Chris’ Client Corner - Tax Day

With April 15th just around the corner, everyone's least favorite day looms large. However, it's also an opportune moment to explore ways to trim your tax bill for 2024 and beyond. While Uncle Sam will ultimately get his share, there are several strategies worth considering to keep his cut to a minimum. 

One of the simplest tactics to reduce taxes this year is to contribute to a pre-tax retirement account. For those enrolled in employer-sponsored plans (401(k)s, 403(b)s, etc.), you can stash away up to $23,000 pre-tax ($30,500 if you’re 50 or older). These contributions are not included in your income, and therefore exempt from taxation in the year you make the contribution. It's worth noting, however, that taxes will eventually be due on these funds when withdrawn during retirement, possibly at a lower rate. 

For those without employer-sponsored retirement plans, or individuals under the income threshold (see chart below), you can make a deductible contribution into a Traditional IRA offering similar advantages. The maximum limit for an IRA contribution in 2024 is $7,000 ($8,000 with the catch-up). Additionally, there’s the option of a Roth IRA, providing long-term tax benefits without immediate tax breaks. 

Business owners can leverage higher pre-tax retirement plan contributions depending on their plan type and income. For example, business owners with a SEP IRA could potentially put away up to $69,000 pre-tax! Again, be sure to review the specific income limitations for those contributions in the chart above and with a tax professional. 

Contributing to a Health Savings Account (HSA) can also reduce taxable income for individuals on high-deductible medical plans. These pre-tax contributions, along with tax-free growth, remain untaxed upon withdrawal for qualified medical expenses. Similarly, Flexible Spending Accounts (FSAs) offer pre-tax contributions and tax-free withdrawals for medical expenses, but with limitations compared to HSAs. 

Offsetting gains in your investment portfolio with taxable losses is another avenue for tax savings (applicable only for non-retirement accounts). You can even offset up to $3,000 worth of your income with any losses that exceed the gains in your portfolio during a calendar year. For those in higher tax brackets, these losses can go a long way in reducing your tax liability on capital gains, especially when considering the net investment income tax (3.8% tax on capital gains realized over $250k in MAGI). 

Last, but not least, Itemized deductions can significantly reduce income when used appropriately. While most taxpayers opt for the standard deduction, itemized deductions can provide greater benefits in certain situations when used appropriately. For example, charitable deductions can be itemized to help reduce income dollar for dollar. Leveraging these deductions could present a great tax saving opportunity, especially when donating highly appreciated stock to a charitable organization (more to come on that in a future Client Corner). 

Beyond these strategies, other itemized deductions and credits warrant consideration, including (but not limited to) mortgage interest deductions, student loan interest deductions, the Child Tax Credit, and the Clean Vehicle Credit. 

By employing these tax-saving strategies, hopefully you can approach Tax Day with a touch less anxiety. Remember, everyone’s situation is different, and it is important to consult with a CPA for further guidance. In the meantime, don't hesitate to reach out to Liberty One for assistance in navigating your tax planning needs.

Liberty One Wealth Advisors is a Registered Investment Advisory firm located in the state of Pennsylvania. Any opinions expressed are derived from sources generally believed to be reliable and is provided for informational purposes only. It does not constitute any form of advice or recommendation to buy or sell any securities, adopt any investment strategy discussed or invest in any specific product. Nothing contained in this newsletter constitutes investment, legal, tax or other advice and is not to be relied on in making an investment or other decision. Please contact your financial advisor if you have any questions or would like to discuss this content.