9.3 C
New York
Tuesday, March 5, 2024

How Can I Protect My Income From Taxes in 2024?

How Can I Protect My Income From Taxes in 2024?


A woman looks at how much money she saved after using a tax-saving strategy.

Although you can’t avoid taxes, the IRS allows you to reduce your tax burden by combining deductions and tax credits. Here are nine common tax-saving strategies to protect your wealth.

A Financial Advisor can help you optimize your investment portfolio to reduce your taxes.

Aim for long-term capital gains

Long-term capital gains are profits from the sale of assets held for more than one year. Tax rates for long-term capital gains are generally lower than those for short-term capital gains, providing an opportunity for tax efficiency. For example, a single filer earning $95,000 in 2024 will pay a long-term capital gains rate of 15%. On the other hand, their tax rate for standard income and short-term capital gains are 22%.

To qualify for long-term capital gains treatment, you must hold an asset for more than one year before selling it. Additionally, your income level determines your capital gains tax rates. Therefore, it is advisable to sell investments to realize gains in years when your overall income is lower, which could result in a lower tax rate.

Harvesting tax losses can also help reduce your tax bill. Specifically, the U.S. tax code allows capital losses to offset capital gains. This means you can deduct up to $3,000 in capital losses in excess of capital gains. So if you sell assets for less than you bought them for, the loss can reduce your taxable income and potentially your overall tax rate.

Maximize Retirement Accounts

Contributing pre-tax dollars to retirement accounts can reduce taxable income while building a nest egg for the future. Popular retirement accounts serving this purpose include 401(k)s And Traditional IRAs.

You can reduce your taxable income each year by contributing to traditional retirement accounts. Specifically, you can contribute $7,000 to an IRA in 2024 or $8,000 if you’re over 50. Likewise, you can contribute $23,000 to your 401(k) in 2024 or $30,500 if you’re over 50.

Taking advantage of one or both accounts can reduce your taxable income by tens of thousands of dollars. If your employer provides a 401(k) and you open an IRA, you could reduce your taxable income by $30,000 if you are under 50.

Additionally, 401(k)s and IRAs offer tax-deferred growth. This way, you will not have to pay taxes each year for the amount accumulated in your accounts. Instead, you’ll pay income taxes when you withdraw the money.

Invest in Municipal Bonds

State and local government problem municipal bonds to finance public projects, such as schools and infrastructure. Investors buy these bonds and then receive principal and interest from the government over time. In essence, municipal bond investors make a loan to municipalities and profit from the interest payments. Fortunately, most municipal bond interest is exempt from federal income taxes, giving you a tax-free federal income stream. The downside is that municipal bond interest rates may be lower than other investments.

Fund a health savings account

Health Savings Accounts (HSA) are tax-advantaged accounts linked to highly deductible health plans. If your employer offers a high-deductible health insurance plan (or you have your own high-deductible plan), you can contribute to an HSA and withdraw from the account to pay for medical expenses.

Your HSA contributions are made pre-tax, just like your 401(k). Your funds also grow tax-deferred, and your employer could even match a portion of your deposits. Withdrawals are tax-free if you use the funds to pay for medical care and other qualified expenses.

Like IRA and 401(k) contributions, your HSA has an annual limit. Specifically, individuals can contribute $3,850 and families can contribute $7,750 in 2023. The figures for 2024 are $4,150 for individuals and $8,300 for families.

Claim tax credits

A man looks at how much he could save by claiming tax credits. A man looks at how much he could save by claiming tax credits.

A man looks at how much he could save by claiming tax credits.

Tax credits directly reduce your tax liability, providing a dollar-for-dollar reduction in the amount of taxes you owe. You may be eligible for the following:

  • Child tax credit: Families with qualifying children may be eligible for the child tax credit. You’ll get up to $2,000 in credit for each dependent under 17 years old.

  • Child and dependent care credit: If you pay for the care of a dependent adult or a child aged 13 or younger, you can claim this credit. You can receive up to 20% to 35% of your child care costs, with a maximum of $3,000 for one dependent and $6,000 for two or more.

  • Earned Income Tax Credit (EITC): The EITC reduces the tax burden on low-income families. The more children you have, the higher the benefit. For example, eligible families with three or more children in 2024 will receive $7,830, while eligible families with one child will receive $4,213.

Contribute to a 529 plan

A Plan 529 is a tax-advantaged savings plan for future education expenses. It’s like a 401(k) in that the earnings are tax-deferred, but they fund education instead of retirement. Contributions to a 529 plan are not federally tax deductible, but earnings grow tax-free if used for qualified education expenses. Additionally, contributions may be tax deductible in some states.

Donate to charity

Giving to a registered 501(c)(3) charity can also reduce your taxes. Money and items count toward this deduction. Concretely, you can deduct between 20% and 60% of your adjustable gross income in charitable donations, depending on your situation. Remember that it is necessary to itemize your deductions to benefit from this tax advantage.

Look for state and local tax breaks

Beyond federal taxes, explore tax breaks offered by your state and local governments. For example, more than 30 states offer pass-through tax benefits to small business owners. Additionally, New York City residents receive a parking tax waiver, and New Jersey residents can deduct medical expenses above 2 percent of their adjustable gross income.

Some states also have a 0% income tax rate. If you live in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming, you won’t pay any income tax. Similarly, New Hampshire does not tax earned income, but it does tax interest and dividends (although this is currently being phased out).

Make your home energy efficient

Investing in energy efficient improvements for your home can result in tax credits and long-term cost savings. The Inflation Reduction Act of 2022 provides a tax break of up to $3,200 through 2032 for heat pumps, energy-efficient windows and doors, and improved insulation. Additionally, the Home Clean Energy Credit provides a tax benefit equal to 30% of the cost of solar panels, wind and geothermal energy, and fuel cells/battery storage.

Conclusion

A taxpayer itemizing deductions for the tax year.A taxpayer itemizing deductions for the tax year.

A taxpayer itemizing deductions for the tax year.

Adopting strategic financial practices can significantly mitigate the impact of taxes on your income. Even if you take the standard deduction, you can benefit from most of the items listed above. Remember, retirement savings offer one of the largest tax deductions available. Working with a tax professional can help you optimize your taxes and keep as much of your hard-earned money as possible.

Tips for Protecting Income from Taxes

  • A Financial Advisor can help you optimize your investments to reduce your tax liability. The free SmartAsset tool connects you with up to three licensed financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one seems best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.

  • Higher income can result in higher tax rates. here are the most vulnerable areas where high earners lose money in taxes.

Photo credit: ©iStock/Thicha Satapitanon, ©iStock/Liubomyr Vorona, ©iStock/pixdeluxe

The post office Strategies to protect income from taxes appeared first on SmartReads by SmartAsset.



Source link

Latest stories