5 Tax Saving Strategies To Lower Your Tax Bill

Top 5 Tax Planning Strategies

by, Jeremy Reif, CRPS

Spring is in the air, and tax forms are showing up in your mail and online databases.  Are you worried about that impending tax bill? You’re not alone. Many individuals find themselves scrambling to find ways to lower their tax bills as the deadline approaches. There are strategies you can implement to potentially reduce your tax burden this year.  We’ll explore some tax planning strategies that could help you keep more money in your pocket.

Traditional Tax Deduction Strategies

One effective way to lower your tax bill is by maximizing your contributions to tax-deductible retirement accounts such as company retirement plans, aka 401(k), and Individual Retirement Accounts (IRAs). One idea is front-loading your yearly contributions, but only if you can afford to do so.  The more standard approach is dollar cost averaging and making contributions throughout the year.

As a reminder, Traditional, Simple and SEP IRAs can be funded up until tax day for the prior year.  This might help reduce your tax bill for the previous year.

Tax-Loss Harvesting

Being proactive and culling on non-qualified portfolios is a valuable strategy for offsetting capital gains taxes. By selling investments that have decreased in value and reinvesting in similar assets, you can realize losses to offset gains. Any remaining losses can be used to offset up to $3,000 of ordinary income, with the option to carry forward excess losses to future tax years.

Qualified Dividends

Did you know that there is a difference between qualified dividends and ordinary dividends?  There are separate lines on your (1040) tax return for this.  Ordinary dividends are taxed at your normal tax rate, while qualified dividends are taxed at capital gains tax rates.  In some cases, the capital gains tax can be as low as zero percent.

Donor Advised Fund

Taxpayers have a much harder time being able to utilize itemized tax deductions these days. They are still an option; it is about finding ways to bunch multiple deductions to qualify, perhaps loading up every other year as an example.  Loading up is another way to say that bunching charitable gifts with a Donor Advised Fund allows you to make a lump-sum contribution and receive an immediate tax deduction.  The most common hesitation is about gifting all of the money at the same time.

Fear not; donor-advised funds allow you to get the tax credit but will hold the money until you tell them to gift it to the qualifying charity of your choice.  This gives you the ability to continue gifting at the same rate as if you had not done the donor-advised fund.

Roth Conversions

Think of paying taxes as a chess match with the IRS.  Your job is to try to minimize your taxes.  Think about this:  The IRS allows you to pass all your assets to your spouse upon passing because they know they will get their money owed.  Eventually, distributions will occur; either the money is needed for income and regular use or forced distributions through Required Minimum Distributions.  If there is a remaining balance at the end of the spouse’s life, the said beneficiary(s) will then have to pay the taxes on the retirement account.  The IRS can wait indefinitely for their taxes owed.

If you do nothing and default on gifting everything to your spouse, the government can, in some cases, claim more taxes.  When the spouse claims all of the traditional retirement assets, the distributions are taxed at their current tax rate.  This assumption is that the spouse does not remarry.  No longer filing taxes under married filing for joint tax returns, but rather single.  The tax bracket is essentially cut in half.

A Roth IRA conversion may offer long-term tax benefits. Electing to pay taxes now rather than in the future.  This is where the real strategy comes into play.  There are many variables to scrape together: income now versus projected income later, and tax brackets now versus unknown tax brackets later.  One thing is for certain: taxes at present are at historic lows, and the nation’s debt has risen sharply.  The citizens of this fine nation are tasked with at least paying the interest that is owed on the nation’s debt. Will this go up or down in the future?  Will this change our taxes, up or down?

Strategies to consider include filling up the remaining portion of your existing tax bracket.  During retirement, utilizing down-income years to help offset all or some of your future RMD’s might help as well.  To watch how to do a Roth conversion, check out this video:

Considerations

Please note: It is crucial to consider potential tax implications and seek professional guidance before proceeding with a conversion.  Tax planning is a proactive approach to minimizing your tax liability and maximizing your savings. By implementing these strategies and seeking guidance from a financial planner and CPA, you can take control of your financial future and potentially lower your tax bill.

Single Filer 2024 Tax Rates

Married filing jointly or qualifying surviving spouse

Sources: https://www.irs.gov/filing/federal-income-tax-rates-and-brackets