As the tax season approaches, taxpayers are still searching for ways to legally reduce their taxable income for the previous year. Ryan Losi, a certified public accountant, highlights that certain actions can be taken to decrease your taxable income, even after the year has ended.
One effective measure to consider is contributing to an Individual Retirement Account (IRA) or a Health Savings Account (HSA). These contributions can be allocated as prior-year contributions up until April 15, which can significantly lower your taxable income. For instance, traditional IRAs allow for contributions using pre-tax dollars, making them deductible from your taxable income. This offers flexibility, as taxpayers can make contributions within a grace period for the previous year. Specifically, for 2024, the contribution limit is $7,000, increasing to $8,000 for those aged 50 and above.
Despite the immediate tax benefits of contributing to an IRA, it’s important to remember that withdrawals in retirement will be taxable. Additionally, early withdrawals—before the age of 59 and a half—may incur tax penalties. Therefore, while increasing contributions can serve as a tax-saving strategy, one must also plan for future tax obligations. Courtney Alev from Credit Karma emphasizes the advantage of this tax break, particularly during the current tax season.
Meanwhile, Health Savings Accounts provide another avenue for reducing taxable income along with future health care benefits. These accounts enjoy significant tax advantages: contributions are tax-deductible; investments within the account grow tax-free, and withdrawals for qualified medical expenses are not taxed by the IRS. Notably, these accounts are available only to individuals with high-deductible health plans, and they are acknowledged by financial planners as strong retirement savings tools.
For 2024, individuals can contribute up to $4,150 to an HSA, or $8,300 for family coverage. An additional $1,000 contribution is available for those aged 55 and older. These contributions can be made up until April 15 and designated for the prior tax year. This can cumulatively amount to $17,300 if combined with the maximum IRA contribution, offering a significant reduction in taxable income while simultaneously supporting long-term financial goals.
In conclusion, individuals seeking to reduce their taxable income have viable options through thoughtful contributions to IRAs and HSAs. These strategies, focusing on retirement and health care savings, not only lower current tax liabilities but also contribute to future financial stability. As tax day approaches, it is prudent for eligible taxpayers to evaluate and capitalize on these opportunities before the deadline.
