the married filing jointly rates.

Several years ago, I was working with a couple (we’ll call them John and Mary), and after several years in a long-term care assisted living facility, John sadly passed away at age 85. Because John and Mary did not have long-term care insurance, they had sizeable out-of-pocket medical expenses that resulted in a significant medical deduction in the year of John’s passing. Several months after her husband’s passing, I met with Mary and suggested we convert over $100,000 from her IRA to a Roth IRA. Because this was the last year she could file jointly on her taxes along with the significant medical deduction that was only present the year John passed, Mary only paid an average tax rate of 10% on the $100,000 we converted. As we stand here today, Mary is now filing single and finds herself in the 24% tax bracket (which will likely increase to 28% in 2026 as our current low tax rates are set to expire at the end of 2025!)

The widow’s penalty should be on every married couple’s radar. While it’s possible that while both spouses are living, their tax rate will always remain the same, as we’ve highlighted above, unless both spouses pass away within a very short period of time from one another, higher taxes and Medicare premiums are likely inevitable. However, proper planning could help to dramatically reduce the impact this penalty could have on your plan.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc., is not a registered broker/dealer and is independent of Raymond James Financial Services.

The information contained in this blog has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Tax Loss Harvesting: The “Silver Lining” in a Down Market

Contributed by: Mallory Hunt

"The difference between the tax man and the taxidermist is the taxidermist leaves the skin." Mark Twain

Three to five years ago, we would be singing a different tune, talking about capital gains and how to minimize your tax drag during the bull market. These days, we may be looking at capital losses (like those likely carried over by many investors after 2022) from this tumultuous market. Given the recent market downturn, tax loss harvesting is more popular than ever. While investors can benefit from harvesting losses at any time, down markets may offer even greater opportunities to do so. Investors who hold securities in taxable accounts (i.e., not your retirement accounts) can harvest losses that may benefit them in a couple of different ways depending on their specific situation. So let's look at the ins and outs of the unsung hero and how to use it to your advantage.

What is Tax Loss Harvesting and How Does it Work?

Tax loss harvesting is an investment strategy that can turn a portion of your investment losses into tax offsets. The strategy is implemented by strategically selling stocks or funds at a loss to offset gains you have realized or plan to realize throughout the year from selling other investments. The result? You only need to pay taxes on your net profit or the amount you have gained minus the amount you have lost. In turn, this reduces your tax bill. When and if capital losses are greater than capital gains, investors can deduct up to $3,000 from their taxable income. This applies even if there are no investment gains to minimize for the year, and harvested losses can also be used to offset the taxes paid on ordinary income. If net losses for a particular year exceed $3,000, the balance of those losses can be carried forward and deducted on future tax returns. 

With the proceeds of the investments sold, similar (but not identical) holdings are usually purchased to help ensure your asset allocation and risk profile stay unchanged while you continue to participate in the market. These newly purchased investments are typically held for a short period of time (no less than 30 days) and are then, more often than not, sold to repurchase those holdings that we sold at a loss initially. Do take heed of the wash-sale rule to ensure the proper execution of the strategy. This rule prohibits investors from selling an investment for a loss and replacing it with the same or a "substantially identical" investment 30 days before or after the sale. The IRS provides a substantially identical definition and, unfortunately, has not been very clear on what is determined to fall into that category, leaving a lot of gray area. If the same investment is purchased before the wash sale period has expired, you can no longer write off the loss. However, the opportunity is not lost as the loss will be added back to the cost basis of the position, and the opportunity to harvest the loss at a later date is still an option.

Additional Considerations

Keep in mind that your capital gains taxes on any profits are based on how long you have held an asset. Long-term holdings held for one year or more will be taxed at long-term capital gains tax rates (0%, 15%, or 20%, depending on your taxable income and filing status), which generally tend to be lower than short-term capital gains tax rates. Short-term assets held for less than one year will be taxed at the same rate as your ordinary income (10%-37%). Investors in higher tax brackets will see the most significant benefits from tax loss harvesting as they will save more by minimizing taxable gains.

If you want to harvest losses, transactions must be completed by the end of the year you wish to realize the losses. For example, if you want to harvest losses from 2021, transactions would have needed to be completed by December 31, 2021.

In the end, tax loss harvesting is one way for investors to keep more of their investment earnings. According to researchers at MIT & Chapman University, tax loss harvesting was calculated to yield, on average, an additional 1.08% annual return each year from 1926 to 2018*. Overall, this is a time-tested strategy and potentially helpful tool, particularly during down markets. Consider speaking to your Financial Planner about how they implement this strategy, and always consult a tax advisor about your particular tax situation.

