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Importance of Tax Planning in 2024

What is tax planning? 

Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible. A plan that minimizes how much you pay in taxes is referred to as tax efficient. Tax planning should be an essential part of an individual investor's financial plan. Reduction of tax liability and maximizing the ability to contribute to retirement plans are crucial for success.
Key Takeaways
  • Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible.
  • Considerations of tax planning include the timing of income, size, the timing of purchases, and planning for expenditures.
  • Tax planning strategies can include saving for retirement in an IRA or engaging in tax gain-loss harvesting.

Retirement Saving Strategies

Contributing money to a traditional IRA can minimize gross income by the amount contributed. For 2023, if meeting all qualifications, a filer under age 50 can contribute a maximum of $6,500 to their IRA with an additional catch-up contribution of $1,000 if age 50 or older. That number rises to $7,000 in 2024, with the catch-up contribution holding steady at $1,000.

If an individual who made $75,000 a year contributed a total of $7,000 to a traditional IRA in 2024, they would have an adjusted gross income of $68,000 ($75,000-$7,000) on which they would be taxed. The $7,000 would then grow tax-deferred until withdrawn.

There are several other retirement plans that an individual may use to help reduce tax liability. 401(k) plans are popular with larger companies that have many employees. Participants in the plan can defer income from their paycheck directly into the company’s 401(k) plan. The greatest difference is that the contribution limit dollar amount is much higher than that of an IRA. 

In 2023, the contribution limit for a 401(k) is $22,500, increasing to $23,000 in 2024. For both years, if you are 50 and over, you can contribute an additional $7,500.

If we take the example above, if an individual contributed $23,000 in 2024, their adjusted gross income would be $52,000 ($75,000-$23,000) on which they would be taxed. The $23,000 would grow tax-deferred until withdrawn.

Tax Planning vs. Tax Gain-Loss Harvesting

Tax gain-loss harvesting is another form of tax planning or management relating to investments. It is helpful because it can use a portfolio's losses to offset overall capital gains. According to the IRS, short and long-term capital losses must first be used to offset capital gains of the same type.

In other words, long-term losses offset long-term gains before offsetting short-term gains. Short-term capital gains, or earnings from assets owned for less than one year, are taxed at ordinary income rates. 

In 2023, long-term capital gain limits are the following:

  • 0% for single filers whose income is no more than $47,025 ($94,050 in the case of a joint return or widow(er), $63,000 in the case of an individual who is head of household, $47,025 in the case of a married individual filing a separate return)
  • 15% tax for single filers whose income is between $47,026 and $518,900 ($583,750 in the case of a joint return or widow(er), $551,350 in the case of an individual who is the head of a household, or $291,850 in the case of a married individual filing a separate return)
  • 20% tax for those whose income is higher than that listed for the 15% tax

In 2024, long-term capital gain limits are the following:

  • 0% for single filers whose income is no more than $44,625 ($89,250 in the case of a joint return or widow(er), $59,750 in the case of an individual who is head of household, $44,625 in the case of a married individual filing a separate return)
  • 15% tax for single filers whose income is between $44,626 and $492,300 ($553,850 in the case of a joint return or widow(er), $523,050 in the case of an individual who is the head of a household, or $276,900 in the case of a married individual filing a separate return)
  • 20% tax for those whose income is higher than that listed for the 15% tax
For example, if a single investor whose income was $100,000 had $10,000 in long-term capital gains, there would be a tax liability of $1,500. If the same investor sold underperforming investments carrying $10,000 in long-term capital losses, the losses would offset the gains, resulting in a tax liability of 0. If the same losing investment were brought back, then a minimum of 30 days would have to pass to avoid incurring a wash sale.

FAQs

  • How Do High-Income Earners Reduce Taxes?

    There are many ways to reduce taxes that are not only available to high-income earners but to all earners. These include contributing to retirement accounts, contributing to health savings accounts (HSAs), investing in stocks with qualified dividends, buying muni bonds, and planning where you live based on favorable tax treatments of a specific state.

  • Can I Contribute to a 401(k), a Traditional IRA, and a Roth IRA?

    Yes, you can contribute to a 401(k), a traditional IRA, and a Roth IRA. You must ensure that you only contribute the legally allowed amount per year. If you invest in both a traditional IRA and a Roth IRA, you cannot contribute more than the overall maximum allowed for an IRA.

John LoCascio
Experienced tax and accounting professional with over 15 years in the industry. Specializes in tax planning, financial analysis, and compliance. Dedicated to providing accurate, efficient, and personalized financial solutions.

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