Reducing Your Taxes
Main Idea: Most people would benefit from focusing on the core tax strategies offered before moving on to more complex ones, some of which are listed below.
Per usual, I try to stick one tax topic in per week. Today, I'm covering lowering your taxes by way of deductions.
But first: I don't have the Tik Tok, but if I did I'm sure I'd see someone mention writing off my Range Rover, family trips, and more to save on taxes. In other words, hot garbage.
The IRS has almost 83,000 employees. Do you really think that there are just "tax hacks" that they don't want you to find or somehow missed?
Keep in mind, taxes are the only way the government brings in revenue. Just like you, they want to get paid for their jobs, and your taxes are how they do so.
They did not leave a "tax loophole" open for you to find as if it were a secret hack of the wealthy, you just hate taxes. And rightfully so.
It is absolutely true that the tax code is written in favor of business owners and those who take risks beyond regular employment, but today will focus on options that every person has regardless of if they're 1099 or W2. (Self-employed or traditionally employed)
Now with that out of the way, let me share some tax deduction options you may have that will not land you in hot water with the 83,000 strong.
Fair disclosure: Never make any final decisions on taxes without consulting your tax professional.
Some ways to reduce your taxable income:
Most of your present-day tax deductions with come through your employer. Remember a tax deduction means reducing your income in the eyes of the IRS before applying your tax rate.
401(k): Consider maximizing your employee deferral up to $23,000 (with an additional $7,500 for those over 50). Using the deduction example, you would remove $23,000 from your income and you'd now multiply your 22% tax rate (example) to your income afterwards.
Traditional/Roth IRA: The 2024 contribution limit is $7,000 (with an extra $1,000 for those 50 and older). I love Roth IRA's with a Capital L, Traditional IRAs provide similar benefits to a 401(k) or 403(b).
SEP IRA and Solo 401(k): Contribution limit is $69,000. These are available for business owners. While it always depends on the individual, Solo 401(k) is a great option for most.
You may have heard the word "harvest" on social media, and assumed it meant something with fall foliage or something with decorations. While that’s not far off, in finance, “harvesting” means strategically selling investments to realize a certain amount of gains or losses, which can help reduce your tax bill.
Tax-Loss Harvesting: Sell investments at a loss to offset gains or take losses up to $3,000 per year to reduce taxable income. This one is a bit confusing, but essentially for every dollar you lose, you can deduct a dollar gained. Any loss above the amount of gains can be carried over to future years up to 3,000 buckaroos.
Gain Harvesting: A bit different strategy in which if you’re in a low tax bracket this year compared to others, you can take gains from your investments without paying more in taxes.
Consider making year-end donations of cash, securities, or appreciated assets directly to charities or through a Donor-Advised Fund.
To keep it simple: the most effective way to give is one that allows you to claim a tax deduction while also removing investments that could have triggered taxes.
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For future education expenses, consider contributing to a 529 plan. The annual gift exclusion is $18,000 per donor, per recipient.
There is also a special 5-year rule in which you can take the maximum annual amount and multiply it by 5, but then you cannot contribute for the next 5 years without some exclusions so be mindful.
An HSA is debatably the most tax-efficient investment vehicle one can own. It is triple-tax free meaning as you contribute it takes that amount off of your income, as it grows it is tax free, and assuming you use the funds on medical needs, the gains will be tax free.
Similar to the HSA is the FSA. In my opinion the FSA is like the more strict, less cool sibling.
It has a use it or lose it provision, meaning if you do not spend the dollars in the account by the end of year the money is lost. Who does that?
CONCLUSION
Two mistakes that many people will make in viewing this list is either ignoring it in favor of some more unique tax planning option, or simply assuming their CPA will take care of this.
While it is true that there are more opportunities out there to plan for taxes beyond this, I myself prefer to start here. While it is true some CPAs will indeed cover these topics with you, I prefer to never leave anything up to assumption.
I prefer to start small, and then build.
In the same way that it's ideal for most humans to invest in stocks before investing in opportunities like real estate and private investments (can't say all for compliance), it would be ideal for most to start with their tax deductions the government is literally asking you to take.
In the future I'll get into opportunities offered through real estate and others for tax deductions, but this will cover the "broccoli" of your tax planning. If you don't know what I mean by this, I have an older article in which I discuss covering the most important pieces first.
Good follow up to watch: 10-minute video on tax deductions. Sounds great, I know, but this guy is great. You only need to watch the first few mins unless you're a business owner, but this CPA has a great channel on explaining taxes. Click here to watch.
Action Item: Review your options at your company before doing anything else. The lowest hanging fruit will be here. In my previous article I listed above, I also walk through some ways I would proceed from here, but keep in mind if you have an advisor this is where they will come in handy.
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