*Source: https://alo.mit.edu/wp-content/uploads/2020/07/An-Empirical-Evaluation-of-Tax-Loss-Harvesting-Alpha.pdf

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mallory Hunt, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Understanding your Tax Return: Why Adjusted Gross Income Matters

Contributed by: Robert Ingram, CFP®

Tax Filing season is officially underway for the 2022 tax year returns. If you find yourself feeling a little extra stress or anxiety during this time, you are not alone. The U.S. tax code is undoubtedly complicated (that may be the understatement of the year), and your main focus is simply trying to get to the bottom line: how much do I owe, or how much am I getting back as a refund? Sound familiar?

As you are completing and reviewing your tax return, some other line items on your return (in addition to the bottom line) are worth looking at a bit more closely. In particular, your Adjusted Gross Income (AGI) may seem like just a number on the way to calculating your taxable income, which then determines your tax bill. And while that is true, your AGI is also used to determine eligibility for a number of different tax deductions, tax credits, and even retirement plans. It is also used to determine things like Medicare premiums, the amount of taxable Social Security benefits, and whether you may be subject to an additional tax on investment income.  

What is Adjusted Gross Income?

Simply stated, your Adjusted Gross Income is your total income minus certain types of…well, adjustments.  

This total income would be your gross income that combines a wide range of items, including things like W2 wage income and certain types of employer benefits, business income, Social Security benefits, pension and retirement plan distributions, investment income, capital gains, and other applicable income.

Once your Total Income is determined you would still make other potential adjustments for items that can include self-employment SEP IRA, SIMPLE IRA, or other qualified plan contributions, eligible Traditional IRA contributions, Health Savings Account contributions, eligible student loan interest, self-employed health insurance, alimony paid, and other adjustments. 

Why Adjusted Gross Income (AGI) Matters

As mentioned, the AGI is a number on the way to determining your Taxable Income.  Potential deductions such as the standard deduction or the itemized deductions, for example, are applied to the Adjusted Gross Income amount.

The applicable tax rates are applied to the Taxable Income to determine your Tax amount (almost), after factoring in additional deductions and/or credits you may be eligible to include.

The result after subtracting and adding any of those items is the amount of your Total Tax.  

(A key point to remember here is that while tax deductions lower your income used to calculate your tax amount, tax credits reduce the actual tax amount itself dollar for dollar.)

Based on your total amount of tax withholding and tax payments you’ve made, plus any additional eligible tax credits (e.g. Additional child tax credit, American Opportunity credit, Earned income credit), you may have paid more than the calculated Total Tax amount or less than the Total Tax amount.  If you have overpaid, then you would expect a refund.  If you have paid less than the Total Tax, then you would owe additional tax.

AGI Determines Eligibility for Some Tax Deductions and Credits

Several tax deductions and tax credits you may be able to take advantage of are subject to different AGI limitations.

• If you itemize deductions, medical expenses above 7.5% of your AGI are deductible. Therefore, the lower your AGI, the easier it is for more of your medical expenses to clear that 7.5% hurdle to be deductible.

• Itemized charitable donations you can deduct in a tax year are capped at a percentage of AGI. For example, you can deduct cash gifts made to qualified public charities up to 60% of your AGI. Non-cash gifts to public charities, such as stocks, bonds, and mutual funds owned for more than one year, are up to 30% of AGI.  

If you have a year with large charitable gifts, in some cases it could actually benefit you to have a higher AGI so that the deductible ceiling is a larger dollar amount.  Now, any portion of charitable gifts exceeding the percentage of AGI limit is therefore not deductible for that tax year, but the potential tax benefit is not completely lost. 

The amount in excess of the AGI limit can carry forward for use in future tax years (for up to 5 years).  But remember, you would still need to itemize your deductions to take advantage of the amount carried over into those years.  This is something to factor in to your charitable giving and tax planning, particularly if you expect to take only the standard deduction in the future.

Part of the eligibility criteria for some tax credits is that Adjusted Gross Income cannot exceed certain amounts, depending on your filing status (i.e., single, married filing jointly, head of household, married filing separately). Some credits where this applies include:

• The Child and Dependent Care credit

• Elderly and Disabled Senior tax credit

• The Earned Income tax credit

Modified Adjusted Gross Income (MAGI)

Along with Adjusted Gross Income (AGI), another related term to get to know is your Modified Adjusted Gross Income (a.k.a. MAGI). Your MAGI is essentially your AGI with certain income and deductions added back into that figure. The IRS uses MAGI to determine if you qualify for a range of tax benefits and programs, separate from the deductions and credits using AGI mentioned earlier.   

