Whether you’re a business owner, high earner, or retiree, consider these strategies to reduce taxable income and capital gains taxes to lower your total tax bill in 2024. But don’t sit on these options. Nearly all tax saving strategies must be done before year end.
10 Tax Strategies For 2024
Although not an exhaustive list, here are nine ideas to reduce tax (in no particular order):
- Optimize your investment income
- Max out retirement plans at work
- Make a tax-deductible IRA contribution
- Retirement income planning
- Stock option/equity compensation tax planning
- Give stocks to charity with a donor-advised fund
- Harvest losses
- Plan distributions from an inherited IRA
- Reduce taxes on business income with retirement plans
- Donate your RMD
Optimize Investment Income
Consider if you: have investments outside of retirement accounts.
In taxable (non-retirement) accounts, investors pay tax annually on dividends, interest, and capital gains (from sales and distributions from mutual funds). So all else equal, putting income-producing assets like bonds to retirement accounts can yield tax savings. There are caveats to be aware of, though.
For example, tax exempt municipal bonds (from federal income tax and possibly state tax too) and tax-efficient funds generally don’t belong in retirement accounts. Further, Treasurys are free from state and local taxes. And keep in mind that dividends are taxed in two ways: ordinary income (regular dividends) and under more favorable long-term capital gains tax rates (qualified dividends).
Consider the tax efficiency and possible tax advantages in your investments when deciding how to allocate across your portfolio of taxable and tax deferred accounts.
Max Out Your 401(k), 403(b), Or Employer Plan To Lower Income Taxes
Consider if you: have a tax deferred retirement plan at your job or company.
In 2024, the limit for individuals to reduce taxable income by saving in a 401(k) or 403(k) is $23,000. Over age 50? You can put away another $7,500. You can’t defer more than you earn each pay period, so if you’re not on track to maximize pre-tax contributions, do this now. For many workers, this is one of the biggest tax benefits they have.
Although there’s no tax deduction, workers can also consider the mega backdoor Roth strategy. Funds converted to a Roth grow tax-deferred and in retirement you’ll enjoy tax free withdrawals.
Make A Tax-Deductible IRA Contribution
Consider if you: qualify to make a pre-tax traditional IRA contributions.
Although this option isn’t available to most high income earners, for those who can make a deductible traditional IRA contribution, it’s worth considering.
In 2024, if you have access to a workplace retirement plan, you can make a pre-tax IRA contribution if your income is at or below $77,000 (single) or $123,000 (married). Without an employer plan, single filers at any income can contribute pre-tax and married couples can make a fully deductible contribution is income is $230,000 or less.
Contribution limits are $7,000 or $8,000 if age 50 and up. If you earn slightly more than the limits you may be able to do a partially deductible contribution
Warning: due to the very high risk of paying tax twice, we typically advise against non-deductible IRA contributions.
Planning Retirement Withdrawals Around Tax Rates
Consider if you: have tax-diversified pool of assets to draw down in retirement.
The required minimum distribution age is currently 73. But it may be advantageous to start tapping retirement accounts early. One way is to consider ongoing Roth conversion while in a lower tax bracket, drawing on a taxable brokerage account, or a blend of each.
Roth conversions are very flexible so it’s possible to only convert enough to fill up the current marginal tax bracket. Also consider taking profits from taxable accounts to fill up the 0% capital gains tax bracket. In 2024, married couples filing jointly can have income up to $94,050 and pay 0% on long-term capital gains.
Tax Planning For Stock Options And Equity Compensation
Consider if you: have stock options or restricted stock.
Depending on several factors, perhaps most notably the spread between your exercise price and the current value of the shares, the tax impact (ordinary income or possibly alternative minimum tax) can be huge.
One way to manage AMT is to use the calendar year to your advantage. If you exercised incentive stock options at the beginning of the year and the stock price has fallen, it may make sense to do a disqualifying sale before the end of the year to avoid AMT. Alternatively, work with your tax advisor to calculate what your alternative minimum tax liability would be if you exercised now and held the shares.
For some early employees, one potential tax planning opportunity is an early exercise of stock options. Also common with restricted stock, properly filing an 83(b) election can be instrumental to reduce your taxable income from the purchase (perhaps to zero), in favor of long-term capital gains tax rates later on. And we can’t forget about the potential for startup employees to sell stock tax free using Section 1202.
