Taxes, according to the late Supreme Court Justice Oliver Wendell Holmes Jr., are what we pay for a civilized society. But that doesn’t mean you should pay more than you’re legally required to remit to federal and state tax authorities.
Unfortunately, the tax code has become more complex, increasing the risk that you’ll overlook money-saving tax breaks.
Start by reviewing how much tax was withheld from your paychecks in 2023. If you received a big refund, adjust your withholding so that less of your paycheck goes to the Internal Revenue Service (IRS).
The majority of taxpayers claim the standard deduction. But even if you don’t itemize deductions, you may still be eligible for a long list of tax credits and above-the-line deductions. For example, if you have a child who will start college this fall, there’s a good chance you’ll be eligible for the American Opportunity Credit. This tax credit is available for up to $2,500 of college tuition and related expenses (but not room and board) paid during the year.
Meanwhile, reducing taxes on investments in your brokerage account is a surefire way to increase your profits or minimize losses. Start by understanding the difference between long- and short-term capital gains. You’ll pay long-term capital gains tax on income from the sale of assets that you’ve held for more than a year, at rates ranging from zero percent to 20 percent, depending on the amount of your taxable income. If you sell stocks, mutual funds or other assets you purchased a year ago or less, the net proceeds will be taxed as ordinary income, with rates ranging from 10 percent to 37 percent.
Clearly, you’re better off selling investments you’ve owned for more than a year, particularly if you qualify for the zero percent tax rate. In 2024, you’re eligible for the zero percent tax rate if you’re single and have taxable income of up to $47,205, or up to $94,050 if you’re married and file jointly. This tax break can be particularly valuable to retirees who may need to sell assets to meet expenses and are no longer earning income from a job.
Where taxes and your wealth are concerned, you need to be thinking about how much you’ll pay in the future, too. Contributions to a 401(k) or deductible individual retirement account (IRA) will reduce your tax bill now, but the money will be taxed when you take withdrawals—possibly at a higher tax rate than you’re paying today.
For that reason, many financial planners recommend directing at least some of your contributions to a Roth 401(k), if your employer offers one. As is the case with Roth IRAs, contributions are after-tax, but withdrawals will be tax-free after you’re 59½ and have owned the Roth for at least five years. Unlike Roth IRAs, however, there are no income limits—anyone with earned income can contribute to a Roth 401(k).
