As the new year approaches, you may be wondering what you can do to decrease how much you pay in taxes.
Being proactive is important, as many tax planning strategies take some time to implement and may need to be in place prior to the end of your reporting tax year on December 31.
Here are five effective tax strategies that could help lower your 2024 tax bill:
1. Put Money Into Your 401(k) Retirement Plan Contributions for Deductible Savings
Businesses and individuals alike have a lot of tax benefit flexibility in saving with their workplace retirement plans (including ESOPs) and individual retirement accounts. As long as certain requirements are met, contributions to such plans may be deductible if paid by the extended due date of your tax return. With help from a CPA, you can determine the most advantageous deductible contribution in a given tax year.
In 2020, the IRS began allowing individuals to contribute to their traditional individual retirement account (IRA) after the year in which they turn 70 ½; previously, contributions had to cease by that age. Beginning at age 72, individuals must begin to take required minimum distributions (RMDs), the first of which must occur by April 1st of the year after turning 72.
Secure 2.0 established new and improved features to retirement plans, allowing for more flexibility in saving for retirement. Tax credits are also available to eligible employers to offset the costs of setting up a new retirement plan.
2. Properly Recognize Your Entity or Capital Losses
Are you fully utilizing any business or personal losses?
Any pass through entity losses sustained must meet several tests (basis, at risk, and passive loss limitations) in order to be fully utilized to offset other income items. Planning may be necessary to ensure that these tests are satisfied to fully deduct your business losses.
Capital loss harvesting is also an important activity that must take place before year-end, particularly if you have recognized capital gains during the course of the calendar year.
Action must be taken to recognize the capital losses to effectively reduce your tax bill. Capital losses are subject to strict limitations, so we recommend that you reach out to a certified tax expert or CPA to determine the appropriate amount of losses to recognize.
3. Save Tax Money Through Income Shifting
If you own a business through a pass-through entity such as an S corporation, you may be able to achieve tax savings by shifting some income from wages to owner distributions in a process called income shifting. Be cautious, however, as the IRS does require S corporation owners to pay themselves a “reasonable salary.”
If you currently operate as a single-member LLC, there may be some tax savings available if you restructure to an S corporation.
4. Explore Savings With State Tax Deduction Elections
Since the $10,000 cap on state and local tax deductions was imposed by the Tax Cuts and Jobs Act (TCJA), many taxpayers are no longer able to fully deduct the personal and/or business state and local taxes being paid.
However, there are several state tax elections that may allow you to preserve the federal tax benefit. Many states have developed “entity level taxes” which imposes the tax burden on the Flow-through entity, rather than the indirect owners. These structures have converted the income tax expense to a corporate or partnership level tax which is not subject to the $10,000 cap. These state elections can be favorable but should be modeled out as each state’s tax structure and implication to the owners will vary based on the specific facts and circumstances.
5. Save Taxes & Money for College With Strategic 529 Plan Contributions
If you have young children (or grandchildren), you might be looking for a tax-advantaged vehicle to save for college. You can open a plan benefiting anyone: a relative, a friend, or even yourself.
The earnings within your 529 plan will receive preferential savings on federal taxes and are not subject to state tax. Additionally, depending on your state of residency, your current contributions may be eligible for a state tax deduction to reduce your tax bill.
Starting in 2024, 529 account holders will be eligible to transfer a limited amount to a Roth IRA for a beneficiary.
Get More Specific Tax Savings Strategies
The tax planning landscape is continually changing with the release of new tax proposals, adjusted tax brackets, and the sunset of current tax laws.
Contact our Tax Strategies team if you have any questions or would like help implementing the strategies mentioned above.