Are you tired of seeing a big chunk of your income disappear during tax season? You’re not alone. Many people share this concern, especially when they’re unsure if they’re maximizing all available tax deductible deductions.
Whether you’re saving for retirement, paying off student loans, or dealing with medical bills, there are practical ways to reduce your taxable income. That is because every dollar saved matters.
In this blog, we’ll walk you through the most effective tax deductible deductions that can help you keep more of your money where it belongs: in your pocket. If you’re looking to lighten your tax load, read on to learn how to lower taxable income and what deductions can I claim.
In addition to providing these useful tips, SWAT Advisors provide specialized tax planning for doctors, providing effective tax planning solutions to help them manage their finances and reduce their tax burden.
What are Tax Deductions?
Tax deductions are specific expenses you can subtract from your total taxable income, reducing the amount of income subject to tax. This can lower your overall tax bill, as you only pay taxes on the reduced income.
Tax deductions are key to lowering your taxable income, but understanding which deductions you can claim is important for maximizing your savings. Whether you’re wondering how to reduce taxable income or looking to explore the deductions available to you, the right guidance can make a big difference.
Now that we know what are tax deductions, let’s get into the details of the tips on reducing taxable income with deductions.
Maximize Your Retirement Contributions
Contributing to a pre-tax retirement account like a 401(k) or traditional IRA is one of the most effective strategies to reduce your taxable income.
- 401(k): For 2024, you can contribute up to $23,000 to your 401(k) and an additional $7,500 if you’re 50 or older, lowering your taxable income while allowing it to grow tax-deferred.
- Traditional IRA: Traditional IRA contributions up to $7,000 (plus $1,000 if 50+) may also reduce your taxable income, depending on your income and retirement plan status.
Deduction Eligibility for Traditional IRA Contributions
- If you don’t have a retirement plan at work, you can usually deduct the full amount of your IRA contributions.
- But, let’s say you have a retirement plan at work. In that case, your ability to deduct IRA contributions depends on your income. You cannot take the deduction if your income is $87,000 or more (single/head of household) or $143,000 or more (married filing jointly). Still, a partial deduction may be available if your income is below these thresholds.
Maximize Your Health Savings Account (HSA)
If you have a high-deductible health plan, an HSA is a smart way to save for medical expenses. Here’s what you should know:
- Triple Tax Advantage:
- Contributions are tax-deductible.
- Your money grows tax-free.
- Withdrawals for medical expenses aren’t taxed.
- Contribution Limits for 2024:
- Individuals: Up to $4,150.
- Families: Up to $8,300.
- If you’re 55 or older, you can contribute an additional $1,000.
- Employer Contributions: Any contributions from your employer also count toward your annual limit, so check if they offer this benefit.
- Flexible Spending Accounts (FSAs): These are similar to HSAs but have some differences:
- Funds usually don’t roll over to the next year.
- You can’t invest FSA funds and you lose the account if you change jobs.
Join an Employee Stock Purchase Plan (ESPP)
If your company offers an Employee Stock Purchase Plan (ESPP), it’s a great way to buy company shares at a discount, usually around 15%. Here’s how it works:
- Contribution: You can allocate a portion of your paycheck (1% to 10% of your salary) to buy shares, with a yearly cap of $25,000.
- Tax Benefits:
- If you sell your shares immediately, you’ll pay regular income tax.
- If you hold onto the shares for at least a year, you’ll pay a lower long-term capital gains tax.
- Financial Planning: Make sure you have enough money set aside for this and that it fits with other financial goals like paying off debt or saving for retirement.
Use Tax-Loss Harvesting
If you have investments that aren’t doing well, you can use them to your advantage through tax-loss harvesting:
- Offset Gains: Sell your losing investments to offset gains on other investments, lowering your taxable income.
- Reduce Ordinary Income: If you don’t have gains to offset, you can use up to $3,000 of these losses to reduce your ordinary income.
Deduct Your Student Loan Interest
Paying off student loans can be tough, but you can get some relief by deducting the interest you’ve paid:
- Deduction Limits for 2024:
- You can deduct up to $2,500 if your income is below $75,000 (single) or $150,000 (married filing jointly).
- If your income is higher but under $90,000 (single) or $180,000 (joint), you may still get a partial deduction.
- Federal Loans: If you paid any interest on federal student loans after October 2023, you can deduct that too.
Maximize Your Charitable Contributions
- When it comes to charitable giving, two strategies can help you reduce your taxable income:
Qualified Charitable Distributions (QCDs): For retirees over 70½, donating directly from an IRA to a charity can help reduce taxable income. You can give up to $105,000 per year without paying federal taxes on that amount, and it counts toward your required minimum distribution (RMD). This option is beneficial even if you don’t itemize your tax deductible deductions.
