Tax season can feel stressful as you brace to find out if you owe taxes this year or are in the lucky pool of those getting a refund.
Who wouldn’t want a chance to improve the likelihood of getting money back? Lucky for you, there are strategies that you can employ to do just that.
Tax and finance experts explain how to not only improve your chances of getting money back but to save as much as $5,000.
Maximize Retirement Contributions
The best thing you can do to increase the likelihood of getting money back is maximize your IRA and 401(k) contributions. This is because, according to senior tax accountant and a board advisor at Fiona, Wayne Bechtol, they significantly reduce your taxable income.
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For example, you can contribute a maximum of up to $22,500 to a 401(k) or $6,500 to a traditional IRA. People aged 50 or older can contribute more — $30,000 to a 401(k) and $7,500 to an IRA. This strategy saves you money by lowering your taxable income.
Utilize Health Savings Accounts
Another important step, for those eligible, is contributing to a Health Savings Account (HSA), which Bechtol said can provide triple tax benefits, especially if you have a high-deductible health plan.
“First, your contributions are tax-deductible,” said Bechtol. “Second, the HSA grows tax-free, and third, withdrawals for qualified medical expenses are tax-free.”
For example, in 2024, you can contribute up to $4,150 for individual coverage and up to $8,300 for family coverage. Individuals 55 and over can contribute an additional $1,000 as a catch up contribution.
Claim Tax Credits
Another way to save tax is to maximize your Earned Income Tax Credit (EITC), which benefits low-to-moderate-income workers.
As Bechtol explained, families with three or more children can claim up to $7,830 since the EITC includes both the Child Tax Credit and Education Credits. For 2024, the Child Tax Credit is up to $2,000 per qualifying child under 17 while the American Opportunity Tax Credit (AOTC) offers up to $2,500 per eligible student for qualified education expenses.
Deduct Mortgage Interest
Individuals who own homes can deduct the interest paid on their mortgage, which can be substantial, especially in the early years of the mortgage.
Bechtol said, “The interest paid on your mortgage directly reduces your taxable income and, hence, your tax liability.”
Harvest Tax Losses
In Bechtol’s professional opinion, tax loss harvesting is an excellent way of reducing your taxable income. This means selling investments at a loss to offset gains from other investments.
“This strategy can help reduce your taxable income by up to $3,000 per year,” he added.
Charitable Donations
Donating to charity is another viable tax-saving alternative. The donations are tax-deductible if you itemize your tax deductions, Bechtol explained. You can donate cash, goods or even appreciated securities to earn a significant tax benefit.
Adjust Your Withholding
Another quick way to cut taxes (thus potentially building a larger refund) is to use the IRS withholding estimator to adjust your W4 form and ensure that your withholding aligns with your actual tax liability.
“It helps avoid underpayment penalties at the end of the year,” Bechtol said.
Flexible Savings Accounts
Eligible people can also take advantage of Flexible Spending Accounts (FSAs) to set aside pre-tax dollars for medical and dependent care expenses, Bechtol pointed out.
In 2024, you can contribute a maximum of $3,200 to healthcare FSA. It reduces your taxable income and provides tax-free funds for eligible expenses.
Invest in Municipal Bonds
Bechtol also highlighted that the interest earned on municipal bonds is exempt from federal income tax, meaning “it is one of the tax-efficient ways to generate income.”
Leverage Business Expenses
Self-employed individuals and those with a side business can deduct business expenses, such as home office costs, travel expenses and supplies. These deductions add up and together reduce your taxable income, Bechtol pointed out. It’s a good idea to work with an accountant to be sure you’re only deducting legitimate expenses, however.
Additionally, you may also be able to employ strategies such as deferring income to next year or prepaying expenses this year may reduce the tax burden, according to David Blain, chartered financial analyst (CFA) and CEO at BlueSky Wealth Advisors.
“One client pushed $200,000 in sales to January, dropping his tax bill by $50,000,” said Blain. “Small businesses should also consider advantageous deductions like Section 179 to immediately expense equipment purchases. A manufacturing client bought equipment in December and deducted $70,000, saving $15,000 in taxes.”
Refinance a Mortgage
Blain advised homeowners to review mortgages and lines of credit. The Fed just cut interest rates, so refinancing high-rate debt may cut payments.
“HELOC interest deductions were reduced, so borrowers should do the math,” said Blain. “One couple cut 5 years off their mortgage and $100,000 in interest by refinancing.”
Deduct Medical Expenses
Medical expenses are deductible once they hit 7.5% of your income, so paying for procedures or devices this year or next may yield tax savings. One client paid $20,000 for a surgery in December and saved $5,000 on her taxes.
Always consult experts on major financial decisions. Even just pairing a couple of these strategies together could lead to significant tax savings next year.
