As the current tax year draws to a close, individuals and families are looking for ways to reduce their tax liability while also securing their financial future. While the window of opportunity is narrowing, there are still several prudent strategies that can help you not only shrink your 2024 tax bill but also pave the way for better financial health in the years ahead.
Boost Your Retirement Savings
One of the most effective ways to lower your taxable income and prepare for retirement is by funding your retirement accounts. As the tax year comes to a close, consider maximizing your contributions to retirement vehicles such as 401(k)s, 403(b)s, 457(b)s, or Thrift Savings Plans. The contribution limit for 2024 stands at $22,500. Don’t overlook employer matches, which essentially provide free money for your retirement fund. Additionally, if you’re aged 50 or older, you have the opportunity to make “catch-up contributions,” allowing you to raise your limit to $30,000 for the year. It is important to note that these limits do not stop you from contributing to an Individual Retirement Account (IRA), offering further savings potential.
Act on Employee Contributions
It’s crucial to take action promptly regarding employee contributions. For those contributing to a 401(k), the deadline for 2024 contributions is December 31. However, if you are self-employed and possess a “solo” 401(k), you have until your 2024 return’s due date (including extensions) to fund the employer part of the account. If you’re not self-employed, consider funding an IRA, as the deadline for 2024 contributions extends until Tax Day, April 15, 2024. While the contribution limits are typically lower for IRAs, they provide a valuable avenue for tax-efficient savings.
Explore Saver’s Credit
The saver’s credit is a lesser-known gem in the tax code. It offers nonrefundable credits of up to $1,000 for single taxpayers and $2,000 for joint filers who contribute to retirement plans, including 401(k)s, traditional or Roth IRAs, or 529 ABLE accounts. However, strict income limits apply, with your adjusted gross income (AGI) needing to be less than $73,000 in 2024. Also, remember that contributions must be from “new money,” meaning rollovers won’t qualify. You can save a lot of money if you take advantage of this credit.
Consider Health Savings Accounts (HSAs)
Health savings accounts (HSAs) offer a unique opportunity to save on both taxes and healthcare costs. If you haven’t yet contributed the maximum to your HSA for 2024, you have until Tax Day to do so. For 2024, the contribution limit for a HSA is $3,850 for an individual and $7,750 for family coverage. A $1,000 catch-up contribution is available to individuals 55 and over. What makes HSAs especially appealing is that contributions are tax-deductible, and both the growth and withdrawals are tax-free as long as they’re used for qualified medical expenses, even in retirement.
Harvest Investment Losses
Managing your investments smartly can also lead to tax savings. The strategy known as “harvesting” investment losses involves selling underperforming assets to offset gains from winning investments. This tactic can help reduce your overall tax liability. However, it’s crucial to realize a taxable event, such as a stock sale, to benefit from this strategy. Keep in mind that losses must be used to offset gains of the same kind. Any excess loss can potentially offset gains of a different type.
Make Charitable Contributions
You can reduce your taxable income by giving to charitable causes while also supporting the causes you care about. Whether you choose to write checks, make contributions via credit card, or explore other avenues, it’s important to ensure your gifts are made by year-end to qualify for the related deduction. If you don’t anticipate itemizing deductions in 2024, consider “bunching” your donations in 2024 to maximize the tax break. Donating appreciated property, such as stock, can provide additional tax benefits.
Explore Donor-Advised Funds (DAFs)
Donor-advised funds (DAFs) offer a flexible and tax-efficient way to manage your charitable giving. Sponsored by public charities, DAFs allow you to make irrevocable charitable contributions, take an income tax deduction for the donation, and recommend distributions from the fund over time. This is particularly useful if you’re uncertain about where to direct your charitable dollars or if you hold appreciated stock that you’d like to use for several years of charitable giving.
Qualifying Charitable Distributions (QCDs)
For individuals aged at least 70 1/2, qualifying charitable distributions (QCDs) present an enticing tax-saving opportunity. QCDs are tax-free, do not count toward your charitable limits, and do not require itemizing deductions. With a QCD, you can roll up to $100,000 directly from your IRA to a qualified charity in 2024. Additionally, if you’re at least 73 years old, a QCD can satisfy your required minimum distributions (RMDs) for the year. To benefit from this strategy, ensure your donation is in the charity’s hands by December 31, 2024.
Intrafamily Loans
Borrowing from family members can be a tax-savvy way to cut costs and preserve your existing tax breaks. Intrafamily loans, when properly documented, can allow you to lower interest rates while preserving valuable tax benefits. Family members with available liquidity can loan you money to pay down student loans or your mortgage, providing significant interest savings compared to traditional bank loans.
Invest in Energy Efficiency
Whether you want to reduce your carbon footprint or save on taxes, investing in energy-efficient improvements is a double win. You can qualify for clean vehicle tax credits by purchasing new plug-in electric vehicles (EVs) or fuel cell vehicles (FCVs) in 2024 or later. To qualify, the vehicle must be primarily used in the United States, and income limits apply. The credit can be as much as $7,500, but the amount varies depending on when the vehicle is placed into service and whether it meets certain criteria related to critical minerals and battery components.
You may also be eligible for the Energy Efficient Home Improvement Credit or the Residential Clean Energy Credit if you plan to make green improvements to your home. These credits apply to a wide range of energy-efficient home improvements, including solar, wind, and geothermal power generation. In addition to reducing your tax liability, they can improve your home’s energy efficiency.
Remember that claiming these credits depends on the year the improvements are installed, not the year of purchase or delivery, so timing is crucial.
The end of the tax year provides a valuable opportunity to optimize your financial situation and reduce your tax liability. By strategically implementing these financial moves before the year’s end, you can secure your financial future and potentially enjoy greater savings in the long run. Don’t miss out on these valuable opportunities to enhance your financial well-being and lower.