Good morning! As we roll into the end of January, with W2's, 1098's, 1099's and other tax documents coming our way (Ok, so maybe tax preparers are excited this time of year), this is definitely a good time to revisit our personal or business tax strategy and look for any gaps or optimizations we can make before we file taxes for 2024. Or at least be aware of things we might consider for making your life easier this year. Below are some places to examine for this coming tax season. Enjoy!
Take a closer look at your paycheck, part one: If you are expecting a pretty good-sized refund this year, and are consistently getting a refund each year, your W4 withholding is the place to look. Check out https://www.irs.gov/pub/irs-prior/fw4--2024.pdf and the links/worksheets therein to help estimate your withholding for the year. One item to check first is in Step 1, item c, withholding status. If this is a new job, sometimes by default your withholding can be categorized as a "single" taxpayer versus "married filing jointly (MFJ)", which causes greater withholding during the year. This goes for state taxes too. Here in Alabama, this is the A4 form: https://www.revenue.alabama.gov/ultraviewer/viewer/basic_viewer/index.html?form=2021/10/A4_201403.pdf. That said, some folks like to get the refund each year and so prefer the extra withholding. Others prefer to receive a larger paycheck throughout the year versus granting the government use of their money. One strategy is to receive the "extra income" during the year by adjusting the withholding; then save this money on the side and earn interest on it or put it in a Traditional or Roth IRA. Or if you file earlier, get your refund and put it into an IRA.
Take a closer look at your paycheck, part two: Since we are coming out of open enrollment at the end of last year, now is also a good time to check out the benefits withholding on our paycheck. Check to make sure those items that should be pre-tax are pre-tax (HSA, FSA, Medical, etc.), and those items that should be post-tax are indeed withheld as post-tax (Roth 401k, long-term disability). Are they the expected amounts? Am I withholding enough to get the full employer match on my 401(k)? Is it pre-tax or Roth, or both? What are the group life, disability or other benefits I signed up for?
Retirees and newly retired: This is a great time to look at tax strategy. One can check if enough withholding is on one or more income sources (Social Security, pensions, IRAs, etc.) to satisfy the tax withholding and liability for the coming year. If one is instead doing estimated taxes each quarter, it would be worthwhile to revisit the rules to avoid any potential penalties for underpayment. See "Avoid a penalty" at https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty. Either way, if there is a larger withdrawal or other event such as a Roth conversion, this may trigger a payment.
Can you do a Spousal IRA?: If you are a MFJ taxpayer, and you are covered by an employer plan at work and your spouse is not, you may be able to qualify and make use of a spousal IRA to lower your taxes for the previous year. You have until April 15th, 2025, to make this happen for 2024, and it is worth checking out. A tax software or your CPA can model this to see if it has any benefit. The AGI phase out to do this for 2024 is $230,000 - $240,000, so if you are under this threshold, you likely qualify to take advantage of it. You can contribute up to $7000, and if over 50, an additional $1000.
Own a business? How about a SEP-IRA?: If you are self-employed, and there is no retirement plan in place for the business, you can still start and fund a SEP-IRA up until April 15th, 2025. The plan will be in effect and count for 2024. SEP-IRAs are pre-tax, so it is a tax-deferred vehicle and may save some taxes for the previous year.
Did I have any deductions or tax credits that I forgot about?: Although these had to be done in calendar year 2024, thinking back about what happened during the year and if anything changed or major happened such that you can claim some tax credits for the prior year. This applies for federal and state taxes, as they each have different lists of credits that one can claim.
So that is the short list. In reality there are a lot more tax strategies we can consider during and near the end of the calendar year, so I will have another segment discussing these options later in the year. If you would like to discuss and formulate a personal tax strategy before you file for 2024, and to plan out one for 2025, reach out to us and we can dive in. For our clients this is an annual topic we visit every year to optimize their financial plans. Until next time, blessings to you and yours.