10 Ways to Lower Your Income Tax Bill for Next Year

10 Ways to Lower Your Income Tax Bill for Next Year

Tips to Pay Lower Income Taxes Next Year (No Matter Which Tax Bracket You’re In)

Next year’s taxes are probably the last thing you want to think about, especially if you’ve recently filed your return. However, forming a tax strategy can mean less stress during tax season and more money in your pocket. If you’re an employee, business owner, high earner, or anyone in between, read on to find out how to lower your tax bill with each passing year.

It can’t be said enough – If you’re getting a tax return payment from the IRS – CONGRATULATIONS! This means you’ve given the government an interest-free loan for the past year. Couldn’t you put that money to better use?

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10 Ways to Lower Income Taxes for High Earners and Entrepreneurs

One of the most common questions I hear is, “How can I pay less taxes next year?” The answer depends on your unique situation: your income, your business structure, your investments, and your overall financial goals. That said, there are a few things you can do right now to minimize your federal tax liability next year.

1. Make Your Estimated Tax Payments on Time

Employees usually have taxes deducted from their pay in the form of withholding, a way of paying taxes throughout the year. If you’re an entrepreneur, small business owner, or have an irregular income, you’re still expected to make these payments in the form of quarterly estimated taxes. 

Taxpayers who will owe $1,000 or more in federal taxes are expected to send estimated tax payments to the IRS every three months. When you miss a quarterly tax payment deadline, the IRS can assess a penalty of 0.5% of what you owe for each month (or part of a month) it’s late.

2. Maximize Your 401(k)

One of the simplest ways to save on taxes is to lower your taxable income. The IRS does not tax earnings sent directly from your paycheck into a 401(k), allowing you to fund your retirement while lowering your tax liability.

However, there are limits to how much you can contribute. For instance, the maximum tax-free contribution to a 401(k) in 2024 is $23,000, or $30,500 for people over 50. We recommend funding these accounts with as much as possible, especially if your employer matches some or all of your contributions.

We have to say it: we don’t give investment advice. For that, you should speak with a financial advisor. However, we do think there are some basic financial concepts that everyone should learn.

3. Fund Your IRA

You could contribute to other retirement accounts to save tax, such as individual retirement accounts (IRAs). There are two types of IRAs:

  • Traditional IRA. Contributions to this IRA are tax deductible based on certain conditions. For the 2024 filing, you can deduct your contributions if an employer’s retirement plan doesn’t cover you and your modified adjusted gross income (AGI) is $143,000 or less.
  • Roth IRA. In a Roth IRA, payments are made using after-tax dollars. Since you pay tax before the money goes into the account, you can receive tax-free distributions at retirement.

Like 401(k)s, there are limits on how much you can contribute to an IRA. The maximum is $7,000 annually in 2024, or $8,000 for people over 50. Note: this amount is a total for all IRAs combined, not per account.

4. Review Your Business Taxation

If you’re a business owner, consider whether your current business structure is the most tax-efficient. A tax professional can help you explore possibilities such as S-Corporations or partnerships.

Certain investments also offer tax advantages. For example, investing in Opportunity Zones or certain real estate ventures may allow deferral or reduction of capital gains taxes.

Self-employed taxpayers can deduct office supplies like laptops and monitors, their home office space, and other qualified expenses. Unfortunately, many entrepreneurs underestimate the cost of their business expenses, resulting in a significant tax overpayment. You should ask your accountant and tax advisor about the best way to claim your business costs.

5. Itemize Your Deductions

Taking the standard deduction is often easier, but there are benefits to itemizing your deductions. For example, itemizing certain expenses may result in higher tax savings, and some deductions are only available on itemized returns. 

If you plan to itemize your deductions, you might consider timing certain large expenses to occur within a single tax year. This allows you to take advantage of higher allowable limits in the years you itemize, rather than in years you take the standard deduction. 

It takes careful planning to determine whether the standard deduction or itemized deduction is most beneficial for you. We can position you to maximize tax benefits and help ensure you’re taking advantage of all available deductions.

Important: Many taxpayers have been taking advantage of the bonus depreciation rules under the Tax Cuts and Jobs Act. This rule is phasing out over the next couple of years – use it or lose it!

6. Check Your Tax Credit Eligibility

Tax credits directly subtract the amount of tax you owe dollar-for-dollar. Available credits change from year to year, and each one has specific restrictions. For example, certain energy-efficient improvements to your home,  pursuing higher education, or investments in renewable energy may qualify for tax credits.

7. Start a College Fund

You could save on taxes by funding your child’s college education. Contributions to a 529 plan—a tuition savings account through an educational institution—may be deductible on your state income taxes.

You can also give money directly to your children and grandchildren, but this won’t reduce your taxable income in the eyes of the IRS. In fact, you will incur gift taxes if you give any beneficiary $18,000 or more in 2024. Early tax planning can help you make the most of your gift tax exemption while allowing your heirs financial flexibility.

Pro Tip: For the grandparents, you could seed those 529 accounts with a 5x donation this year, then allocate the gift over 5 years so that no gift tax is paid.

8. Write Off Bad Investments

Deducting losses on stock sales could also offset any taxable capital gains from other investments, a strategy known as tax-loss harvesting. If there are bad investments in your portfolio, you might be able to sell them at a loss and claim up to $1,500 on your tax return.

9. Donate to Charities

Charitable donations are tax-deductible. Consider donating cash, appreciated assets, clothes, food, or vehicles to eligible charitable organizations. You can claim a higher amount if you itemize your deductions, but you should back these up with receipts.

If you want to support a charity and are 70.5 years or older, you could make a qualified charitable distribution (QCD) of up to $100,000 from your IRA. These donations prevent IRA distributions from raising your income and could count toward your required minimum distribution.

10. Review Your Estate Plan

Life changes can significantly impact your tax liability. Higher earnings could push you into a higher federal income tax bracket, subjecting a portion of your income to a higher tax rate. Estate planning can substantially reduce tax liability by employing strategies such as gifting and careful asset allocation. 

Strategic gifting during one’s lifetime can reduce the size of the taxable estate, as annual gift exemptions and lifetime gift exemptions exist. Allocating assets tax-efficiently with retirement accounts or life insurance can minimize tax burdens. 

5 Ways Employees Can Lower Their Income Tax Bill

Employers provide their workers benefits far beyond health and retirement plans. Check your W-2 statement or the employee handbook to see your available fringe benefits (and their restrictions) to take full advantage of your employment. Common fringe benefits include:

1. Health Savings Account (HSA)

HSAs are a good option for those with a high-deductible health plan. Contributions are tax deductible, and withdrawals for qualified medical expenses are tax-free.  

In 2024, the maximum HSA contribution is $4,150 for a single plan or $8,300 for family coverage. Taxpayers 55 or older get an extra $1,000 added to the limit.

2. Flexible Spending Account (FSA)

Contributions to flexible spending accounts are deducted from your paycheck pre-tax, reducing your taxable income. In 2024, workers can contribute up to $3,200 for dental care, prescriptions, glasses or contacts, or other eligible expenses. Some employers allow you to carry balances in these accounts over to the next year.

3. Dependent Care FSA

Some employers offer a dedicated FSA for dependent care, which can cover expenses related to daycare, preschool, field trips, or even elder care. The 2024 maximum pre-tax contribution to these accounts is $5,000.

4. Medical Expense Deductions

In 2024, qualified medical expenses in excess of 7.5% of your AGI are tax deductible. If you claim this deduction, be sure to keep a file of your medical expenses and receipts for your out-of-pocket care costs.

5. Employee Stock Purchasing Program

Employees generally receive a discount on shares of company stock, or employee stock purchase plans (ESPPs). Contributions to an ESPP are typically made through payroll deductions, reducing your taxable income. An ESPP’s taxation is based on the difference between a stock’s purchase price and its fair market value.

Tax savings depend on when the employee sells the shares. Employees who sell less than a year after purchase pay tax at their ordinary income rate. Employees who sell one year or more after purchase pay at the long-term capital gains tax rate, potentially resulting in lower taxes.

5 Easy Ways to Prevent Owing on Your Tax Return

Some years are leaner than others. Fortunately, there are options to ease tax burdens for those who have fallen on hard times or can’t afford to pay another bill. If you’re worried about owing money to the IRS, consider these changes to give yourself some wiggle room:

1. Change Your Withholding

If you’re an employee, you can tell the IRS to withhold more taxes during the year. While it may result in a smaller refund, it can also prevent a huge tax bill come spring. Simply raise your tax withholding amount on your W-4 form (many employers allow you to access them online).

2. Deduct Your Student Loan Interest

The interest you pay on your private student loans may be tax deductible. In 2024, you can deduct up to $2,500 if your modified AGI is $75,000 or less ($150,000 if filing jointly).

3. Earned Income Tax Credit (EITC)

The EITC can be a lifesaver for taxpayers with lower earnings. In 2024, taxpayers with incomes under $66,819 may qualify for a tax credit of up to $7,830. The IRS will likely issue a refund if this credit reduces your tax bill below zero.

4. Education Tax Credits

The federal government rewards higher education with a variety of tax credits. The American Opportunity Tax Credit provides students up to $2,500 annually in the first four years of higher education; the Lifetime Learning Credit offers up to $10,000 to pay for qualified expenses.

5. Child Tax Credits

The Child Tax Credit helps parents who claim children, stepchildren, siblings, or descendants under 17 as dependents on their tax return. Parents who earn less than $200,000 ($400,000 married and filing jointly) may receive up to $2,000 per qualifying child. You could also explore options like the Adoption Tax Credit or Education Savings Accounts to maximize tax benefits related to your family situation.

Your Trusted Advisors for Life

Tax laws are complex and subject to change. At Yolofsky Law, it’s our job to stay updated on tax legislation, ensuring you’re taking full advantage of available opportunities while complying with current regulations. Email us at [email protected] today or schedule a 15-minute call for personalized tax planning advice.