The tax season ends on April 5 every year and is a stressful time for most as the tax laws in the US are continuously changing. While some of the taxation strategies from last year may still be valid, others have undergone some changes that you must stay informed about.
Being proactive in tax planning and tax preparation and reviewing your finances and tax obligations helps you and your family stay on top of how to reduce taxable income and even keep more of your hard-earned money. In this blog, you will learn the ten best ways to reduce income tax in 2024.
Table of Contents
- Contributing to Your HSA
- Harvesting Your Investment Losses
- Opening a Flexible Spending Account (FSA)
- Paycheck Withholdings
- Making Charitable Contributions
- Maximizing Your Tax Credits
- Maximizing your business expenses
- Save Tax Money as You Save for Your Retirement
- Setting Up a College Fund for Your Children
- Time your expenses to bundle deductions Frequently Asked Questions
10 Best Ways to Reduce Income Tax in 2024
You can reduce your income tax in 2024 by contributing to your high-deductive Health Savings Account (HSA). You have time until the tax deadline to make these contributions and apply them to last year’s tax spending.
Investment losses can offset capital gains, allowing you to lower your taxable income by up to $3,000 (or $1,500 for married individuals filing separately) with a net capital loss. If the net capital loss exceeds this amount, you can carry it forward to later tax years.
Ensure you sell underperforming investments because you genuinely want to divest from them. Remember that violating wash sale rules, which disallow losses for tax purposes, occurs if you repurchase substantially similar stock or securities within 30 days.
Ensure you sell underperforming investments because you genuinely want to divest from them. Remember that violating wash sale rules, which disallow losses for tax purposes, occurs if you repurchase substantially similar stock or securities within 30 days.
You must utilize funds allocated to a Flexible Spending Account (FSA) must be utilized for eligible medical expenses within the same tax year; otherwise, the funds are forfeited. Contrary to a common misconception, a high-deductible health plan is not a prerequisite for contributing to an FSA. Similar to an HSA, contributions to an FSA can reduce your taxable medical income for the year.
In 2023, individuals received an average tax refund of $2,753, reflecting a growth of over 7%, equivalent to approximately $229 per month. However, failing to withhold sufficient taxes from your paycheck may result in owing money and potentially incurring penalties.
You can adjust your payroll tax withholdings at any time, and the IRS tax withholding calculator can assist with this; consult your tax planner for guidance.
In 2023, individuals received an average tax refund of $2,753, reflecting a growth of over 7%, equivalent to approximately $229 per month. However, failing to withhold sufficient taxes from your paycheck may result in owing money and potentially incurring penalties. When itemizing your expenses on your tax return in 2024 in 2024, you can deduct charitable contributions as a tax deduction. This deduction applies to cash contributions and donated goods or services, for which it is essential to retain receipts if you intend to claim the charitable contributions.
Generally, the deduction for charitable contributions is capped at 60% of your adjusted gross income (AGI).
You can adjust your payroll tax withholdings at any time, and the IRS tax withholding calculator can assist with this; consult your tax planner for guidance.
When itemizing your expenses on your tax return in 2024 in 2024, you can deduct charitable contributions as a tax deduction.
This deduction applies to cash contributions and donated goods or services, for which it is essential to retain receipts if you intend to claim the charitable contributions.
Generally, the deduction for charitable contributions is capped at 60% of your adjusted gross income (AGI).
If you want to know the ways to reduce taxable income in 2024, tax credit is an excellent place to start. For instance, if you qualify for a $2,000 tax credit, it will reduce your tax bill bill by the same amount. Some of the most common tax credits that may benefit you include the following:
- American Opportunity Tax Credit
This tax credit is worth up to $2,500 for any qualified higher education expenses paid in the first four years of your higher education.
- Child Tax Credit
This tax credit is worth up to $2,500 for any qualified higher education expenses paid in the first four years of your higher education.
- Child and Dependent Care Credit
This tax credit helps cover expenses when you pay someone to look after your qualifying dependent or child so you and your spouse can continue to work. You can claim up to 35% of your caretaking expenses. This tax credit is up to $3,000 for one dependent or $6,000 for two or more qualifying dependents.
- Earned Income Tax Credit
Are you on a low-to-moderate income? You can claim an earned income tax credit based on your income and the number of qualifying children.
- Lifetime Learning Credit
You can get a credit of up to $2,000 for any qualified tuition and related costs.
