Allworth Co-CEO Scott Hanson shares a few reminders about how to lower your tax bill moving forward.
By now, most taxpayers have already filed their 2022 taxes, are in the process of filing, or they have filed an extension.
If you are like most taxpayers, at best, you find filing taxes a bit nerve wracking, and, at worst, you despise it with a white-hot passion.
And yet still it must be done.
Since this is the time of year when taxes are top of mind, why not look ahead at how you might be able to save on taxes next year (2024)?
What follows are 4 ways to save taxes in 2024, and beyond.
1. Up the contributions to your retirement accounts
If you have yet to retire and are still contributing to a traditional IRA, 401(k), or a 403(b), and you are not already “maxing” them out, you can significantly lower your taxable income by upping your contributions.
The 2023 contribution limits for the previously mentioned retirement accounts are:
- 401(k) and 403(b)s: $22,500, or $30,000 if you are age 50 or older
- Traditional IRAs: $6,500, or $7,500 if you are age 50 or older
And if you are self-employed, there are several retirement plans that could lower your taxable income while simultaneously helping you prepare for the future. Among these are a SEP IRA, which allows you to put away 25% of your compensation, or $66,000, whichever is less, pre-tax.
Also, remember that if you have a side-hustle, a small business that you operate in addition to your job, that mileage, shipping, travel, and even your home internet may be eligible as deductions that can drastically lower your taxable income.
2. Dial in your paycheck withholding
The average tax refund in 2022 ($3,039) was up almost 8% from 2021, but much of that can be attributed to the tax credits for pandemic relief, including the child tax credit.1 This year (2023), average refunds are expected to be much smaller, which, unsurprisingly, means that more people will likely also owe additional taxes than did in 2022.
What can you do to help protect yourself from a surprising tax bill in 2024? You should:
- Speak with your accountant
- Check with your HR department to analyze your deductions (if you are still employed)
- Talk to your advisor
- Use the IRS’s Tax Withholding Estimator
Withhold too little, and you might find yourself with a monster tax bill. Withhold too much, and while refunds are nice, you are allowing the government to hang on to money, interest free, I might add, that should be working for you.
3. Fund a health savings account
A nifty tax-advantaged way to both save on taxes and to save for retirement, a health savings account (HSA) may be available if your employer offers a high deductible health plan for your out-of-pocket medical expenses. HSAs can help you save money on taxes three separate ways:
- The deductions are pre-tax, which lowers your taxable income
- The money is invested and grows tax-deferred
- Withdrawals used for certain medical costs are tax free
4. Consider tax-loss harvesting
Tax-loss harvesting is a tax-saving/tax-deferral strategy that too few savers and investors understand. In a nutshell, you are intentionally selling an investment at a loss to reduce your tax burden on investments that you have sold for a gain.
For example, in simplest terms, if you buy a stock for $30,000, and then later, you sell that stock for $35,000, you have realized a capital gain of $5,000. That $5,000 is taxable for the year you sold the stock. In certain situations, you can then sell a stock that is down (capital loss) to help offset the taxes on that $5,000 gain.
Complex, and only appropriate for some investors, make certain you speak to your advisor and your accountant before you sell any stock with the intention of employing a tax-loss harvesting strategy.
Of course, there are other ways to save on taxes. You might be able to open a flexible spending account (FSA) through your employer. Not typically available to folks who fund an HSA, using pre-tax dollars, you may be able to fund an FSA to cover future expenses for prescriptions, elder care, and other medical costs.
You could also consider contributing to a grandchild’s education via a 529 college savings plan. Unlike the strategies mentioned above, money goes into a 529 after tax, but growth is tax deferred, and so long as the money is used for its intended purpose (approved educational expenses), withdrawals are tax free.
Taxes. Virtually no one loves paying them. And while most people search for legal ways to pay as little as possible, make certain that you only work with qualified tax and advisory professionals, and that you always file on time.
1 Why Your Tax Refund May Be Lower This Year | Time