For example, MAGI is used as a criteria to determine

• If Traditional IRA contributions are deductible

• If you are eligible to contribute to a Roth IRA

• If you are eligible for the Child Tax Credit

• If you qualify for the American Opportunity or Lifetime Learning education tax credits

• If you are eligible for Premium Tax Credits and savings applied to marketplace health insurance plans under the Affordable Care Act

• If you pay higher Medicare premiums due to having income above certain thresholds

What makes the MAGI complicated (and often confusing) is that it is not a separate line item shown on Form 1040 of the tax return. Instead, it is calculated and used where applicable when completing your tax return or by external programs using tax return information. Also, the specific calculation for MAGI can be different, depending on how it is used. Different eligibility items add back different deductions or types of exempt incomes in each of their definitions of MAGI. To illustrate this point, let’s look at a couple of specific examples.

In the case of determining if contributions to a Traditional IRA are deductible, MAGI is calculated by adding AGI plus the following items (as applicable):

• student loan interest deduction

• foreign earned income and housing exclusions

• foreign housing deduction,

• excluded savings bond interest used for higher education,

• excluded employer adoption benefits

On the other hand, for the purpose of determining any Medicare premium adjustments, the Social Security Administration uses MAGI calculated as AGI plus any tax-exempt interest earned. 

When determining your eligibility for these types of tax benefits or projecting your Medicare premium, it is important to know the Modified Adjusted Gross Income that applies to each one. For many people without a lot of the unique deductions or exempt income to add back, their MAGI will be very close to their AGI. However, being aware of both AGI and MAGI and how each is applicable can be very beneficial when doing proactive tax planning throughout the year, not only during tax filing season.  

The tax code is complex, and determining how tax-related items apply to your unique situation depends on many factors. These are important conversations to have with your financial planner and tax professional, so please don’t hesitate to reach out to us if you have questions. 

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Examples used are for illustrative purposes only.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Maximizing your 401k Contributions: Nuances to Save you Money

Contributed by: Nick Defenthaler, CFP®, RICP®

When starting a career, we are always told to contribute at least the minimum needed to get the full company match in our 401k (typically between 4% and 8%, depending on how your plan is structured). “Never throw away free money!” is a phrase we use quite often with children of clients who are starting that first job out of college.

But what about those who are well established in their career and fully maximizing 401k contributions ($22,500 for 2023, $29,000 if you are over the age of 50)? They should not have to worry about not receiving their full employer match, right? Well, depending on how your 401k plan is structured at work, the answer is yes! 

Let me provide an example to explain what I am referring to:
Let’s say Heather (age 54) earns a salary of $325,000 and elects to contribute 18% of her salary to her 401k. Because Heather has elected to contribute a percentage of her salary to her 401k instead of a set dollar figure, she will max out her contributions ($29,000) by the end of June each year. Let us also assume that Heather receives a 5% employer match on her 401k – this translates into $16,250/yr ($325,000 x 5%). If Heather does not have what is known as a “true up” feature within her plan, her employer will stop making matching contributions on her behalf halfway through the year – the point at which she maxed out for the year and contributions stopped. In this hypothetical example, not having the “true up” feature would cost Heather over $8,000 in matching dollars for the year!

So, how can you ensure you receive the matching dollars you are fully entitled to within your 401k? 
The first step I recommend is reaching out to your benefits director or 401k plan provider and asking them if your plan offers the “true up” feature. If it does, you are in the clear – regardless of when you max out for the year with your contributions, you will be receiving the full company match you are entitled to. 

If your plan does not offer the “true up” feature and you plan on maximizing your 401k contributions for the year, I would strongly suggest electing to defer a dollar amount instead of a percentage of your salary. For example, if you are over 50, plan on contributing $29,000 to your 401k this year, and if you are paid bi-weekly, elect to defer $1,115.38 every pay period ($1,115.38 x 26 pay periods = $29,000). Doing so will ensure you maximize your benefit by the end of December and not end up like Heather, who maxes out by the end of June and potentially loses out on significant matching dollars.  

Subtle nuances such as the “true up” 401k feature exist all around us in financial planning, and they can potentially have a large impact on the long-term success of your overall financial game plan. If you have questions on how to best utilize your employer’s 401k or retirement savings vehicle, please don’t hesitate to reach out to us for guidance. 

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Examples are hypothetical and are not representative of every employer's retirement plan. Not all employers offer matching 401(k) contributions. Please contact your employer's benefits department or retirement plan provider for terms on potential matching contributions.

Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Roth vs. Traditional IRA – How Do I Decide?

Contributed by: Kali Hassinger, CFP®, CSRIC™

As April 18th approaches, many are focused on the deadline to gather information and file taxes. However, April 18th is also the deadline to make a 2022 IRA contribution! How will you decide between making a Roth or traditional IRA contribution? There are pros and cons to each type of retirement account, but there is often a better option depending on your current and future circumstances. The IRS, however, has rules to dictate who and when you can make contributions. 

