Tim Steffen: Smart Tax Moves for 2024 and Beyond

Episode Summary

Executive Summary: Tim Steffen, Director of Advanced Planning at Baird, joins Morningstar's podcast to discuss tax and financial planning strategies for 2024 and beyond. Key topics include inflation-adjusted tax brackets, Secure 2.0 provisions like student loan matching and Roth 401K RMD elimination, bunching deductions using donor-advised funds, the potential sunset of the Tax Cuts and Jobs Act (TCJA) in 2025, and its impact on income and estate taxes. He advises caution in preemptive planning, especially regarding Roth conversions and estate planning for high-net-worth individuals. The discussion also covers asset location, direct indexing, qualified charitable distributions, state tax considerations, and the declining number of CPAs.

Main Topics: 2024 Inflation Adjustments and Secure 2.0 Provisions (Priority: 5/5): Overview of inflation-adjusted tax brackets (~5.5% increase), standard deduction, and retirement contribution limits. Discussion of Secure 2.0 changes: employer matching for student loan payments, elimination of RMDs for Roth 401ks from 2024, and the potential for increased retirement plan utilization. Bunching Deductions and Donor-Advised Funds (DAFs) (Priority: 4/5): Strategy of timing charitable contributions to maximize itemized deductions over the standard deduction. DAFs facilitate this by allowing a lump-sum deduction in one year while distributing funds to charities over time. Appreciated securities are ideal for contributions to avoid capital gains taxes. TCJA Sunset and Tax Planning Implications (Priority: 5/5): Many TCJA provisions (lower rates, larger standard deduction, doubled estate tax exemption) expire at end of 2025. Potential tax increases in 2026 for most taxpayers, especially those currently benefiting from the standard deduction. Strategic planning for high-net-worth individuals (estate tax) and income timing is advised, but Steffen warns against premature action due to possible legislative changes. Asset Location, Direct Indexing, and Roth Strategies (Priority: 4/5): Optimal placement of assets: fixed income in retirement accounts, growth equities in taxable accounts, with municipal bonds for high earners. Direct indexing allows tax-loss harvesting at individual security level. Roth IRA conversions are favored in low-income years (e.g., early retirement trough). Mega backdoor Roth strategies for after-tax 401k contributions are growing in popularity. Retirement Planning: Conversions, QCDs, and Long-Term Care (Priority: 3/5): Roth conversions are best in the 'trough period' between retirement and RMDs/Social Security. Qualified Charitable Distributions (QCDs) from IRAs are beneficial vs. donating appreciated stock for itemizers. Long-term care costs may be paid from HSAs or taxable accounts, but not ideally from retirement accounts. State tax residency decisions require careful planning beyond the 6-month rule. State Tax Trends and CPA Shortage (Priority: 2/5): High-tax states losing population may face budget pressures; some (like Minnesota) are cutting taxes for retirees. The number of CPAs is declining due to burnout and complex tax codes, leading to a demand for advisors with tax expertise (e.g., CPA, EA, CFP credentials) or access to specialized teams.

Key Arguments: Inflation adjustments for 2024 tax brackets (5.5% increase) are historically significant but lower than 2023's adjustments. Secure 2.0's student loan matching provision will likely see slow adoption but become common over time; elimination of Roth 401k RMDs levels the playing field with Roth IRAs. Bunching deductions, especially charitable gifts via DAFs, is most beneficial for married couples who alternate between standard and itemized deductions in alternating years. The TCJA sunset is uncertain; estate tax exemption halving impacts those with $15-30 million net worth the most, but income tax changes are difficult to predict and should not prompt drastic action too early. Direct indexing enables tax-loss harvesting even in passive index strategies, useful for offsetting gains from concentrated positions. Roth conversions are most impactful during low-income windows (e.g., early retirement, pandemic) but should not be assumed as 'always right' due to fluctuating tax rates. State relocation strategies require demonstrable changes beyond 6 months+1 day, including lifestyle adjustments that may offset tax benefits. The CPA shortage increases the value of advisors with tax planning skills or access to advanced planning teams.

Data Points: 2024 Tax Bracket Increase: ~5.5% - Brackets and standard deduction increasing by about 5.5% in 2024, lower than the previous year but still historically large. 2024 Standard Deduction: $13,600 (single) / $27,200 (married) - Approximate numbers for 2024 standard deduction based on inflation adjustments. 2024 Estate Tax Exemption: $13.6 million per person, $27.2 million per couple - Lifetime exemption amount, set to halve if TCJA sunsets at end of 2025. TCJA Tax Rate Increases: 2-4 percentage points per bracket - Potential increase in marginal tax rates if TCJA provisions expire, as described by Steffen. 401k Contribution Limit (2023): $22,500 (under 50), $30,000 (50+) - Base and catch-up contribution limits for 2023. HSA Contribution Limit (2024): $4,150 (individual), $8,300 (family) - 2024 limits, mentioned in context of long-term care expenses. Annual Gift Tax Exclusion (2024): $18,000 - Per person annual gift exclusion, relevant for estate planning strategies.

Pivotal Quotes: "Most individuals probably saw some form of tax cut. So the Tax Cuts and Jobs Act had kind of a unique combination of things. It famously eliminated a lot of deductions... but it also lowered the marginal tax rate." — Tim Steffen: Explaining the net effect of TCJA for most taxpayers, setting up the discussion of potential sunset impact in 2026. "The ones that have the most to be concerned about right now are the ones in the middle. So, a married couple with a net worth between, say, $15 and $30 million." — Tim Steffen: Describing the estate tax planning window for those who could be significantly affected by the exemption halving. "I think we have to break at least the provisions of the TCJA into two broad categories. We talked about the estate provisions a bit. Those are ones that I think if you find yourself in that north of $30 million net worth, somebody who's always going to have an estate tax liability, you really ought to be trying to take advantage of this exemption before it potentially goes away." — Tim Steffen: Advising on proactive planning for estate tax-exposed individuals vs. caution for income tax strategies.

Implications: Listeners should review their 2024 tax situation now, especially given inflation adjustments and Secure 2.0 changes. Those with net worth over $15 million should consider estate planning before TCJA sunset. Roth conversions and bunching strategies remain powerful tools for the right situations. The trend towards advisor tax specialization will continue; consumers should seek advisors with strong tax acumen or team support.