Spring is right around the corner and if you’re anything like me you’re already excited about longer days and warmer weather. But it’s not all rainbows and butterflies (literally). Everyone’s favorite holiday comes in mid April to remind us that Punxsutawney Phil isn’t the only thing that can ruin the good vibes. I’m talking, of course, about Tax Day.
Now, there is no (legal) way to completely avoid paying taxes, but there are some strategies that can help you control when you pay them and reduce the amount you owe. Good news for you, there’s still time to execute on them.
Here are four things to consider before Tax Day rolls around:
One way you may be able to save on 2024 taxes and stash away money for later is to contribute to a traditional individual retirement account (IRA).
If you have earned income, you can contribute to a traditional IRA. Whether or not those contributions are deductible depends on how much money you make and if you or a spouse have a 401(k) or other employer retirement plan. If you qualify, these accounts can give you an upfront tax deduction on your contributions, and your earnings can grow on a tax-deferred basis. For 2024, you can contribute up to $7,000 to a traditional IRA (plus a $1,000 catch-up if you're age 50 and over), and you have until Tax Day in 2025 to do so.
Since pre-tax contributions to traditional IRAs lower your taxable income, they may even drop you into a lower tax bracket. Some gaps between tax brackets are substantial—just take a look at the gap between the 22% and 12% brackets—so those savings can be significant.
Another option would be to contribute to a Roth IRA. Doing this won't lower your taxable income today, but it might help you save on taxes down the road. In fact, sometimes a Roth may make more sense than a traditional IRA. If you're in a low tax bracket today but anticipate being in a higher tax bracket when it’s time to withdraw the money, a Roth could be a good option. It’s important to note though, Roth IRA contributions are subject to income limitations.
In the event you’re not qualified to make tax deferred contributions to a traditional IRA and your income is too high for a Roth IRA, you may want to consider a "backdoor Roth."
If you're a small business owner or freelancer, you might qualify for what’s called a SEP IRA. It's like a supercharged IRA with higher contribution limits. Thanks to the SECURE 2.0 Act, you can contribute pre-tax or after-tax dollars. For 2024, you can generally sock away up to 20% of your net income or $69,000, whichever is less.
HSAs are like the superheroes of the tax world. They offer a triple tax advantage: contributions are usually tax-deductible, the money grows tax-free, and withdrawals are tax-free if used for qualified medical expenses. For 2024, individuals enrolled in high-deductible health plans can contribute up to $4,150, and families can save up to $8,300. Plus, if you're over 55, you can add another $1,000.
Itemizing deductions is like finding hidden treasures on your tax return. If your deductions exceed the standard deduction ($14,600 for individuals or $29,000 for married couples filing jointly in 2024), you could save some serious cash. Mortgage interest, property taxes, medical expenses – these can all add up. Just be sure to keep those receipts handy and consult a tax professional to make sure you're doing it right.
All of this can be very confusing, so it's a good idea to work with an expert. Your CPA will do a phenomenal job of helping you with taxes, but remember that they typically focus on one piece of your overall situation. Exclusively utilizing an accountant for your finances would be like going to a neurologist for a physical. They are very smart and knowledgeable about the brain, but don’t necessarily have expertise in your whole body. That’s why the best outcomes occur when CPAs work hand in hand with financial advisors to deliver holistic advice for their clients.
If you’d like assistance in thinking about how some of these moves could impact your overall financial health, we’re here to help. We can also help you find a great neurologist, I mean CPA if you don’t have one already.
Let’s make your goals happen, together.
Past performance is no guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful. This information is for illustrative purposes only.