Suppose you operate a small business or engage in a side hustle where you report income or loss on Schedule C, Profit or Loss from Business, of Form 1040. In that case, U.S. Individual Income Tax Return makes sure that you maximize your business expenses.
This will allow you to have access to specific and advantageous business expense deductions. Deductible expenses include:
- Home office expenses
- Vehicle expenses
- Business loan interest
- Qualified business income
401(K) Contributions
Roth 401(K)
Traditional IRA
Roth IRA
With a Roth account, taxes are incurred in the present year, offering a potential tax advantage in the future. Contributions can be withdrawn at any time without incurring taxes or penalties.
Moreover, after keeping the account active for five years, you can withdraw earnings without facing taxation. However, the penalty-free withdrawal of earnings is only applicable once you have reached the age of 59½.
Some employers offer a dependent care FSA, specifically designed to cover daycare, preschool, and elder care expenses, facilitating your ability to work. It’s crucial to adhere to the IRS’s precise regulations governing each account type, ensuring proper and compliant utilization of your FSA.
A 529 plan, commonly referred to as a qualified tuition program, enables the payment of eligible higher education expenses at an eligible educational institution. Moreover, you can allocate up to $10,000 annually for K-12 expenses at an elementary or secondary public, private, or religious school.
While contributions are not tax-free, earnings accumulate tax-free and can be withdrawn without taxation when utilized for qualified purposes.
If you expect a tax-deductible expense in the near future, try consolidating as many of them as possible within the current year. Most expenses must be settled before December 31 to be eligible for claiming on the current year’s tax return.
Consider paying property taxes in advance or scheduling a costly surgery before December 31. This strategy may empower you to bundle adequate expenses, facilitating itemized deductions and potentially reducing your tax bill.
Consider paying property taxes in advance or scheduling a costly surgery before December 31. This strategy may empower you to bundle adequate expenses, facilitating itemized deductions and potentially reducing your tax bill.
If you expect a tax-deductible expense in the near future, try consolidating as many of them as possible within the current year. Most expenses must be settled before December 31 to be eligible for claiming on the current year’s tax return.
Consider paying property taxes in advance or scheduling a costly surgery before December 31. This strategy may empower you to bundle adequate expenses, facilitating itemized deductions and potentially reducing your tax bill.
Frequently Asked Questions
The IRS calculates your tax liability based on your income, tax filing status, adjustments, deductions, and credits. Locate your tax liability on line 24 of Form 1040.
Your tax filing status and age determine the minimum income amount. For instance, in 2023, individuals under the age of 65 with a single filing status have a minimum income threshold of $12,950. If your income falls below this threshold, there is generally no requirement for you to file a federal tax return.
For 2023 and 2024, there are seven federal income tax rates and brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your taxable income and filing status dictate the federal tax rates applicable to you and the corresponding amount of taxes you will owe in that year.
The IRS considers inheritances, gifts, cash rebates, alimony payments (for divorce decrees finalized after 2018), child support payments, most healthcare benefits, welfare payments, and money reimbursed from qualifying adoptions as nontaxable.
A tax deduction decreases your taxable income, thereby lowering the amount of taxes you owe. In contrast to a tax credit that directly reduces the taxes owed dollar for dollar, a tax deduction diminishes your tax bill by your marginal income tax rate.
You can implement many of the same tips applicable to individuals and actively reduce the tax bills for your small to medium-sized business. You may qualify for special business deductions related to your home office, vehicle, and business loan interest.
Moreover, as a small business owner, you may qualify for the qualified business income deduction. This allows you to deduct up to 20% of your qualified business income, 20% of qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnership (PTP) income. Engage with a tax professional to determine if your business qualifies for these advantageous deductions.
Proactive and careful attention to organization is necessary for year-round tax planning. For a successful tax season 2024, review your finances, maximize contributions to retirement accounts, monitor deductible expenses, assess your investment portfolio, and maintain proper organization.
The above-mentioned ten tips will help reduce your income tax in 2024. You must also consider taking professional advice from an experienced tax planner or a local CPA in Dallas to optimize your financial investments and maximize your tax benefits.
If you are a salaried person, self-employed, or small business owner, contact Owais Shamsi, a highly experienced CPA in Dallas with over two decades of experience in tax planning,tax preparation and submission.
Don’t leave your tax preparation and submission to the last minute. Find out how our proactive tax preparation and submission services can help your business- book an appointment here or call at 214-253-8515.
