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Tax season might not be the most exciting time of the year, but making the right moves before and during tax time can save you a significant amount of money. Whether you’re a seasoned tax filer or a first-timer, understanding these key tax strategies can help you minimize your liability, maximize your refund, and keep more money in your pocket.
Here are 5 must-know tax moves that can make a big difference come tax time.
1. Maximize Your Retirement Contributions
One of the smartest moves you can make to lower your taxable income is contributing to retirement accounts like a 401(k), IRA, or Roth IRA. These contributions can reduce your taxable income for the year, meaning you’ll pay less in taxes.
- 401(k): Contributions to a traditional 401(k) are made with pre-tax dollars, which reduces your taxable income. The annual contribution limit for 2024 is $22,500 (or $30,000 if you’re over 50).
- Traditional IRA: Like a 401(k), contributions to a traditional IRA are tax-deductible, reducing your taxable income for the year. The contribution limit is $6,500 (or $7,500 if you’re 50 or older) for 2024.
- Roth IRA: While contributions to a Roth IRA aren’t tax-deductible, the big advantage is that qualified withdrawals in retirement are tax-free. It’s a great way to save for the future while taking advantage of tax benefits now or later, depending on your situation.
The earlier you contribute to these accounts, the more you can reduce your taxable income. Also, contributing the maximum amount is a smart strategy for both tax savings and long-term retirement growth.
2. Claim All Eligible Tax Deductions
Tax deductions are your best friend when it comes to lowering your taxable income. Here are a few of the most common deductions you might be eligible for:
- Standard Deduction vs. Itemized Deductions: For 2024, the standard deduction is $27,700 for single filers and $55,400 for married couples filing jointly. However, if your itemized deductions (e.g., mortgage interest, property taxes, charitable donations, and medical expenses) exceed the standard deduction, it might be worth itemizing instead.
- Charitable Donations: If you donate to qualified charities, you can deduct those contributions, whether it’s cash or goods. Be sure to keep receipts and records of all donations.
- State and Local Taxes (SALT): You can deduct state and local income, sales, and property taxes up to $10,000 ($5,000 if married filing separately).
- Medical Expenses: If your medical expenses exceed 7.5% of your adjusted gross income (AGI), you can deduct the portion above that threshold.
If you’re not sure whether you should take the standard deduction or itemize, it’s worth consulting with a tax professional. Many tax prep software programs will help you compare both options to see which one benefits you most.
3. Take Advantage of Tax Credits
Unlike deductions, which reduce your taxable income, tax credits directly reduce the amount of taxes you owe. There are a variety of credits available, and you’ll want to make sure you’re taking advantage of any that apply to you.
- Earned Income Tax Credit (EITC): This credit is for low-to-moderate-income earners. If you qualify, it can result in a significant refund, even if you don’t owe taxes.
- Child Tax Credit: If you have dependent children under the age of 17, you may be eligible for a credit of up to $2,000 per child. Part of this credit is refundable, meaning you could receive a refund even if you don’t owe any taxes.
- American Opportunity Tax Credit: If you or your dependents are attending college, this credit can help offset the cost of tuition, fees, and course materials, offering up to $2,500 per eligible student.
- Energy-Efficiency Credits: You may qualify for tax credits if you make energy-efficient upgrades to your home, like installing solar panels or purchasing electric vehicles.
Tax credits can be a real game-changer in terms of reducing your tax burden, so make sure you’re familiar with all the credits that might apply to you.
4. Plan for Capital Gains Taxes
If you’ve made investments in stocks, bonds, or real estate, you may be subject to capital gains taxes when you sell. However, there are strategies to minimize the tax impact of your investments.
- Hold Investments for Over a Year: If you hold an investment for more than a year before selling, you qualify for long-term capital gains tax rates, which are generally lower than short-term rates. Long-term capital gains tax rates range from 0% to 20%, depending on your income bracket.
- Tax-Loss Harvesting: If you have investments that are performing poorly, you can sell them to offset gains you’ve made on other investments. This strategy, known as tax-loss harvesting, helps reduce your taxable income and the amount of tax you owe.
- Consider Your Tax Bracket: Be mindful of how capital gains fit into your overall income. If you’re close to a higher tax bracket, timing your sale to stay within a lower bracket could save you money.
Properly managing your investments and understanding the tax implications of buying and selling can help you keep more of your returns and avoid unnecessary taxes.
5. Don’t Forget About Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) are a powerful tool for tax savings, and they’re often underutilized. If you have a high-deductible health plan (HDHP), you can open an HSA, which allows you to set aside money tax-free for medical expenses.
- Contributions Are Tax-Deductible: For 2024, you can contribute up to $3,850 for individual coverage or $7,750 for family coverage. If you’re 55 or older, you can make an additional catch-up contribution of $1,000.
- Tax-Free Growth: The money in your HSA grows tax-free, and you can use it to pay for qualified medical expenses without paying taxes on the withdrawals.
- No “Use-It-Or-Lose-It” Rule: Unlike Flexible Spending Accounts (FSAs), you don’t have to use the funds in your HSA by the end of the year. The money rolls over, and you can continue to use it for future medical expenses.
HSAs provide a unique triple-tax benefit—deductions for contributions, tax-free growth, and tax-free withdrawals for eligible expenses. If you’re eligible for an HSA and haven’t been contributing, it’s worth considering this tax-smart move for the upcoming year.
Final Thoughts
By being proactive with these key tax strategies, you can maximize your refund, minimize your liability, and take control of your financial future. Whether it’s contributing to retirement accounts, claiming all eligible deductions and credits, or planning for capital gains, the right moves can make a big impact on your bottom line.
Before filing your taxes, take the time to review your options and consult with a tax professional if needed to ensure you’re making the most of every opportunity to save.
Got any other tax-saving tips? Feel free to share them in the comments!