Practical Money: Tax Strategies For 2024, Last Minute Tax Savings
Ways to potentially save money on your taxes
Introduction
It’s the most bothersome time of the year (well at least for me it is). It’s tax season, and it’s time to collect all your W-2s, 1099s, etc. Taxes can range from pretty simple to fairly complicated. I am not a tax advisor nor do I pretend to be one in newsletters, but I’ve always found it beneficial to have a tax professional help every year, especially if you have side businesses, real estate investments, etc.
Below is a list of items (some old, some new) I do each year preparing for that year’s taxes. I’ve always found that it’s best to start planning early so you don’t have to play catch-up at the end.
Almost 63 million people have already filed their returns this year ahead of the deadline, which is Monday, April 15th. If you haven’t filed your taxes yet, some of these items may still be applicable. I put notes in bold for items you can still take advantage of for your 2023 taxes.
A quick reminder that this is not financial advice, just myself sharing my personal strategies, investments, stocks, index fund strategies, what I'm buying, and where I plan to take those investments. Everyone’s financial goals are different. No financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert.
Please subscribe and help spread the word:
Get Organized
Every January I create a folder for taxes where I store all receipts, forms, and documents that could be useful during tax season. I also create folders in the cloud in iCloud and Google Drive where I store digital copies of these documents. These include donations, major purchases, auto registrations, property tax statements, etc.
One thing I try to avoid is closing any banking or investment accounts during the year where I may receive tax documents at the end of the year. I may zero out the balance, but I wait until the following year before closing it so that I can easily access any tax documents or data online. After I’ve filed my returns, I then close out any accounts not being used.
Reduce Taxable Income
A great way to lower your tax bill is by reducing your taxable income. This can be done by contributing to a 401K, a traditional IRA, or an HSA, which I’ll go into further below. There are other ways to reduce your taxable income as well, such as contributing to a SEP IRA if you’re self-employed, or contributing to a 403(b) or 457 plan if your employer offers those.
Reducing your taxable income may put you at a lower marginal tax rate. For instance, if you are a single filer and make $250,000 a year and contribute $15,000 to a 401K, your taxable income is now $235,000. Along with the lower taxable income, your tax rate falls from 35% to 32%, with an overall savings of $12,300. Remember, however, that you will eventually pay taxes when you take your 401K distributions at retirement, and there’s no guarantee of what your tax bracket will be when that happens.
Below are the tax bracket rates for 2024, via NerdWallet.
Contributing to a ROTH or Traditional IRA
The first thing I do each year is plan my IRA contributions. I did an entire newsletter here regarding the pros and cons of ROTH and Traditional IRAs, and why I prefer a ROTH if it’s an option.
Starting this year, the limit on contributions to a ROTH and Traditional IRA is $7000 for people under 50, up from $6500 in 2023. For people 50 and above, the limit is now $8,000.
The income limit for a ROTH IRA for 2024 is $161,000 for single tax filers and $240,000 for those married filing jointly. If you are above the income limit, you can do a “backdoor Roth IRA conversion,” which I explained here. While contributing to a ROTH IRA won’t reduce your taxable income for the year, it might help you save on taxes in retirement. The biggest advantage of ROTH IRAs is the contributions are usually made with after-tax money, but the growth is tax-free. For instance, if a 25-year-old made a one-time $7000 contribution into a ROTH IRA and it grew 10% a year, it would be worth around $315,000 when that person turns 65. While that initial $7000 contribution was made with after-tax money, the $315,000 is tax-free.
Contributing to a traditional IRA might lower your taxable income depending on your filing status, whether you or your spouse (or both) participate in an employer-sponsored retirement plan, and your modified adjusted gross income. Investopedia has more about the rules for deducting traditional IRA contributions at this link.
You can still make 2023 Traditional and ROTH IRA contributions by April 15th.
Contributing to a 401K retirement plan
Contributing to a 401K plan (or 403(b) or 457 plan) is another thing I always plan to do when it’s an option, especially if there’s an employer match. The limit on contributions to these employer retirement plans increased to $23,000 for 2024, up from $22,500 in 2023.
As noted before, contributing to a 401K, 403(b) or 457 can reduce your taxable income because the contribution comes out of your paycheck before federal taxes are taken into account.
Maxing Out An HSA account
One regret I have is never taking advantage of health savings accounts (HSAs) … until this year. I’m going to do an entire newsletter about HSAs in the future, but they offer the best of what you get with ROTH and Traditional IRAs: contributions generally reduce your taxable income, the growth is tax-free and withdrawals are tax-free for qualified medical expenses. Before the age of 65, any withdrawals will be taxed and subject to a 20% penalty. After the age of 65, withdrawals can be spent on anything, however, it will be taxed as income if you aren’t spending it for qualified medical expenses
For 2024, the contribution limit is $4,150 for individuals and $8,300 for families, up from $3,850 for individuals and $7,750 for families in 2023.
If you have not yet filed your tax return, you can still max out your HSA by April 15th.
Conclusion
As always, when it comes to tax-related topics, it’s always best to consult with a tax professional. Making mistakes can be costly and erase many of the benefits of tax-saving strategies.
That's it for this week! If you found this newsletter helpful, please share it with one friend who might find it useful by using the button below:
As always, no financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert.
Please let me know your thoughts on this newsletter by leaving a comment using the button below:
If you haven’t already, please subscribe below: