Tax Planning: Minimizing Your Tax Burden
Introduction
Tax planning is the art of tax and finance nerds. The goal of tax planning is to minimize the amount of taxes you pay by examining tax laws and strategizing.
Retirement Contribution
To begin, one of the most strategic ways to reduce your taxable income is to max out your retirement accounts. In 2024, the contribution limit is $7,000. Consider that someone made $50,000 a year and contributed $7,000 to a traditional IRA. Their adjusted gross income would become $43,000 on which they would be taxed. The money they contributed would then grow tax-deferred until withdrawn.
Tax Loss Harvesting
Tax loss harvesting is another tax planning strategy that involves investments. The goal is to use your portfolio’s losses to offset capital gains. Imagine an individual who had $10,000 in long-term capital gains. There would be a tax liability according to what tax bracket they fall into. If they decided to sell underperforming assets carrying $10,000 in long-term capital losses, the losses would offset the gains, and the tax liability would be 0.
Maximizing Deductions
Deductions include certain categories of outflowing money that can be subtracted from your gross income to lower the amount of your income that is taxed. This could be student loan interest, mortgage interest, contributions to retirement or health savings accounts, medical expenses, or charitable contributions. It is important to pay attention to tax brackets and the standard deduction, especially in years when the standard deduction is higher, or years that the tax brackets have widened. The more you can deduct from your income and the lower tax bracket you can fall into, the more tax relief you will find.
Roth Conversions
Converting the pre-tax savings in a Traditional IRA to a Roth IRA will allow you to reap tax-free withdrawals in retirement. This strategy is helpful for entrepreneurs, or anyone who has uneven income streams. During years of lower income there is a tax advantage, because more shares can be converted for the same amount and same potential tax bill.
Charitable Contributions
These contributions are great for lowering your adjusted gross income. For anyone over the age of 72 who is taking a Required Minimum Distribution, you can direct these funds to pay to a qualified charity. This is helpful if you do not need the additional income but want to lower your tax bill.
Conclusion
Taking the time to learn these strategies yourself or consulting a professional to help you is worth the time and investment. You never know how much money you can save with a little bit more knowledge about tax laws and planning strategies.
Matt’s Corner
