Everyone has to pay taxes. But some are paying more than they should because they aren’t taking advantage of some simple strategies available to them. Why give Uncle Sam more than they are entitled to when you can keep more of that money in your pocket? Here are five tax deductions individuals and their spouses can take advantage of to reduce their tax liability. Note that these will not include business deductions for business owners. We are going to cover that in another article.
#1) HSA Deduction
If you have a high-deductible health insurance plan, you can take advantage of a Health Savings Account (HSA). An HSA is an amazing tool as you can pay qualified medical expenses with tax free money. You can also invest your HSA funds in the market so that the funds grow tax free over time.
A high-deductible health insurance plan defined by the IRS (see publication 969) is an insurance plan with a minimum annual deductible of $1,500 for individuals and $3,000 for families and a maximum annual deductible of $7,500 for individuals and $15,000 for families. If your insurance plan meets these qualifications, and you don’t have any other health coverage (with some exceptions), aren’t enrolled in Medicare, and can’t be claimed on someone else’s tax return, you qualify for the HSA deduction.
The maximum contribution amount for 2024 is $3,850 for an individual and $7,750 for families. Contributions up to that amount reduce your gross income for the purposes of determining your tax liability. You can contribute through your job or directly to your HSA plan administrator. Just make sure not to go over the total limit. Any amounts paid by your employer also count to your contribution limit. Make sure to meet with your tax professional to go over some of the more nuanced issues that go along with HSA plans.
#2) Traditional IRA Deduction
Using a traditional IRA is fantastic way to defer taxes until retirement. Before going this route it is important to discuss the future tax ramifications with your financial advisor and tax professional. If the assumption is that you will have greater income in the future you may be better off using an after-tax retirement vehicle such as a Roth IRA, which grows tax free into the future. If you determine a traditional IRA is the most advantageous way to go then use this strategy.
For 2024, the total contributions you can make each year to your IRA is $7,000 ($8,000 if age 50 or older). The deductibility on your tax return is subject to a few rules including whether you have other types of retirement plans such as a 401k, if you work but your spouse doesn’t (spousal IRA), and limits on higher income earners.
#3) Student Loan Interest Deduction
A huge portion of Americans are paying off student loans for higher education. Each year you can deduct up to $2,500 in student loan interest from you income subject to tax. There is a phaseout of the deduction depending on your income. If you are single and make less than $80,000 ($165,000 if you file married filing jointly) in income during the year, you will be able to take the full deduction and it will be gradually phased out until your income hits $95,000 ($195,000 if you file married filing jointly) at which point you will not have any deduction available. In most cases, you should receive a Form 1098-E from the lending institution detailing how much interest you paid.
#4) Capital Loss Harvesting
Capital loss harvesting involves reviewing your investment portfolio and using timing to your advantage to sell investments at a loss to offset capital gains during the year. Nobody wants to have a “losing” asset but if you do you might as well use it to your advantage. You can use net capital losses to offset your ordinary income by $3,000 each year, with any unutilized losses being carried forward to offset future years.
For example, if you had capital gains of $20,000 and capital losses of $25,000 in 2024, you could offset your ordinary income by $3,000 and carry forward to the remaining loss until is used up in future years.
#5) Itemized Deductions
Ok, so technically this is a whole bunch of different deductions. But we wanted to include them here anyway because itemized deductions are only taken if when combined they exceed your standard deduction. Since the Tax Cuts and Jobs Act doubled the standard deduction in 2017, fewer and fewer taxpayers actually itemize their deductions. However, they are important to mention since the standard deduction provision is sunsetting at the end of 2025 unless congress chooses to extend the provisions. Therefore, it may be a good planning tool in case that occurs. Also, some states have a lower threshold to cross to itemize so it is always worth doing the analysis to see what is going to save the most tax
Itemized deductions include:
- Qualified medical and dental expenses, subject to a 7.5% adjusted gross income floor. Also, be sure not to double-dip with medical expenses paid through an HSA, MSA, etc.
- State and local taxes paid up to $10,000. The $10,000 cap will also sunset in 2025 unless the provision is extended. Note: If you are a shareholder or partner in a pass-thru entity, see our article here about having the entity pay state and local taxes on your behalf.
- Home mortgage interest and points.
- Some investment interest.
- Gifts to charity. Conditions apply differently depending on the type of gift.
- Other less common such as qualified disaster losses.
If you want to see if you are taking advantage of every deduction available to you, reach out to us at High Impact CPA. We look forward to helping you save as much tax as possible.
