Maximize Your Tax Savings: Tips for Lowering Taxes or Boosting Your Refund for 2024

As the 2024 tax season approaches, many Americans are looking for ways to reduce their tax burden or maximize their refunds. Financial experts say there’s still time to implement effective strategies that can enhance your financial landscape before the new year. Here’s a closer look at practical steps you can take to optimize your tax situation.

Understanding Tax Refunds and Bills

Typically, taxpayers may receive a refund if they overpay taxes throughout the year via withholdings or estimated payments. Conversely, underpayment can lead to a tax bill at the end of the year. It’s crucial to evaluate your current tax status to anticipate whether you will owe money or receive a refund.

Since the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017, taxpayers have fewer options for reducing their taxable income, according to Tricia Rosen, a certified financial planner and enrolled agent. The TCJA increased the standard deduction, which means that fewer individuals and families itemize their deductions for preferences like charitable gifts or medical expenses.

For 2024, the standard deduction stands at $29,200 for married couples filing jointly and $14,600 for single filers. This limited deductibility can make effective tax planning even more essential.

Boost Pre-Tax 401(k) Contributions

One of the most straightforward ways to lower your taxable income is to increase your pre-tax 401(k) contributions. By deferring income into a 401(k) plan, you reduce your adjusted gross income (AGI), thereby potentially lowering your tax bill.

For 2024, employees can contribute up to $23,000 to their 401(k) plans—up from $22,500 in 2023. Workers aged 50 and older have the opportunity to make additional catch-up contributions of $7,500. Utilizing this option not only assists in long-term retirement savings but also provides immediate tax benefits that can lead to a more favorable tax situation for the current year.

Increase Paycheck Withholdings

If you anticipate facing a tax bill, consider increasing your paycheck withholdings. This move can help ensure that you pay a sufficient amount of your tax liability throughout the year. It’s essential to remember that many taxpayers set their withholding rates only once when completing Form W-4. However, life changes such as job shifts, marriage, divorce, or the addition of a new child can impact your tax obligation, making periodic adjustments necessary.

Increasing withholdings can also prevent the unpleasant surprise of a tax bill when you file your return. Alternatively, you may opt to make estimated payments directly to the IRS to cover any shortfall. Consulting with a financial professional can help tailor a withholding strategy that fits your specific needs.

Consider Bunching Deductions

Given the increased standard deduction, many taxpayers may find it challenging to itemize deductions effectively. Nonetheless, one strategy to consider is "bunching deductions." This method involves consolidating deductions—such as charitable contributions—into a single tax year to surpass the standard deduction threshold.

For instance, instead of making charitable donations annually, you could group several years’ worth of donations into one year. Not only does this maximize your itemized deductions, but it can also provide you with a larger tax break in the year you do the bunching.

Rosen often conducts projections to examine how this tactic could impact clients’ taxes, allowing them to make informed decisions that align with their financial goals.

Conclusion

As the 2024 tax landscape approaches, it is crucial for taxpayers to remain proactive in their financial planning strategies. Whether boosting contributions to retirement savings, adjusting paycheck withholdings, or considering alternative methods like bunching deductions, there are numerous opportunities to optimize your tax situation. Engaging with a financial professional can provide additional insights and strategies tailored to your unique circumstances. With thoughtful planning, you can navigate the complexities of taxes effectively and ensure a more favorable outcome come tax time.