Cypress Wealth Services
January 2024
Like it or not, tax season is here. While you may not be ready yet to think about your taxes, being prepared can save you time and money.
At Cypress Wealth Services, our goal (in addition to relieving stress during tax time) is to help clients keep more of what they earn by minimizing their tax liability and maximizing their savings. We’ve compiled 10 strategies to plan ahead to maximize your tax savings in 2024.
Maximizing your retirement contributions is one of the best ways to minimize your tax liability. This is because retirement plans (*1) offer useful tax advantages that are not available if you were to simply put your money in a savings account. There are several accounts to consider, depending on your unique circumstances:
If you are outside of the income eligibility threshold for Roth IRAs but still want to take advantage of the Roth tax benefits, a Roth conversion could be the right strategy for you. It works by paying the income tax on your pre-tax traditional IRA and converting the funds to a Roth IRA.
You could also consider the mega backdoor Roth and backdoor Roth IRA strategies:
All three Roth conversion strategies will allow the contributions to grow completely tax-free and allow you to avoid future RMDs, which is helpful if you expect to be in a higher tax bracket in the future.
An efficient but underutilized way to maximize your savings and minimize your taxes is to contribute to a health savings account (HSA). HSAs offer triple tax savings: contributions are tax-deductible, earnings grow tax-free, and you can withdraw the funds tax-free to pay for medical expenses. Unused funds roll over each year and will essentially become an IRA at age 65, at which point you can withdraw funds penalty-free for non-medical expenses. You must be enrolled in a high-deductible health plan in order to qualify for an HSA.
HSAs can be a great tax-management tool if you are able to pay medical expenses out of pocket and leave the HSA funds to grow. The 2023 contribution limits for HSAs (*6) are $3,850 for individuals and $7,750 for families. (The 2024 limits increased to $4,150 and $8,300, respectively.) If you are 55 or older, you may also be able to make catch-up contributions of $1,000 per year. You have until April 15th for your contributions to count for the previous year’s tax return.
If you itemize your tax deductions because of charitable contributions, you may want to consider investing in a donor-advised fund (DAF). You can contribute a lump sum all at once and then distribute those funds to various charities over several years. With this strategy, you can itemize deductions when you make the initial contribution and then take the standard deduction in the following years, allowing you to make the most out of your donation tax-wise.
You can also donate appreciated stock, which can further maximize your tax savings. By donating the appreciated position, you avoid paying the capital gain tax that would have been due upon sale of the stock and you are effectively donating more to your charities of choice than if you had sold the stock and donated the proceeds.
If you own a qualified retirement account and are at least 70½, you can use a qualified charitable distribution (QCD) to receive a tax benefit for your charitable giving. Since this is an above-the-line deduction, it can be used in conjunction with other charitable tax strategies. A QCD is a distribution made from your retirement account directly to your charity of choice. It can also count toward your RMD when you turn age 73, but unlike RMDs, it won’t count toward your taxable income. Individuals can donate up to $100,000 in QCDs per year (*7), which means a married couple can contribute a combined amount of $200,000!
Tax-loss harvesting involves selling investments at a loss in order to offset the gains in your portfolio. By realizing a capital loss, you are able to counterbalance the taxes owed on capital gains. The investments that are sold are usually replaced with similar securities in order to maintain the desired asset allocation and expected return.
With the ups and downs the market experienced in 2023, chances are you have some capital losses that can be utilized. For example, if you are expecting a large capital gain this year, sell an underperforming stock and harvest the losses to offset your gain.
Tax-loss harvesting can also be used to reduce your ordinary income tax liability if capital losses exceed capital gains. In this case, up to $3,000 can be deducted from your income, and capital losses in excess of this amount can be carried forward to later tax years.
Understanding the tax implications of long-term versus short-term capital gains can go a long way in reducing your tax liability. For instance, in 2023 a married taxpayer would have paid 0% capital gains tax on their long-term capital gains if their taxable income falls below $89,250 (*8). That rate jumps to 15% and 20% for taxable incomes that exceed $89,250 and $553,850, respectively. Understanding where you fall on the tax table is an important part of minimizing your liability.
Gains that are short term in nature (held less than one year) will be taxed at your marginal tax bracket, which could be up to 37%! Knowing both the nature of your gain, as well as your tax bracket, is crucial information if you want to minimize your tax liability.
Business owners involved in partnerships, S corporations, or sole proprietorships can take a qualified business income deduction (QBID) to help reduce taxable income and maximize tax savings. This allows for a maximum deduction of 20% of qualified business income, but limits apply if your taxable income exceeds a certain threshold (*9). To qualify for this deduction, consider reducing or deferring income so that you can remain below the phase out threshold. A great way to do this is to maximize your retirement contributions to tax-advantaged accounts (as discussed in point #1).
Estate tax-planning techniques can also be an effective way to reduce current-year tax liability. For 2024, the lifetime exemption (*10) for assets that can be given gift-tax free is estimated at $13.61 million for individuals and $27.22 for married couples (12.92 million for 2023 (*11)).
The annual gift tax exclusion (*12) increased to $18,000 per recipient in 2024, up from $17,000 in 2023. This is the annual amount taxpayers can give tax-free without using any of the above-mentioned lifetime exemption. Not only that, but the annual exclusion applies on a per-person basis, so each taxpayer can give $18,000 per person to any number of people per year.
Though gifting and other estate tax-planning strategies are not tax-deductible, they can help to significantly reduce your taxable estate over time.
Beyond consulting with a tax professional, you’ll want to be sure your entire financial team is working together to provide cohesive oversight and guidance. This should include professionals like CPAs, financial advisors, investment advisors, and estate attorneys. Your finances don’t exist in a bubble and so neither will your tax-minimization strategies. When your advisory team works together, strategies are easier to identify and execute, and proactive tax solutions become much easier to implement, reducing stress and your tax bill.
Good news: Tax planning doesn’t have to be stressful or complicated.At Cypress Wealth Services, we can help you navigate these strategies while taking into account your overall goals and financial plan.
If you want to be proactive about tax planning and don’t have a trusted advisor yet, we would love to help you experience confidence in every aspect of your financial plan. Set up an appointment today by calling us at 866.888.6563 or contact one of our offices today.
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high-net-worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services serves a broad range of client needs using their knowledge and experience to act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring the wealth and legacy a person has already built to their loved ones. With financial advisors in California, Alaska, Arizona, and Georgia, the firm serves clients across the country with Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.
(*1)- https://www.cypressws.com/news/countdown-to-retirement-12-step-checklist-if-youre-retiring-in-2024
(*4)- https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
(*5)- https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2023
(*6)- https://www.irs.gov/pub/irs-drop/rp-22-24.pdf
(*8)- https://www.kiplinger.com/taxes/capital-gains-tax/602224/capital-gains-tax-rates
(*9)- https://www.irs.gov/newsroom/qualified-business-income-deduction
(*11)- https://smartasset.com/estate-planning/gift-tax-explained-2021-exemption-and-rates
