6 ways to cut taxes at mid-year 2024
By early summer you have probably filed your taxes, seen your refund (if there was one) and deposited it to your bank. Now you can forget about taxes until next April, right? Well, I think you know the answer to this question. In fact, now is one of the best times of the year to review your tax situation and make adjustments.
Why?
Because you have recently received last year’s tax return which often has clues for reducing this year’s tax bill. Plus, there is still time to act before the tax year closes out on December 31st.1 Here are a few mid-year ideas for putting yourself on the right track for taxes next filing season.
1. Adjust your tax withholding
Every time you get paid federal (and in many cases state) tax is withheld from your paycheck. This makes it easy for you to set aside money to pay your income taxes at the end of the year rather than having to make a huge tax payment in April. But getting the right amount withheld can be tricky. If your taxable income is pretty consistent from one year to the next, your tax bill is usually pretty predictable and consistent.
However, if your pay varies a lot from one year to the next or you have significant investments in non-retirement accounts, you can have big tax bills one year and big refunds the next. Those with variable income have to pay closer attention to changes in taxable income in order to stay on track with what they owe.
If you are an employee, you can adjust your withholding by completing IRS Form W-4 and submitting it to your employer. States with income tax have a similar form. Mass. employees should complete Form M-4.
2. Adjust Quarterly Estimated Taxes
Retirees, self-employed individuals and business owners don’t have an employer making tax payments for them. If you fall into one of these categories, you need to file Quarterly Estimated Taxes on IRS Form 1040-ES. Most people I talk to hate making these filings because it requires pulling cash out of one of their bank accounts. Plus, you have to remember to make those payments four times a year.
There are two ways to make the process a little less painful: 1) make your tax payment when a chunk of income is deposited to your bank account and 2) use the electronic direct deposit
systems. For federal estimated taxes, the EFTPS system allows you to send an immediate electronic payment immediately to the US Treasury. Most states have a similar system to pay estimated state income taxes, if applicable.
While no one likes to pay taxes, these electronic systems take only a few minutes to make a transfer, are immediate, and safer than sending a check through the mail. They also simplify the quarterly payment process.
Mid-year is a good time to review how much you’ve paid so far and your year-to-date income. If you are running ahead or behind, it is easier to make adjustments now before the year is over.
3. Increase 401(k) and 403(b) salary deferrals
You probably know that one of few, sure fire ways to reduce your taxable income (regardless of income) is to maximize your salary deferrals to your retirement plan at work. With the maximum deferral amount indexed to inflation, most years the top limit increases. This year that maximum amount is $23,000. And, if you are turning age 50 this year, you can make an additional catch up contribution of $7,500 for a total of $30,500. Self-employed individuals can put away $69,000 in 2024 into a SEP-IRA, which reduces taxable income.
4. Consider improving home energy efficiency
With the costs of so many things going up, reducing your energy consumption can make a difference. If you are interested in improving the energy efficiency of your home, there is a growing list of tax credits and rebates that are available to homeowners, renters and business owners. Whether you need weather sealing, new windows or a new heating or air conditioning system, there are a number of programs available today. Most programs start with a home energy audit which is free in Massachusetts or low cost other states.
Homeowners can take advantage of federal tax credits of up to $3,200. You can find more info here: https://www.irs.gov/credits-deductions/energy-efficient-home-improvement-credit
In Massachusetts, there are a wide range of energy efficiency and clean energy programs for individuals and businesses. The state has been a pioneer in many areas with creating programs to improve energy efficiency. You can find more info here: https://www.mass.gov/guides/massachusetts-energy-rebates-incentives#-rebates/incentives-for-your-home-
Even if you don’t live in Massachusetts, many other states offer similar programs that could save on taxes but also on your energy costs.
5. Manage capital gains and losses on investments
We’re only half way through the year but this is a good time to review your gains or losses. There are two types: realized and unrealized. Realized gains or losses are the result of selling investments that you own. You either have a gain or loss from these sales. As you think about
the balance of the year, you may want to consider opportunities to offset or balance transactions you’ve already completed so far this year.
For example, if you have sold stock this year with a gain of $28,000, you may want to see if any of your remaining holdings have unrealized losses that could be used to offset the $28,000 gain. The IRS has a netting process that requires you to use a certain calculation method depending on whether your gains and losses are short-term (e.g., held for less than one year) or long-term (held for a year or more). Selling to realize or lock in losses before the end of this year might allow you to reduce the amount of your $28,000 gain that would be subject to tax.
6. Tax shifting strategies when you own highly appreciated stock
Recently, we have been able to help a few clients transfer highly appreciated stock from a high income family to a lower income family member. In these cases, the transfer allowed the lower income recipient to sell the stock and pay zero capital gains taxes. Obviously, one needs to want to transfer assets to a family member and a number of other circumstances need to be met first. But this strategy helped these clients avoid what would otherwise have been a large tax bill on the sale of securities.
While you would probably like to forget about taxes right now, this can be a great time of year to take steps to improve your 2024 tax situation. While you should always consult your CPA or tax professional before pursuing a tax strategy, we are familiar with many strategies that can help investors and families minimize their taxes.
If you would like to discuss how you might be able to reduce your current year tax bill, give me a call. We are happy to work with you and your tax professional to come up with a tax strategy that works for you. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
Lyman@PlanWithFPS.com
617-653-3303
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1Too many taxpayers wait until the tax year is over to find out that they have a big tax bill. At that point, it is too late to make many changes.
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