There’s still time to reduce your taxes or boost your refund for 2024. Find out how you can do that!
With 2024 upon us, taking proactive steps to reduce your taxes can help save money and better position you financially. Whether you’re aiming to maximize deductions, strategically manage investments, or take advantage of tax credits, there are many ways to legally reduce your 2024 taxes. So, let’s talk about them!
1. Maximize Retirement Contributions
Contributing to a retirement account like a 401(k) or a Traditional IRA is one of the most effective ways to lower your taxable income. Contributions to traditional retirement accounts are tax-deferred, meaning you won’t pay taxes on the money until you withdraw it, often after you retire. This strategy lowers your current taxable income, possibly pushing you into a lower tax bracket, which could reduce the overall tax you owe. By contributing up to the maximum limit, you can reduce your taxable income for 2024. In 2024, the IRS limits for 401(k) contributions are $23,000 if you’re under 50 and $30,500 if you’re 50 or older, thanks to a $7,500 catch-up contribution allowance for older workers.
2. Leverage Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) allow you to set aside pre-tax dollars to pay for eligible medical expenses. You can deduct your contributions from your taxable income, and withdrawals used for qualified medical expenses are tax-free. HSAs, in particular, have the added benefit of being a portable account that rolls over from year to year, making it an excellent long-term tax-saving strategy. An HSA, available for those with high-deductible health plans, allows contributions up to $4,150 for individuals or $8,300 for families in 2024. FSAs, on the other hand, have lower limits but still offer a way to reduce taxable income.
3. Claim Education-Related Credits
Education tax credits, such as the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC), are valuable for individuals or families paying for college or other qualifying educational expenses. These credits directly reduce the amount of tax you owe rather than just reducing taxable income. While deductions lower taxable income, credits lower the tax liability dollar for dollar, which can make a significant difference in your final tax bill. The AOTC allows a credit of up to $2,500 per eligible student, while the LLC offers up to $2,000 per tax return.
4. Take Advantage of Energy-Efficient Home Improvements
The Inflation Reduction Act has extended tax credits for making energy-efficient home improvements. Not only do energy-efficient improvements save on utility costs, but they can also lower your 2024 tax bill through credits. The Residential Clean Energy Credit and the Energy Efficient Home Improvement Credit allow you to deduct a percentage of improvement costs directly from your tax bill, maximizing savings. You can claim up to 30% of costs for eligible home upgrades like solar panels, energy-efficient windows, and home battery storage.
5. Use Charitable Contributions Wisely
Charitable contributions to qualified organizations can be deducted if you itemize your deductions. When you donate appreciated stocks or property, you avoid paying capital gains tax on the appreciated amount while still deducting the fair market value as a charitable contribution. This double benefit can reduce taxable income while also aiding causes you support. Ensure that your charitable organization is qualified for tax-deductible contributions, as listed on the IRS website. Donations can be in cash, goods, or even investments, and each type of donation offers specific tax benefits.
6. Consider Tax-Loss Harvesting for Investment Portfolios
Capital gains from investments are subject to taxes, especially for those in higher tax brackets. Tax-loss harvesting is a strategy where you sell investments at a loss to offset capital gains from other investments. By selling underperforming investments at a loss, you can offset these gains and reduce your taxable income. Losses can be used to offset up to $3,000 in non-investment income as well, giving further tax relief.
7. Maximize Deductions for Self-Employed Individuals
If you’re self-employed or run a small business, you have additional tax-saving opportunities. The Qualified Business Income (QBI) deduction allows certain pass-through entities to deduct up to 20% of their qualified business income, lowering taxable income significantly. This deduction applies to a range of self-employed professionals, such as freelancers, contractors, and small business owners, and can drastically reduce their tax liabilities. Beyond QBI, self-employed individuals can deduct business-related expenses like office space, utilities, and professional services.
8. Defer Income to Lower Current Year Taxable Income
If possible, deferring income to the following tax year can reduce your tax burden for 2024. For example, you could delay end-of-year invoices or bonus payments until early 2025. Deferring income may be advantageous if you expect to be in a lower tax bracket next year. This strategy also provides more time to plan and execute additional tax-saving moves before the higher income becomes taxable.
9. Organize and Maximize Itemized Deductions
When itemized deductions are higher than the standard deduction, they provide a greater reduction in taxable income. If you find that your itemized deductions exceed the standard deduction for 2024 ($14,600 for single filers and $29,200 for joint filers), it makes sense to itemize. Mortgage interest, property taxes, state and local taxes, medical expenses, and charitable donations can all be itemized. Bundling deductions (for example, making charitable contributions every other year) can also maximize their impact, especially if some years you wouldn’t reach the itemization threshold.
10. Take Advantage of Child Tax Credits and Earned Income Tax Credit (EITC)
Families with children or low to moderate incomes can benefit from credits like the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC). These credits are valuable because they apply to your tax bill dollar for dollar, unlike deductions. They also phase out at higher income levels, so it’s advantageous for qualifying families to maximize them if eligible. The CTC allows eligible parents to claim up to $2,000 per qualifying child under 17.