Reducing Taxes in 2024: The Ultimate Guide for North Alabama
By: Brian Seay, CFA
The Super Bowl is over. Taylor Swift won. Baseball season is around the corner.
I usually share my pick for “Ad of the Year,” in the tax guide. I thought this year’s ads were weak across the board. But, I’ll pick a winner anyway. My winner is the Dunkin Donuts “Dunkings.” It’s just not Super Bowl Sunday without Tom Brady.
All that means it’s time for our 2024 Tax Guide.
Before we dive into strategies and ideas to reduce your 2023 taxes, it’s important to remember that tax reduction is a long-term game. Smart tax planning is not an annual hunt for deductions. The best ways to minimize taxes long-term are by:
Investing in the right types of accounts (think retirement IRAs, ROTHs, 401ks),
Structuring your business entities appropriately (think S-Corps, Partnerships) and
Managing your taxable income over many years
So if your “tax planning” is reduced to a deduction hunt each March, consider working with your CPA or financial advisor to create a more efficient, long-term tax plan. We would be happy to help!
Like last year, most taxpayers will take the standard deduction (>90%), thus the game of searching for novel deductions each year is over. This is for two reasons. First, the standard deduction was increased through the Tax Cut and Jobs Act in 2017. Second, most deductions now phase out as income increases. Therefore, the value of itemized deductions has declined significantly for higher income taxpayers. So don’t be shocked if the “standard deduction” is right for you.
We divide our 2024 Tax Guide into two sections. The first is tips for reducing your 2023 taxes. The second section covers some of the lmost common long-term tax strategies mentioned above.
Reduce 2023 Taxes:
MAXIMIZE 2023 TAX Credit and DEDUCTIONS:
Child Tax Credit…Don’t Forget Summer Camp: If you have children, you are eligible for a credit up to $2,000 until your income reaches $400,000 ($200,000 if single). You can also get a credit for the cost of daycare, household help and even day camps where children don’t spend the night. You may receive a credit of about 30% of your expenses up to $3,000 for one child or $6,000 if you have more than one child.
Home Mortgage Interest: Home mortgage interest is one of the few deductions that remained after the tax law changes in 2017. However, interest is only deductible on balances below $750,000. As home prices have risen, particularly in large metro areas, more homes are crossing that threshold. The good news is that if you purchased your home before 2018, you are grandfathered in at the old $1,000,000 limit.
Home Office Deduction: If you work from home as a requirement (i.e. not by your own choice) of your employment, then you may be eligible to deduct the cost of your home office. This includes pro-rata portions of mortgage interest, utility bills and depreciation.
Long-Term Care Insurance: Long-term care insurance premiums may be deductible as medical expenses when your total medical expenses are greater than 7.5% of your adjusted gross income. There are limits on the amount of premium that can be deducted, so check with your CPA when you file your taxes.
REDUCE 2023 TAXABLE INCOME:
Open a Heath Savings Account (HSA): If you have “material” medical expenses, which is virtually everyone, then an HSA is a great way to reduce your long-term tax liability. These accounts receive the “tri-fecta” of deductions. The contributions are tax deductible, the account grows tax-free, and distributions for healthcare expenses and some Medicare premiums are not taxed. Even if your medical expenses are not higher than 7.5% of income, an HSA may be a great tax reduction strategy. Similar to retirement accounts, you may still open and contribute to an HSA for 2023 until April 15th 2024.
Retirement Account Contributions: You have until the April tax deadline to contribute to retirement accounts for 2023. If your income was relatively high in 2023, consider making IRA contributions to receive a tax deduction now. However, we caution against doing this blindly every year. If your 2023 income was lower than usual, consider paying taxes now and receiving preferential capital gains tax treatment on future investment gains. Also, lower income years are great opportunities for ROTH conversions to minimize your total long-term tax liability. Remember, the IRS is in it for the long-haul, so you should be too!
Strategies for Reducing Taxes Long-Term:
CONTROLLING INCOME and Taxes:
Regardless of whether you own a business or are a highly compensated employee, you should attempt to control your taxable income. Controlling your income year over year allows you to smooth out years with usually high income that results in higher taxes. Here are a few ways to control taxable income:
Control Business Income: If you are a partner or outright owner of a business in Huntsville, you may be able to influence whether the business pays income, realizes expenses, or sells assets in a given year. Managing your business income alongside your outside income can help lower your long-term effective tax rate and avoid “spikes” that lead to higher tax rates in one-off years. Your advisors should help you manage your total tax picture.
Bunching Charitable Donations: If you normally give to charity each year, consider giving less in one year and substantially more in the next, especially if bunching your donations would allow you to give more than the standard deduction in a one year ($27,700).
Net Investment Income (NIIT): If your Modified Adjusted Gross Income is above $250,000 (married) or $200,000 (single), you may be exposed to the Net Investment Income surtax of 3.8%. This also includes income from S-Corps for business owners if you aren’t meeting thresholds for active involvement. You may consider more active measures to control taxable income if you are hovering right around the NIIT thresholds.
Tax-Loss Harvesting:
You may be thinking, “…but markets were up last year…” It’s unlikely that every single one of your investments increased in value throughout ALL of last year. You should be selling losers to realize losses throughout the year so that you can use those losses to offset gains, even if total returns for the year are positive.
RETIREMENT ACCOUNT STRATEGIES:
We recommend clients have both ROTH and Traditional retirement accounts. You should look to fund ROTH accounts when income is relatively low and traditional accounts in high income years when the deduction is most valuable. Remember, taking a current year deduction and paying a higher rate down the road is not usually beneficial. Like all deductions, IRA deductions phase out as income grows, so discuss your retirement account contributions with your advisor on a regular basis. This is one area you should not “set and forget.”
Remember, if you own a business or are self-employed, you can contribute to your retirement account as both an employee and employer. This may enable you to defer upwards of $60,000 of income in some situations.
CHARITABLE DEDUCTIONS TO PUBLIC (501C3) CHARITIES:
Lastly, the charitable deduction still exists. Our view is that charitable giving should be based on your personal purpose and goals, not simply tax strategy. We hope you will consider being generous to organizations that are doing great work in the Huntsville community and around the world. Whether through your church or other local community organizations, every dollar goes a long way. And remember, not all “charities” are created equal. Private foundations and political organizations have different tax treatments, so ensure your dollars go to a 501(c)3 organization for full deductibility.