- Bunching Charitable Deductions: If you plan to itemize, consider “bunching” your charitable donations into a single year to exceed the standard deduction. This strategy allows you to claim a larger deduction and potentially reduce your tax burden. You can contribute to a donor-advised fund, which lets you take the deduction in the year you donate while distributing the funds to charities over time.
Mortgage Interest Deduction
The mortgage interest deduction can help you reduce your taxable income by deducting the interest you pay on your mortgage. Here’s how it works:
Deductible Amounts for Mortgage Interest
- Up to $750,000 of mortgage debt.
- $375,000 if you’re married and filing separately.
- If your mortgage was taken out between October 13, 1987, and December 16, 2017, you can deduct interest on up to $1 million of debt ($500,000 for separate filers).
- No cap on deductible interest for mortgages taken out before October 13, 1987.
This deduction is beneficial only if you itemize your deductions rather than taking the standard deduction. Given the higher standard deduction introduced by the 2017 Tax Cuts and Jobs Act, it’s crucial to evaluate whether your total itemized deductions, including mortgage interest, exceed the standard deduction. If they don’t, taking the standard deduction might be the better option.
State and Local Taxes (SALT) Deduction
The State and Local Taxes (SALT) Deduction allows taxpayers who itemize their federal tax returns to deduct certain state and local taxes, including property taxes and either state income or sales taxes, but not both. Under the Tax Cuts and Jobs Act (TCJA), this deduction is capped at $10,000 per year ($5,000 if married filing separately).
Here’s how the SALT deduction works:
- Deductible Taxes: You can deduct up to $10,000 of combined property, state income, and sales taxes paid to state and local governments.
- Cap Limitation: Before the TCJA, there was no limit on the amount that could be deducted. Now, the deduction is capped, which can be particularly impactful for taxpayers in states with high taxes, such as California, New York, and New Jersey.
- High-Income Taxpayers: Before the TCJA, this deduction primarily benefited high-income taxpayers, with 91% of benefits claimed by those earning over $100,000.
The SALT deduction is set to expire after 2025 unless Congress extends it, meaning the current $10,000 cap could be lifted or altered in the future.
Medical Expense Deductions
Medical expenses can add up, but some of them might help reduce your taxable income if they exceed 7.5% of your adjusted gross income (AGI). Here’s how the deduction works:
- Deductible Medical Expenses: You can deduct unreimbursed payments for preventative care, surgeries, dental and vision care, prescription medications, and even some travel expenses for medical care. Psychological care, glasses, hearing aids, and other medical appliances are also included.
- Threshold: Only medical expenses that exceed 7.5% of your AGI are deductible.
- How to Claim: To claim these deductions, you must itemize your deductions on Schedule A of your tax return. It’s often only worth it if your total itemized tax deductible deductions, including medical expenses, exceed the standard deduction.
Medical expenses related to COVID-19 treatment are also deductible, provided they are unreimbursed. However, expenses paid using money from an HSA or FSA are not deductible since the funds in those accounts are already tax-advantaged.
Student Loan Interest Deduction
The Student Loan Interest Deduction allows you to reduce your taxable income by up to $2,500 based on the interest you paid on qualified student loans. Here’s how it works:
- Eligibility: If your modified adjusted gross income (MAGI) is $75,000 or less (for single filers) or $90,000 or less (for married couples filing jointly), you can deduct up to $2,500 of the interest paid on your student loans.
- Loan Requirements: The loan must have been taken out for you, your spouse, or your dependents and must have been used for qualified education expenses like tuition, fees, and necessary supplies.
- How to Claim: This deduction is claimed as an “above-the-line” deduction, meaning you don’t have to itemize your deductions to claim it. You’ll report this deduction directly on your Form 1040.
This deduction can provide some relief, especially as you work to manage your student loan debt, by reducing your overall taxable income.
These tips are designed to help you lower your taxable income effectively. If you need personalized assistance to understand and implement these strategies, SWAT Advisors can guide you.
Moreover, as a leading tax planner in California, they also offer advanced tax planning services nationwide to help you optimize your tax strategy and reduce your liability effectively.
End Note!
Now that you’ve explored what are tax deductions, you’re equipped with the knowledge of what deductions can I claim to make smart decisions that keep more of your hard-earned money in your pocket.
Whether you’re planning for retirement, managing healthcare costs, or paying off student loans, these strategies aren’t just about cutting your tax bill—they’re about optimizing your future.
Every deduction counts, and by being proactive, you’re taking an important step toward freedom. Here’s to a more confident, empowered you in the tax season ahead!
And if you ever need assistance or personalized advice, don’t hesitate to seek guidance from expert tax planning advisors like SWAT Advisors. Their expertise can help ensure you’re making the most of every opportunity to reduce your taxable income and achieve your financial goals.