There’s a lot to consider with equity compensation. And with blackout periods around earnings, you may not have much time to get a plan in place.
Donate Appreciated Stock Using A Donor-Advised Fund
Consider if you: are charitably inclined and have appreciated assets in non-retirement accounts.
When you make an irrevocable charitable donation to a donor-advised fund, you receive an immediate federal tax deduction for the fair market value of the asset. Why donate stocks? Giving away appreciated ETFs, mutual funds, or stocks enables you to avoid triggering significant capital gains upon the sale of the security. So there’s more left for charitable contributions.
Individuals experiencing a windfall after selling a business or from stock options after an IPO may also want to consider this strategy in high tax years.
To benefit from this tax planning strategy, the taxpayer must itemize tax deductions (consider bunching charitable donations in one year if you usually take the standard deduction). A charitable deduction may be taken for the full fair market value of the asset, up to 30% of adjusted gross income. There is a five-year carry forward for unused deductions. Only long-term securities are eligible, which includes cash.
Harvest Losses
Consider if you: have unrealized losses in a taxable account and a large taxable gain.
If you have a large taxable gain one year, it may be worthwhile to consider if you have any losses to reduce the tax impact. To estimate possible tax savings, first net short-term gains and losses and long-term gains and losses separately. Then, net the resulting short and long-term figures. This gives you a combined net short or long-term gain or loss.
A net loss for the year can be deducted against your regular income up to $3,000. Any remaining losses over this limit can be carried forward to future years. Beware of wash sale rules.
Tax-loss harvesting doesn’t make sense in every situation. The strategy is often most advantageous when there are other reasons to sell the security, other than for tax purposes.
Planning Distributions From An Inherited IRA
Consider if you: inherited a retirement account from a parent, friend, or non-spouse relative.
Starting in 2020, most beneficiaries who inherit a retirement account from a parent or relative can no longer ‘stretch’ the distributions over their lifetime by taking required minimum distributions (RMDs).
Instead, they must take the funds in 10 years – or earlier. The change won’t impact anyone who inherited a retirement account during 2019 or years prior. But if the account owner was taking required minimum distributions (RMDs) when they died, then the beneficiary must too.
Look at your income tax rates each year and consider taking more than the minimum amount when you may be in a lower tax bracket. Even if you aren’t in a low tax rate, it can still reduce tax overall by avoiding taking a huge taxable distribution in one year at the highest tax brackets.
Reduce Taxes on Business Income With A Retirement Plan
Consider if you: are a business owner.
Whether you’re a solopreneur, small business owner, or working on a side hustle, there’s a retirement plan for you. One of the best ways to lower taxable income is with a retirement plan. If you have employees, you may need to contribute to their accounts too, so discuss with a retirement plan specialist.
Especially for high earners, the ability to lower your tax burden by reducing business income is significant. The 2024 total funding limit (all sources) for SEP IRAs, Solo or traditional 401(k)s is $69,000. In 401(k) plans, individuals age 50+ can make an extra $7,500 pre-tax catchup contribution.
Donate Your Required Minimum Distribution
Consider if you: are 70 1/2 or older with pre-tax retirement money and charitable intent.
Many retirees don’t know they can donate all, or a portion of, their required minimum distribution (RMD) directly to charity using a qualified charitable distribution. Recent tax law made a disconnect between when RMDs start (now 73) and when QCDs are permitted (still 70 1/2).
A check is sent directly from the IRA to the charity you elect. This allows the donor to exclude the gift from taxable income in lieu of charitable deductions.
The annual QCD limit is indexed to inflation. In 2024, the limit is $105,000 per account owner. The limit can exceed the annual required minimum distribution.
More Ways To Reduce Taxable Income
No one likes paying taxes. The best way to lower your tax bill depends on your individual goals and circumstances, which is why it’s important to work with a tax professional and financial advisor. After all, this list is hardly exhaustive. Estate planning and trust techniques, state income tax planning, non-qualified deferred compensation plans, health savings account, and a flexible spending account are just a few strategies that could further your objectives and offer significant tax savings under the right circumstances.
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