Here are some common ways individuals can reduce their taxable income:
1. Maximize Pre-Tax Deferrals to Employer Retirement Plans
Company sponsored retirement plans such as a 401(k), 403(b), and SIMPLE IRA are offered by many employers. Employees have the option to defer a portion of their income to their retirement plan. These contributions are typically tax-deductible, reducing taxable income for the year. In 2024, an employee can contribute up to $23,000 to a 401(k) or 403(b) and up to $16,000 to a SIMPLE IRA. If age 50 and older, an employee can contribute up to $30,500 to a 401(k) or 403(b) and up to $19,500 to a SIMPLE IRA. An additional perk, employers often match employee contributions to their retirement plans up to a certain threshold. If cash flow permits, it is recommended to max out annual contributions to an employer retirement plan, however, at a minimum, an employee should contribute a sufficient amount to receive the maximum match by your employer (essentially free money).
2. Contribute to an HSA or FSA to Pay for Out-of-Pocket Medical Expenses
Depending on the type of medical insurance coverage an employee has, tax-deductible contributions can be made annually to a medical HSA or medical FSA account. These contributions can be used to pay for qualified medical and dental expenses tax-free. FSAs can be used in conjunction with a co-pay plan. In 2024, the contribution limit is $3,200. Any contributions made to an FSA must be used within the calendar year – in other words “use it or lose it”. If you have a high-deductible health plan you may be eligible to contribute to an HSA. In 2024, the family contribution limit is $8,300 and individual contribution limit is $4,150. If age 55 or older, an individual can contribute an additional $1,000 to their HSA. Unlike FSAs, any unused funds in an HSA can be carried over year to year. Additionally, there are options available to invest funds in your HSA.
3. Use a Dependent Care FSA to Cover Portion of Childcare Costs
Anyone with young children knows how costly daycare and other forms of childcare can be. Some employers offer Dependent Care FSAs, allowing an employee to make an annual pre-tax contribution of $5,000 (2024 maximum household limit) to be applied to childcare costs for children younger than age 13. These contributions are deducted from your salary before taxes are calculated, reducing your taxable income.
4. Bolster Savings for Future College Expenses with a 529 Savings Plan
With higher education expenses continuing to become more and more exorbitant, 529 Savings Plans can act as a wonderful savings vehicle, with tax benefits to boot. Contributions to these savings plans are not federally tax deductible, but a New York State income tax deduction is available of up to $5,000 as a single filer or $10,000 for married couples filing jointly. Not every state allows contributions to be deductible, so make sure to consult a financial professional to be in the best shape from a tax perspective. Although there is technically no annual contribution limit, any contributions over the annual gift tax exclusion ($18,000 in 2024 or $36,000 for a married couple) could carry gift tax implications. The earnings from 529 plans aren’t subject to federal taxes, and the distributions aren’t taxed providing they are used to pay for qualified educational expenses. You can use up to $10,000 of 529 plan funds per year, per student, to cover qualified educational expenses for K-12 tuition expenses. There is no annual limit for college expenses.
5. Explore Deductibility of Traditional IRA Contributions
Traditional IRAs are retirement savings accounts usually comprised of pre-tax contributions, meaning your contributions are placed in your IRA before being taxed, lowering your taxable income for the current tax year. Anyone with earned income is eligible to contribute to an IRA for themselves and their spouses. In 2024, the contribution limit is $7,000, with an additional $1,000 catch-up contribution for those 50 and older. However, the deductibility of these contributions depends on a couple variables: if you’re covered by a retirement plan at work and your annual income. In 2024, if you are covered by a retirement plan at work and your modified adjusted gross income is greater than $87,000 for single filers and $143,000 for those married filing jointly, then any IRA contributions will not be deductible. Of note, IRA contributions can be made until the tax filing deadline, which allows extra time to take advantage of this strategy.
As you can see, understanding and implementing any of these tactics has a significant impact on your taxes and overall financial picture. Prior to implementing any tax strategies, it’s critical to consult with a tax professional or financial advisor to ensure they comply with current tax laws and line up with your overall financial plan. If you are looking for ways to mitigate your taxable income and have any questions on these tax saving strategies, our team at Howe & Rusling would love to help! Thanks for tuning in to Street$marts.
Disclosures: This material is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities or investment products. The information provided is not intended as tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction. All investments carry a certain degree of risk, including the possible loss of principal. The value of investments can go down as well as up, and investors may receive less than they originally invested. Past performance is not indicative of future results. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Howe & Rusling does not provide tax advice. Any tax-related information in this material is for informational purposes only and should not be relied upon as tax advice. Investors should consult with their tax professional for personalized advice. The details provided about retirement plan contributions, including 401(k), 403(b), SIMPLE IRA, HSA, FSA, and IRA accounts, are based on 2024 limits and regulations. These limits are subject to change based on new laws or IRS regulations. Contributions to retirement accounts and the benefits thereof depend on individual circumstances and tax regulations. It is important to confirm current contribution limits and rules with a financial advisor or the IRS. Employer matching contributions to retirement plans may vary by employer and are subject to the specific terms of the employer’s plan. Not all employers offer matching contributions. The eligibility and contribution limits for Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) are determined by current health insurance plans and IRS regulations. Employees should verify their eligibility and understand the specific rules and limitations of their plans. The strategies mentioned in this material should be discussed with a qualified financial advisor and tax professional to ensure they align with your personal financial situation and comply with current tax laws. While Howe & Rusling strives to present accurate and timely information, no guarantees are made as to the accuracy, completeness, or timeliness of the information provided.
