With fall here, it's a great time to start planning ways to lower your tax bill for this year and next.
Standard vs. Itemized Deductions
First, figure out whether you’ll take the standard deduction or itemize your deductions for 2024. You may not need to itemize because the standard deduction is quite high ($29,200 for joint filers, $14,600 for singles and separate filers, and $21,900 for heads of household). Plus, some itemized deductions have been reduced or are no longer available.
If you do itemize, you can deduct things like medical expenses (if they exceed 7.5% of your income), state and local taxes (up to $10,000), charitable donations, and mortgage interest. But these will only save you money if they add up to more than your standard deduction.
The “Bunching” Strategy
If you want to get more from your deductions, you can try a "bunching" strategy. This means grouping expenses like medical bills or charitable donations into one year to maximize your deductions. For example, if you plan to itemize this year but not next, you could make two years’ worth of charitable donations now.
Other Tax-Saving Tips
Delay (or Accelerate) Income: If you expect to be in a lower tax bracket next year, you might want to delay income until 2025. This can help you qualify for bigger tax breaks like IRA contributions, the Child Tax Credit, and education credits. But in some cases, it might make sense to do the opposite and bring income into 2024 if you expect to be in a higher bracket next year.
Max out your Retirement Contributions: Put as much as you can into your retirement accounts, like a 401(k) or IRA, to lower your taxable income.
Be Mindful of the 3.8% Surtax: If you’re a high earner, be mindful of the 3.8% tax on investment income (like stocks or dividends). The surtax applies if your income is over $250,000 (joint filers) or $200,000 (single filers). The tax doesn’t apply to retirement account withdrawals.
Offset Investment Gains: Sell losing investments to offset gains on winning ones and reduce taxes.
Take Required Distributions: If you’re 73 or older, make sure you take the required withdrawals from retirement accounts to avoid penalties.
Use up Flexible Spending Funds: If you have a flexible spending account (FSA), spend any remaining funds before the end of the year to prevent losing them.
Defer Bonuses: If you’re expecting a bonus and the amount would push you into a higher tax bracket, consider delaying it until early 2025 to avoid higher taxes.
Charitable Donations from IRAs: If you’re 70½ or older, consider making charitable donations directly from your IRA. These won’t count as taxable income and can be beneficial if you don’t itemize.
Gift Money: You can give up to $18,000 per person in 2024 without paying gift taxes. This can help reduce your family's overall tax bill if you give assets to relatives in lower tax brackets.
These are just a few end of the year tax strategies to help you save on taxes. Reach out to your VAAS Tax Consultant if you'd like personalized advice.