Understanding Tax Planning 01
Standard Deduction vs. Itemized Deductions 02
Standard Deduction:
The IRS adjusts the standard deduction annually to reflect inflation. For 2024, the deduction rates are as follows:
- Single: $13,850
- Married, Joint Filing: $27,700
- Married, Separate Filing: $13,850
- Head of Household: $20,800
Standard deductions are simpler but may not offer the maximum tax benefit for all taxpayers. Itemizing can be advantageous if eligible deductions exceed the standard deduction amount. CPAs should evaluate each client's circumstances to decide the best approach.
Key Tax Planning Strategies 03
01. Maximize Retirement Contributions
Increasing contributions to retirement accounts can reduce taxable income, especially for those with higher incomes. Here’s how to make the most of retirement contributions:
- 401(k) Plans: Individuals under 50 can contribute up to $22,500 in 2024. Those over 50 can make an additional $7,500 in catch-up contributions.
- IRA Contributions: Individuals can contribute up to $6,500 ($7,500 if over 50) to a traditional IRA, which may be tax-deductible depending on income level and participation in employer-sponsored plans.
- Roth IRA Conversions: For those expecting higher tax rates in the future, converting a traditional IRA to a Roth IRA may offer significant tax savings by paying taxes now at potentially lower rates.
02. Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)
Tax-advantaged health accounts offer another way to reduce taxable income while covering medical expenses. For 2024, HSA contribution limits are:
- Individual: $4,150
- Family: $8,300
- Catch-Up (55 or older): Additional $1,000
Funds in HSAs grow tax-free and roll over each year, unlike FSAs, which have a use-it-or-lose-it policy. Encourage clients to maximize HSA contributions if they have a high-deductible health plan and monitor FSA balances closely to avoid forfeiture.
03. Charitable Contributions
Charitable giving offers tax benefits, especially for individuals who itemize. As of 2024, taxpayers can deduct cash donations up to 60% of their adjusted gross income (AGI). Consider the following to maximize charitable deductions:
- Donor-Advised Funds (DAFs): Setting up a DAF allows individuals to make a large, tax-deductible donation in one year while distributing funds to charities over time.
- Qualified Charitable Distributions (QCDs): Individuals over 70½ can make direct transfers from IRAs to charities, reducing taxable income without affecting itemized deductions.
04. Capital Gains and Losses Management
Individuals can reduce taxable income by strategically managing investment gains and losses. Strategies include:
- Harvesting Losses: Selling investments at a loss can offset capital gains, reducing overall tax liability.
- Deferring Gains: Postponing the sale of high-performing assets until the next tax year can help individuals manage income and potentially fall into a lower tax bracket.
- 1031 Exchanges: For real estate investors, deferring capital gains through a 1031 exchange allows reinvestment in like-kind property without immediate tax consequences.
05. Timing Income and Expenses
Managing the timing of income and expenses allows individuals to control their taxable income more effectively. Here are some strategies:
- Bonus Deferral: For those in high-income brackets, deferring end-of-year bonuses until January can reduce the current year’s tax liability.
- Medical and Charitable Deductions: By bunching deductible expenses like medical bills and charitable contributions into a single tax year, individuals may benefit more from itemizing.
06. Consider the Net Investment Income Tax (NIIT)
For individuals with significant investment income, the NIIT applies an additional 3.8% tax on net investment income if their AGI exceeds certain thresholds ($200,000 for single filers, $250,000 for joint filers). Here’s how to reduce NIIT:
- Adjusting AGI: Maximizing retirement contributions and adjusting investment timing can help manage AGI levels.
- Qualified Dividends and Long-Term Gains: Favor investments that yield qualified dividends or long-term gains, as these are generally taxed at a lower rate.
Let’s Get Started
When it comes to your accounting, tax, finance advisory,
you should join hands with a partner you trust.
Documentation and Record-Keeping Essentials 04
- Three Years: Standard retention for income tax returns.
- Six Years: For individuals who underreport income by more than 25%.
- Seven Years: For losses on “worthless” securities or bad debt deductions.
Encourage clients to organize records under categories such as income, deductions, homeownership, investments, and retirement accounts to simplify tax filing.
Why Early Planning Matters 05
Consider Professional Assistance
Ready to simplify your tax planning?