Source: Graphics provided by Dimensional Fund Advisors
Exhibit 1: In USD. Source: Dimensional, using data from Bloomberg LP. Includes primary and secondary exchange trading volume globally for equities. Funds are excluded. Daily averages were computed by calculating the trading volume of each stock daily as the closing price multiplied by shares traded that day. All such trading volume is summed up and divided by 252 as an approximate number of annual trading days. Exhibit 2: The sample includes funds at the beginning of the 20-year period ending December 31, 2023. Each fund is evaluated relative to its primary prospectus benchmark. Survivors are funds that had returns for every month in the sample period. Each fund is evaluated relative to its primary prospectus benchmark. Winners are funds that survived and outperformed their benchmark over the period. Where the full series of primary prospectus benchmark returns is unavailable, non-Dimensional funds are instead evaluated relative to their Morningstar category index. Exhibit 3: This study evaluated fund performance over rolling periods from 2004 through 2023. Each year, funds are sorted within their category based on their previous five-year total return. Those ranked in the top quartile of returns are evaluated over the following five-year period. The chart shows the average percentage of top-ranked equity and fixed income funds that kept their top ranking in the subsequent period. Source (Exhibits 2 and 3): Data Sample: The sample includes US-domiciled, USD-denominated open-end and exchange-traded funds (ETFs) in the following Morningstar categories. Non-Dimensional fund data provided by Morningstar. Dimensional fund data is provided by the fund accountant. Dimensional funds or subadvised funds whose access is or previously was limited to certain investors are excluded. Index funds, load-waived funds, and funds of funds are excluded from the industry sample. Morningstar Categories (Equity): Equity fund sample includes the following Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Global Real Estate, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/ Asia ex-Japan Stock, Real Estate, Small Blend, Small Growth, Small Value, Global Large-Stock Blend, Global Large-Stock Growth, Global Large-Stock Value, and Global Small/Mid Stock. Morningstar Categories (Fixed Income): Fixed income fund sample includes the following Morningstar historical categories: Corporate Bond, High-Yield Bond, Inflation-Protected Bond, Intermediate Core Bond, Intermediate Core-Plus Bond, Long-Term Bond, Intermediate Government, Long Government, Muni California Intermediate, Muni California Long, Muni Massachusetts, Muni Minnesota, Muni National Intermediate, Muni National Long, Muni National Short, Muni New Jersey, Muni New York Intermediate, Muni New York Long, Muni Ohio, Muni Pennsylvania, Muni Single State Intermediate, Muni Single State Long, Muni Single State Short, Muni Target Maturity, Short Government, Short-Term Bond, Ultrashort Bond, Global Bond, and Global Bond-USD Hedged. Index Data Sources: Index data provided by Bloomberg, MSCI, Russell, FTSE Fixed Income LLC, and S&P Dow Jones Indices LLC. Bloomberg data provided by Bloomberg. MSCI data © MSCI 2024, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. FTSE fixed income indices © 2024 FTSE Fixed Income LLC. All rights reserved. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. US-domiciled mutual funds and US-domiciled ETFs are not generally available for distribution outside the US. Exhibit 4: In USD. US Small Cap is the CRSP 6–10 Index. US Large Cap is the S&P 500 Index. US Long-Term Government Bonds is the IA SBBI US LT Govt TR USD. US Treasury Bills is the IA SBBI US 30 Day TBill TR USD. US Inflation is measured as changes in the US Consumer Price Index. CRSP data is provided by the Center for Research in Security Prices, University of Chicago. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. US long-term government bonds and Treasury bills data provided by Ibbotson Associates via Morningstar Direct. US Consumer Price Index data is provided by the US Department of Labor, Bureau of Labor Statistics. Data presented in the Growth of a Dollar chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment. Exhibit 5: Relative price is measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exhibit 6: Number of holdings and countries for the S&P 500 Index and MSCI ACWI IMI (All Country World IMI Index) as of December 31, 2023. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2024, all rights reserved. International investing involves special risks, such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Exhibit 7: In USD. US Large Cap is the S&P 500 Index. US Large Cap Value is the Russell 1000 Value Index. US Small Cap is the Russell 2000 Index. US Small Cap Value is the Russell 2000 Value Index. US Real Estate is the Dow Jones US Select REIT Index. International Large Cap Value is the MSCI World ex USA Value Index (gross dividends). International Small Cap Value is the MSCI World ex USA Small Cap Value Index (gross dividends). Emerging Markets is the MSCI Emerging Markets Index (gross dividends). Five-Year US Government Fixed is the Bloomberg US Treasury Bond Index 1–5 Years. S&P and Dow Jones data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2024, all rights reserved. Bloomberg index data provided by Bloomberg. Chart is for illustrative purposes only. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value Dimensional Fund Advisors does not have any bank affiliates. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions.
