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Considerations for reducing your income

1. Increase Retirement Plan Contributions:

It is helpful to consider your contribution goals at the beginning of the year so you’re not left scrambling at the end of the year trying to reach your targeted contribution amount to your employer’s retirement plan [such as a 401(k) or 403(b)]. For example, if you want to increase your contributions by $12,000 this year, it’s far more palatable to contribute an extra $1,000/month starting in January rather than contributing an extra $4,000/month beginning in October. In addition to contributing to a company retirement plan, some may also be able to decrease taxable income with contributions to a Traditional IRA.

2. Increase Health Savings Account (HSA) Contributions:

HSAs are one of the most tax-friendly vehicles available, however, they are woefully underutilized. Employees with health insurance plans that meet the IRS’s standards of a high-deductible health plan have the ability to contribute money to HSAs. Contributions to HSAs are tax-deductible and can be distributed tax-free to cover current medical expenses. If you have the ability to use non-HSA money to cover current medical expenses, consider investing the money in your HSA where it can grow tax-deferred and can be distributed tax-free to cover qualified medical expenses in the future. Evaluate and set your HSA contributions early in the year in order to hit your desired contribution amount by the end of 2024.

3 Donate to Charity:

While changes to tax law in recent years have limited the ability for some to derive tax benefits from charitable giving, many are still able to reduce their taxable income thanks to their generosity. Consider gifting strategies such as qualified charitable distributions (for those age 70.5 and older), use of donor advised funds, gifting appreciated securities, and gift bunching as potential options to help lower your taxable income. Perhaps you are in a different position where you expect your income to be abnormally low in 2024. If it’s determined that your lower income will drop you into a lower tax bracket than usual, you may consider taking advantage of strategies to actively increase your income this year as you may have an opportunity to pay less in taxes on this income than you normally would. Some options include changing retirement contributions from pre-tax to Roth, converting pre-tax IRA money into a Roth IRA, exercising stock options, or generating capital gains by selling appreciated securities.

As always, know that you don’t have to make this evaluation and come up with a strategy on your own. Reach out to your financial advisor at Fragasso. If you aren’t a client of Fragasso, contact us now. We can coordinate with your tax professional to come up with an approach that aligns with your financial plan. 

 

Fragasso and PCS are not tax service entities and that the reader should always consult with a tax professional regarding his/her own individual situation.