Saturday, 16 December 2023
by Earn Media
Image source: Getty Images
Taxes are a part of life, no matter your age or earnings. But naturally, you probably want to pay as little to the IRS as possible.
You may be worried about your tax bill going up in 2024. And under certain circumstances, it might. But there are also steps you can take to make up for that.
Different scenarios might lead to a higher tax bill.
The U.S. tax system is a marginal one, which means you pay a higher rate of tax on your highest dollars of earnings. If you get a big raise, or you boost your income substantially with a side hustle, you might fall into a higher tax bracket, resulting in a larger bill.
Savings accounts are paying generously these days, as are CDs. And while that’s a good thing in theory, it could be a bit problematic from a tax perspective.
The interest you earn from a savings account or CD is taxed as ordinary income — meaning, at the highest rate that applies to you. So, let’s say you have $20,000 in savings and normally earn 1% interest on your money. That’s $200 in interest over a year. If you’re now earning 5% due to the higher interest rates that are available today, that’s $1,000.
Remember, too, that when you earn money from a salaried job, you have taxes taken out of your paychecks as you go. With interest income, you just collect your money. So at the end of the year, you have to settle up with the IRS by paying them a portion.
When you make a profit in your IRA, it does not result in an immediate tax bill. But when you sell stocks or other assets at a profit in a regular brokerage account, you are on the hook for capital gains taxes the year you make that sale. So that, too, could lead to a higher tax bill in 2024.
If you’re worried about owing more money in taxes in 2024, you can take steps to minimize that hit.
Putting money into a traditional 401(k) or IRA will shield some of your income from taxes, provided your contributions don’t exceed the annual IRS limits. In 2024, these limits are $23,000 for a 401(k) if you’re under 50, or $7,000 for an IRA if you’re under 50. If you’re 50 or older, these limits rise to $30,500 and $8,000, respectively.
Like a traditional IRA or 401(k), HSA (health savings account) contributions are tax-free. You can put in up to $4,150 in 2024 for self-only coverage or up to $8,300 for family coverage in 2024. If you’re 55 or older, you get to contribute an additional $1,000 on top of whichever limit applies to you.
Donations to registered charities can serve as a tax deduction. Just make sure you keep records so you know what to claim. You can also take a deduction for the donation of different goods, from clothing to furniture to even your vehicle. Note that you can only claim a tax deduction from donations if you itemize on your tax return.
Nobody wants to see their tax burden increase. But the good news is that there are things you can do to pay the IRS less, even if your tax bill is higher than what it’s been previously.
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