At Deerfield Financial Advisors, one of the many financial insights we share with our clients is how to realize tax savings.
While tax planning can be a tedious subject, we designed this guide to use as your personal playbook for tax season. We want to give you winning strategies to save time—and money.
1. Contribute the Full Amount to Your Retirement Accounts
One of the better ways to reduce your tax liability is to contribute the full amount allowed by the IRS to your retirement plan. Retirement plans like 401(k)s and IRAs provide tax advantages that aren’t available if your money is in a traditional savings account.
Here are some details to help you contribute the full amount:
- 401(k), 403(b), and 457 Plans: In 2024, you can contribute up to $23,000 annually to these accounts. If you’re over age 50, you can contribute $30,500.
- Traditional IRA: You can contribute up to $6,500 for 2023 and $7,000 for 2024, with a $1,000 catch-up contribution limit for those over age 50. Contributions to a traditional IRA can be made until the April 15th tax filing deadline.
- Roth IRA: This is an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. The contribution limits are the same as traditional IRAs. However, Roth IRAs have income restrictions and you may not be able to open an account outright if you are above certain limits.
2. Deposit Money Into a Health Savings Account
Health savings accounts (HSAs) offer another efficient way to reduce your tax liability. The most beneficial features of this tax-savings strategy are known as triple tax savings because 1) contributions are tax deductible; 2) earnings grow tax-free; and 3) you can withdraw the funds tax-free to pay for qualified medical expenses.
The 2023 contribution limits for HSAs are $3,850 for individuals and $7,750 for families. (The 2024 limits increased to $4,150 and $8,300, respectively.) If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year. You have until April 15th for your contributions to count for the previous year’s tax return.
3. Give to a Qualified Charity
Good news for seniors. If you’re age 70½ or older and own a qualified retirement account, you can use a qualified charitable distribution (QCD) to receive a tax benefit for your charitable giving. Plus, because this type of deduction is above-the-line, you can use it in conjunction with other charitable tax-saving strategies. Individuals can donate up to $100,000 in QCDs per year, and married couples can contribute a combined amount of $200,000.
4. Convert Your IRA to a Roth IRA
For taxpayers outside of the income eligibility threshold to open a Roth IRA account, converting your traditional IRA to a Roth IRA is a great way to take advantage of Roth IRA tax savings. To make it work, you must pay taxes on your pre-tax traditional IRA before converting the funds to a Roth IRA.
In addition to converting your traditional IRA to a Roth IRA, you have more options for utilizing the tax-savings benefits of Roth IRAs.
- Mega Backdoor Roth: This strategy involves converting a portion of your 401(k) plan to Roth dollars.
- Backdoor Roth IRA: Here, you would make an after-tax (non-deductible) contribution to a traditional IRA, and then immediately convert the funds to a Roth IRA.
These Roth conversion strategies allow your contributions to grow tax-free and also avoid future required minimum distributions (RMDs).
5. Utilize Tax-Loss Harvesting
Tax-loss harvesting is selling investments at a loss to offset taxes on portfolio gains. Essentially, you’re counterbalancing taxes owed on capital gains with other underperforming investments.
The bottom line of tax-loss harvesting is that you’re reducing your tax liability. For example, let’s say you bought Investment A for $10,000 and it’s now worth $12,000. You also bought Investment B for $5,000 and it’s now worth $3,000. To offset the capital gains taxes you owe on your $2,000 profit from Investment A, you sell Investment B at a $2,000 loss.
6. Plan Your Estate Taxes
Estate tax planning is another effective way to increase your tax savings. Though gifting and other estate tax-planning strategies are not tax-deductible, they can help to significantly reduce your taxable estate over time.
The annual gift tax exclusion increased to $18,000 per recipient in 2024, up from $17,000 in 2023. This is the annual amount taxpayers can give tax-free.
The 2024 lifetime exemption for assets that can be given gift-tax-free is $13.61 million for individuals and $27.22 million for married couples.
7. Optimize Your Business Deductions
If you’re a business owner and your business is defined as a partnership, S corporation, or sole proprietorship, you can utilize a qualified business income deduction (QBID) to optimize your tax savings. The IRS allows you to deduct up to 20% of qualified business income. However, keep in mind that if your income exceeds a certain threshold, there’s a limit on how much you can deduct.
8. Research Long-Term vs. Short-Term Capital Gains
To take full advantage of the tax-saving options available to you, it’s important to understand the tax implications of long-term versus short-term capital gains.
Two factors determine the rate at which capital gains are taxed: 1) the length of time you hold on to an investment; and 2) your tax bracket.
Taxes on short-term investments (held less than one year) will be taxed at your marginal tax bracket, which could be as high as 37%! And in general, you pay less taxes on long-term capital gains than you do on short-term capital gains.
Knowing both the nature of your gain as well as your tax bracket is critical to understanding how to optimize your tax savings.
Reach Out for More Tax-Savings Help
You’re not alone if you feel overwhelmed by your options to plan your tax strategy. To explore ways to potentially optimize your finances with effective strategies, you can get in touch with Deerfield Financial Advisors by calling (317) 644-7701 or sending an email to mroop@t8j.01f.mywebsitetransfer.com.
About Matt
Matt Roop is Wealth Manager and Shareholder at Deerfield Financial Advisors, a fee-only financial services and wealth management firm with offices in Indianapolis and Chicago. In his role, Matt acts as a personal “chief financial officer” for his clients, overseeing every facet of their financial landscapes, orchestrating strategies to grow their wealth, and enhancing their financial clarity. Catering to the distinct needs of lawyers, engineers, and business owners, he empowers them to embrace their passions and lead their optimal lives. Matt conveys a depth of experience and a calm demeanor that clients find reassuring and soothing, and he loves providing peace and confidence around their financial future.
Matt received a Bachelor of Science from Indiana University and a Master of Business Administration (MBA) from George Washington University. He is a NAPFA Registered Financial Advisor and holds the CERTIFIED FINANCIAL PLANNER™ and Certified Exit Planning Advisor (CEPA) designations. Committed to staying at the forefront of his field, he is actively involved with the Exit Planning Institute, National Association of Personal Financial Advisors, and the Estate Planning Council of Indianapolis. Since 1997, Matt has been involved in the investment and wealth management realm, with experience at Charles Schwab & Co., Inc., as well as a boutique Indianapolis-based independent advisory firm and a brief stint at his family’s closely held business.
Outside the professional realm, Matt serves his Indianapolis community by volunteering for Meals on Wheels of Hamilton County and is on the Executive Leadership Team for the Indiana Alzheimer’s Association’s Walk to End Alzheimer’s. He is dedicated to financial stewardship and continuous growth, with an unyielding commitment to enhancing the lives of both his clients and his community. Matt and his wife, Kimberly, reside in Carmel, IN, with their four children, who are all pursuing their college dreams. When he’s not working, he enjoys traveling, reading, and spending time at his lake house in southern Indiana with family. To learn more about Matt, connect with him on LinkedIn.
