As tax season approaches, taxpayers have a valuable opportunity to reduce their taxable income by making strategic contributions before the April 15 deadline. By contributing to individual retirement accounts (IRAs) and health savings accounts (HSAs), individuals can potentially lower their tax liability by thousands of dollars. For the 2024 tax year, taxpayers have until April 15 to make prior-year contributions, allowing them to designate contributions made before this date as if they were made the previous year.
For single taxpayers looking to trim their taxable income, maximizing contributions to an IRA and an HSA is a viable strategy. In 2024, individuals can contribute up to $7,000 to an IRA, or $8,000 if they are 50 or older. The traditional versions of these accounts are funded with pre-tax dollars, meaning the contributed amounts can be deducted from the taxable income of the year in which they are made.
"Obviously it's a great privilege to have several thousand dollars laying around, but it's one of the only things you can take action on within this tax season that will help you on this year's taxes." – Courtney Alev, head of tax and consumer financial advocate at Credit Karma.
For those aged 55 or older, an additional $1,000 can be added to the IRA contribution. These contributions not only reduce taxable income but also help in building a retirement nest egg. It's important to note that while money withdrawn from an IRA is considered taxable income in retirement, there are penalties for early withdrawal before age 59½.
Beyond IRAs, HSAs offer another tax-saving opportunity. In 2024, individuals with self-coverage can contribute up to $4,150 to an HSA, while those with family coverage can contribute up to $8,300. The funds from an HSA can be used for qualified medical expenses without incurring taxes.
Tax experts like Courtney Alev and Ryan Losi emphasize the dual benefits of these contributions. They provide immediate tax relief while simultaneously preparing individuals for future financial needs.
"There are certain times after the fact that you can still reduce your taxable income for the prior year," – Ryan Losi, a certified public accountant and executive vice president with Piascik.
Taxpayers are encouraged to review their financial situation and consider these contributions as a means to shield more money from 2024 income tax. The paperwork involved over the next few months will include transactions such as property sales, income earned, and loan repayments made in 2024.