For 2022 Roth IRA contribution rules/limits:

• For single filers, the modified adjusted gross income (MAGI) limit is phased out between $129,000 and $144,000 (unsure what MAGI is? Click here).

• For married filing jointly, the MAGI limit is phased out between $204,000 and $214,000.

• Please keep in mind that for making contributions to this type of account, it makes no difference if you are covered by a qualified plan at work (such as a 401k or 403b); you have to be under the income thresholds.

• The maximum contribution amount is $6,000 if you’re under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.

For 2022 Traditional IRA contributions:

• For single filers who are covered by a company retirement plan (401k, 403b, etc.), in 2022, the deduction is phased out between $68,000 and $78,000 of modified adjusted gross income (MAGI).

• For married filers, if you are covered by a company retirement plan in 2022, the deduction is phased out between $109,000 and $129,000 of MAGI.

• For married filers not covered by a company plan but with a spouse who is, the deduction for your IRA contribution is phased out between $204,000 and $214,000 of MAGI.

• The maximum contribution amount is $6,000 if you’re under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.

If you are eligible, you may wonder which makes more sense for you. Well, like many financial questions…it depends! 

Roth IRA Advantage

The benefit of a Roth IRA is that the money grows tax-deferred, and someday when you are over age 59 and a half, if certain conditions are met, you can take the money out tax-free. However, in exchange for the ability to take the money out tax-free, you do not get an upfront tax deduction when investing the money in the Roth. You are paying your tax bill today rather than in the future. 

Traditional IRA Advantage

With a Traditional IRA, you get a tax deduction the year you contribute money to the IRA. For example, if a married couple filing jointly had a MAGI of $200,000 (just below the phase-out threshold when one spouse has access to a qualified plan), they would likely be in a 24% marginal tax bracket. If they made a full $6,000 Traditional IRA contribution, they would save $1,440 in taxes. To make that same $6,000 contribution to a ROTH, they would need to earn $7,895, pay 24% in taxes, and then make the $6,000 contribution. The drawback of the traditional IRA is that you will be taxed on it someday when you begin making withdrawals in retirement. 

Pay Now or Pay Later?

The challenging part about choosing which account is suitable for you is that nobody has any idea what tax rates will be in the future. If you choose to pay your tax bill now (Roth IRA), and in retirement, you find yourself in a lower tax bracket, then you may have been better off going the Traditional IRA route. However, if you decide to make a Traditional IRA contribution for the tax break now, and in retirement, you find yourself in a higher tax bracket, then you may have been better off going with a Roth. 

How Do You Decide?

A lot of it depends on your situation. We typically recommend that those who believe they will have higher income in future years make ROTH contributions. However, a traditional contribution may make more sense if you need tax savings now. If your income is stable and you are in a higher tax bracket, a Traditional IRA may be the best choice. However, you could be disqualified from making contributions based on access to other retirement plans. As always, before making any final decisions, it is always a good idea to work with a qualified financial professional to help you understand what makes the most sense for you. 

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Important Information for Tax Season 2022

Contributed by: Lauren Adams, CFA®, CFP®

As we prepare for tax season, we want to keep you apprised of when you can expect to receive your tax documentation from Raymond James.

2022 Form 1099 Mailing Schedule

• January 31 – Mailing of Form 1099-Q and Retirement Tax Packages.

• February 15 – Mailing of original Form 1099s.

• February 28 – Begin mailing delayed and amended Form 1099s.

• March 15 – Final mailing of any remaining delayed original Form 1099s.

Additional Important Information

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows custodians (including Raymond James) to extend the mailing date until March 15, 2023, for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts, as well as holding company depositary receipts.

• Processing of original issue discount and mortgage-backed bonds.

• Expected cost basis adjustments including, but not limited to, accounts holding certain types of fixed income securities and options.

If you do have a delayed Form 1099, we may be able to generate a preliminary statement for you for informational purposes only, as the form is subject to change.

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation.

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008).

• Changes made by mutual fund companies related to foreign withholding.

• Tax-exempt payments subject to alternative minimum tax.

• Any portion of distributions derived from U.S. Treasury obligations.

What Can You Do?

You should consider talking to your tax professional about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2022.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax professional about the requirements to re-file based on your individual tax circumstances.

You can find additional information here.

And Don’t Forget…

As you complete your taxes for this year, a copy of your tax return is one of the most powerful financial planning information tools we have. Whenever possible, we request that you send a copy of your return to your financial planner, associate financial planner, or client service associate upon filing. Thank you for your assistance in providing this information, which enhances our services to you.

We hope you find this additional information helpful. Please call us if you have any questions or concerns about the upcoming tax season.

Lauren Adams, CFA®, CFP®, is a Partner, CERTIFIED FINANCIAL PLANNER™ professional, and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.