Tax Deductions:
One of the most effective ways to reduce your taxes is to reduce your taxable income by contributing to a work retirement plan. For 2024, you can save as much as $23,000 ($30,500 if you are 50+ years old). These contributions have to come from your paycheck (e.g. you cannot send in a check). Plans have a limit as far as what percentage of your income can be contributed, so check with your HR department.
If you have a high deductible health insurance plan and Health Savings Account (HSA), you can fund it through April 15, 2025. HSAs are typically funded through your paycheck, but it is possible to mail checks in. The HSA contribution limit is $4,150 for a single individual or $8,300 for a family. This is increased by $1,000 per person that is 55+ years old.
Massachusetts laws changed in 2023 making cash and check charitable contributions tax-deductible. However, you must be able to itemize your deductions to receive a Federal benefit. Consider bunching your deductions in certain years to be able to itemize your deductions. For example, if you are donating $10,000 per year, it might make sense to donate $20,000 one year and then skip the next year. You can also consider establishing a Donor Advised Fund (DAF). The DAF provides a potential tax deduction the year that it is established. However, you have flexibility to distribute money from your DAF over time. DAFs can also be invested, so you may be able to just distribute earnings on the investments and have a perpetual fund to gift. If you are over the age of 70 ½, you are able to make a Qualified Charitable Distribution from your IRA directly to a charity. There is no tax deduction on the gift, but you also are not taxed on the distribution.
Portfolio Strategies:
Tax loss harvesting is done when you sell an investment to produce a tax loss. Tax losses offset any capital gains income you have. You can also deduct an additional $3,000 per year of tax losses against other income. Any unused tax losses carry over year-to-year until they are utilized. To implement this, you should look at your cost basis to calculate potential losses. IRS rules require that you do not reinvest in a like-kind security for at least 31 days. So, you can sell an investment and leave it in cash for 31 days before reinvesting, or perhaps invest it in a different type of investment.
Another strategy is to consider selling items with a gain if you are in the 12% Federal marginal tax bracket, as no Federal capital gains taxes are due.
A final portfolio consideration is to convert some of your IRA to a Roth IRA. Taxes are due on conversions. However, there may be long-term tax savings by doing this. Once money is in your Roth IRA, it generally grows tax-free. A strategy I often employ is to convert “just enough” of an IRA to keep in a certain tax bracket. For example, if you are in the 12% or 22% marginal tax bracket, you may want to convert the maximum amount to keep you in your tax bracket.
Business Owner Strategies:
If you do not have a retirement plan established for your business, there is still time to get one in place. You can establish a Solo-K (this is a 401-K plan for sole business owners) through 12/31. You can establish a SEP retirement plan through the date when you file your tax return (including extensions). Consider making purchases for tax-deductible business items. For example, you can stock up on office supplies, pay vendors early, etc.
Lars Lambrecht, Rehoboth resident and Certified Financial Planner® practitioner, is available to answer questions or meet for a consultation. 617-947-6428
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