Introduction to Last-Minute Tax Savings
As the year comes to a close, many of us scramble to find ways to reduce our tax bills before the deadline. While some of us may have missed the window for certain strategies, there are still opportunities to save on taxes before filing. Consulting with a CPA can provide valuable insights into the best steps to take. In this case, CPA Emily Luk shared four key strategies to lower the 2024 tax payment, emphasizing the importance of contributing to retirement accounts, reviewing deductions, and exploring tax-loss harvesting. These tips not only highlight the importance of proactive financial planning but also offer hope for those who may have fallen short of their financial goals earlier in the year.
Maximizing Retirement Contributions: SEP IRA
One of the most effective ways to reduce taxable income is by contributing to a SEP IRA (Simplified Employee Pension Individual Retirement Account). According to Luk, individuals can contribute up to 25% of their total compensation or a maximum of $69,000 for the 2024 tax year. For those who have been inconsistent with their SEP IRA contributions, now is the time to catch up. By contributing more to the SEP IRA, individuals can lower their taxable income, thereby reducing their overall tax bill. For example, contributing $5,000 to a traditional or SEP IRA means only $50,000 of income is taxed if the total income is $55,000. Additionally, the money within the IRA grows tax-deferred until retirement, offering dual benefits of tax savings and retirement security.
However, this strategy requires careful financial planning. Individuals should assess their current financial situation to determine how much more they can realistically contribute. For those who can afford to contribute an additional 5% of their income, this could significantly lower their tax liability. It’s essential to ensure that these contributions align with overall financial goals and retirement planning.
Health Savings Account (HSA) Contributions
Another strategy to reduce taxable income is by contributing to a Health Savings Account (HSA). Similar to a SEP IRA, contributions to an HSA are tax-deductible, and the money in the account grows tax-free. For the 2024 tax year, individuals can contribute up to $8,300 for family coverage, making this a valuable option for those who have not yet maxed out their contributions. However, HSA contributions must be made by the tax filing deadline, which is typically April 15th. For those who have not yet reached their contribution limit, this presents an opportunity to reduce taxable income while also setting aside funds for future medical expenses.
Reviewing Deductions: Standard vs. Itemized
While many people opt for the standard deduction, it’s crucial to evaluate whether itemizing deductions might yield greater savings. The standard deduction for single filers is $14,600, and $29,200 for married couples filing jointly. If the sum of itemized deductions exceeds these amounts, it makes financial sense to itemize. Common deductions include mortgage interest, property taxes, charitable contributions, and medical expenses. For those who have not yet tallied their deductions, now is the time to do so. Spending the necessary time to audit deductions can lead to significant tax savings, making it a worthwhile investment of time and effort.
Tax Loss Harvesting: Turning Losses into Savings
For individuals with investment portfolios, tax loss harvesting can be a valuable strategy to reduce taxable income. By selling investments that have declined in value, individuals can deduct up to $3,000 of losses against their taxable income. While the deadline for such transactions was December 31, 2024, this strategy remains relevant for future tax planning. For those who sold stocks at a loss during 2024, it’s important to ensure these losses are accounted for in the tax return. This approach not only offsets capital gains but also provides a tax benefit for investment losses, making it a smart way to minimize the tax burden.
The Importance of Financial Planning and Professional Advice
While the strategies outlined above offer significant tax savings, they also highlight the importance of proactive financial planning. Many individuals miss out on these opportunities due to lack of knowledge or time constraints. Working with a CPA or financial advisor can help individuals make informed decisions and ensure they are taking full advantage of available tax-saving strategies. Additionally, services like SmartAsset’s free financial advisor matching tool can connect individuals with fiduciary advisors who can provide personalized advice tailored to their specific financial situations.
In conclusion, while it’s easy to miss out on tax-saving opportunities during the year, there are still steps that can be taken before filing taxes to reduce the 2024 tax bill. Whether through retirement contributions, HSA contributions, reviewing deductions, or tax loss harvesting, these strategies offer tangible ways to lower taxable income and save money. By taking the time to assess financial situations and seek professional advice, individuals can make informed decisions that benefit their long-term financial health.
