The following are the top ten generic strategies typically employed to reduce taxes. They may or may not be applicable to your specific situation and this article is not to be read as a task list, or recommendation. Taxes are complex and each strategy must be evaluated for the unique circumstances of each taxpayer. Please contact us to schedule time to discuss your unique situation and for guidance on how to optimize your situation.
Individual Taxpayers
1. Maximize retirement account contributions: Maximize contributions to tax-deferred accounts like IRAs, 401(k)s, or other qualified retirement plans to reduce taxable income. Consider ROTH IRA conversions if 2024 is a lower income / lower tax bracket year.
2. Harvest tax losses: Sell underperforming investments to offset realized capital gains, reducing your overall tax liability. Ensure to follow wash-sale rules to maintain the tax benefit.
3. Bunch itemized deductions: If itemized deductions fall short of the standard deduction, consider grouping deductible expenses, like medical expenses or charitable donations, in a single year to exceed the standard deduction threshold.
4. Make charitable donations: Donate to qualified charities and potentially lower taxable income. For itemizers, charitable contributions may lead to deductions, while others can use the standard deduction.
5. Defer income to next year: Delay income, if possible, to push it into the next tax year to help reduce the current year's tax burden. Useful if expecting to be in the same or lower tax bracket next year.
6. Accelerate deductions into the current year: Pay deductible expenses, such as property taxes or mortgage interest, before year-end to claim them on the current year’s return using the IRS 12-month safe harbor rule.
7. Contribute to a Health Savings Account (HSA): Fund an HSA if you have a high-deductible health plan. Contributions are tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are tax-free.
8. Review and adjust withholdings: Use the IRS withholding calculator to avoid underpayment penalties or large tax bills and ensure your withholding aligns with your tax liability.
9. Make energy-efficient home improvements: Qualify for federal tax credits by investing in energy-efficient systems, such as solar panels or energy-efficient HVAC, potentially reducing both energy costs and taxes.
10. Utilize the annual gift tax exclusion: Give up to $18,000 per individual annually (2024 limit) without incurring gift tax, effectively reducing the estate size over time. Evaluate the use trusts or other estate-planning tools to minimize potential estate taxes.
S-Corporations
1. Optimize owner’s salary for reasonable compensation: Set a salary that meets IRS requirements while taking distributions to minimize payroll taxes. Avoid IRS penalties by maintaining a "reasonable" salary.
2. Maximize the Qualified Business Income (QBI) deduction: Structure income to take full advantage of up to a 20% deduction on qualified business income, subject to IRS limitations and exclusions.
3. Defer income to next year: Delay billing where possible to push income into the next tax year, reducing taxable income in the current year.
4. Accelerate deductions into the current year: Purchase supplies or other deductible items before year-end to bring down taxable income this year using the IRS 12-month safe harbor rule.
5. Contribute to a retirement plan: Establish and contribute to retirement plans for yourself and employees, which can reduce taxable income for the business.
6. Reimburse owners for out-of-pocket health expenses: Establish a health reimbursement arrangement (HRA) to reimburse owner medical expenses on a tax-free basis.
7. Set up an accountable plan for expense reimbursements: Implement an accountable plan to reimburse business-related expenses for owners and employees tax-free.
8. Utilize the Section 179 deduction for equipment purchases: Deduct the full purchase price of eligible equipment immediately, up to the IRS limits, rather than depreciating it over several years. Put QIP (qualified improvement property) into service before the year end.
9. Consider electing to pay pass-through entity tax: Some states allow businesses to pay taxes at the entity level, potentially bypassing the $10,000 SALT deduction cap. (the deadline to elect has passed in most states)
10. Provide tax-free fringe benefits to employees: Offer tax-free benefits like health insurance, dependent care assistance, or retirement contributions, which may reduce the overall tax burden while attracting talent.
Partnerships
1. Maximize the Qualified Business Income (QBI) deduction: Strategize to maximize the 20% deduction on QBI, based on eligibility and income thresholds.
2. Defer income to next year: Delay income receipts or billing, if possible, to defer taxable income to the following year.
3. Accelerate deductions into the current year: Ensure that deductible expenses are paid before year-end to claim them in the current year.
4. Contribute to a retirement plan: Fund a retirement plan for partners and employees, reducing taxable income and offering retirement benefits.
5. Review and adjust partner compensation structures: Examine guaranteed payments and distributions to align with tax-efficient structures.
6. Utilize the Section 179 deduction for equipment purchases: Fully expense qualifying equipment purchases in the year acquired to benefit from immediate tax savings. Put QIP (qualified improvement property) into service before the year end.
7. Consider electing to pay pass-through entity tax: This can allow partnerships in certain states to bypass the SALT deduction cap, potentially lowering partner tax bills (the deadline to elect has passed in most states).
8. Evaluate basis and at-risk limitations: Ensure each partner has sufficient basis to deduct their share of losses. This is especially important for partners who may have high deductions due to losses.
9. Review partnership agreements for tax efficiency: Update agreements to align with tax objectives and to enhance tax benefits for all partners.
10. Implement a tax-efficient profit allocation strategy: Structure profit-sharing arrangements to minimize the total tax burden across partners.
All strategies should be implemented in consultation with a tax professional to ensure compliance and optimize tax outcomes based on specific individual or business circumstances.
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