Navigating the tax code for maximizing savings can be overwhelming. It’s no surprise that many money-saving deductions go unnoticed with about 75,000 pages to sift through. As we reach mid-year, it’s a prime time to explore some tax reduction ideas and review some important changes. Here are six easy to grasp strategies to consider:
1. Maximize Your HSA Contributions
If you have a qualified high deductible health insurance plan, contributing to a Health Savings Account (HSA) can significantly reduce your taxable income. Contributions to an HSA not only lower your taxable income but also allow you to pay for qualified medical, dental, and vision expenses with pre-tax dollars. For 2024, you can contribute up to $4,150 if you’re single, or $8,300 if you’re married, with an additional $1,000 catch-up contribution if you’re 55 or older.
2. Pay Down Student Loan Interest
You can deduct up to $2,500 in student loan interest on your tax return, even if someone else helps you pay your loans. Parents who co-sign student loans are also eligible for this deduction, provided they make the payments.
3. Bunch Two Years Of Itemized Deductions Into One
While many taxpayers take the standard deduction and do not take the itemized deduction (which includes a combination of charitable giving, state & local taxes, and unreimbursed medical costs), you can maximize the itemized deduction by bundling two or three years’ worth of deductions into one tax year can maximize your benefits. For example, if you donate to charities annually, consider prepaying next year’s donations before the end of this year to exceed the itemized deduction threshold. The following year, you can take the standard deduction with minimal charitable donations.
4. Donate Appreciated Assets
Instead of donating cash, consider donating appreciated assets like stocks or mutual funds that you’ve owned for over a year. This approach allows you to claim a charitable deduction on the fair market value of the asset while avoiding capital gains tax on the appreciation. It’s a win-win if you’re holding onto investments in a down market but want to minimize tax exposure.
5. Take Advantage of State Tax Deductions
You can claim up to $10,000 in total taxes as part of the itemized deduction. Even without significant state income or property taxes, you can deduct state sales tax. For small business owners, some states allow you to pay your state income tax directly from your business (Pass-Through Entity Tax or PTET). The PTET allows you to bypass the $10,000 limit and treat your state income tax as a business write-off within your business which can be a significant tax saver.
6. Fully Contribute to Business and Personal Retirement Accounts
Retirement plans like 401(k), 403(b), and SIMPLE IRA offer great tax benefits. Each plan has an annual contribution limit, which, if unused, is lost for the year. Ensure you’re taking full advantage of the tax benefits each plan offers.
For most taxpayers, you have until April 15th of the following year to contribute up to $7,000 ($8,000 if age 50 or over) into a Traditional IRA or a Roth IRA. Is an IRA an option worth considering for you? If so, which is better?
- Traditional IRA: Contributions may be tax-deductible depending on your income level, and earnings are tax-deferred until withdrawal. Contributions are not allowed after age 73, and required minimum distributions must be taken each year.
- Roth IRA: Contributions are made with after-tax dollars, and qualified withdrawals are tax-free. There are no required minimum distributions or age limits for contributions, but there are income limits for eligibility.
Choosing between a Traditional and Roth IRA depends on your financial situation. If you anticipate higher tax rates in the future, a Roth IRA might be more beneficial. If you expect your investments to grow significantly, a Traditional IRA could offer more advantages despite taxes upon withdrawal.
By staying informed and proactive, you can uncover hidden deductions and optimize your tax savings. Mid-year is an ideal time to review these strategies and make adjustments to ensure you maximize your tax benefits.
