Are you tired of paying more taxes than necessary? At Clear View Business Solutions, we understand the challenges salaried employees face when it comes to tax planning.

In this post, we’ll share valuable tax planning tips for salaried employees that can help you keep more of your hard-earned money. From maximizing retirement contributions to leveraging tax-advantaged accounts, we’ll cover strategies that can significantly reduce your tax burden.

How to Maximize Your 401(k) Contributions

Understanding Contribution Limits

The IRS sets annual limits for 401(k) contributions. In 2024, employees can contribute up to $76,500 to their 401(k) plans if you include catch-up contributions. These limits represent the maximum amount you can shield from income tax in the current year.

The Power of Pre-Tax Contributions

Traditional 401(k) contributions are made before taxes. This reduces your taxable income for the year. For example, if you earn $80,000 and contribute $20,000 to your 401(k), you’ll only be taxed on $60,000. This reduction can potentially drop you into a lower tax bracket, resulting in even more savings.

Maximizing Employer Matching

Many employers offer matching contributions (essentially free money). A common match might be 50% of your contributions up to 6% of your salary. If you don’t contribute enough to get the full match, you leave money on the table. Try to contribute at least enough to get the full employer match.

For instance, if you earn $60,000 and your employer offers a 50% match up to 6% of your salary, you should contribute at least $3,600 (6% of $60,000) to get the full $1,800 match from your employer.

Strategies for Increasing Contributions

If you’re not maxing out your 401(k), consider these strategies:

1. Increase your contribution percentage gradually (even a 1% increase can make a significant difference over time).
2. Use auto-escalation features (if available) to automatically increase your contribution percentage each year.
3. Allocate raises or bonuses directly to your 401(k). Since you’re already accustomed to living without this money, you won’t feel the pinch in your monthly budget.

While maximizing your 401(k) is an excellent tax planning strategy, it’s just one piece of the puzzle. A comprehensive tax plan should consider all aspects of your financial life. Let’s explore another powerful tool for tax planning: tax-advantaged accounts.

How Tax-Advantaged Accounts Boost Your Savings

Health Savings Accounts: Triple Tax Advantage

Health savings accounts (HSAs) are savings vehicles that offer tax benefits and can help you cover what may be your largest expense in retirement: health care. HSAs provide long-term value because unused funds roll over year to year, potentially growing into a significant medical expense fund for retirement. Some employers even offer HSA contribution matches (similar to 401(k) plans). Taking full advantage of this benefit can significantly boost your savings.

Flexible Spending Accounts: Plan Carefully

Flexible Spending Accounts (FSAs) allow you to set aside pre-tax dollars for healthcare and dependent care expenses. In 2024, you can contribute up to $3,200 to a healthcare FSA and up to $5,000 to a dependent care FSA. The main caveat with FSAs is the “use it or lose it” rule – you must use funds within the plan year or a short grace period thereafter.

To maximize your FSA benefits, estimate your expected expenses for the year carefully. Some employers offer a $610 rollover option for healthcare FSAs, which provides more flexibility. If you have predictable medical or childcare expenses, an FSA can reduce your taxable income significantly.

Individual Retirement Accounts: Choose Wisely

Individual Retirement Accounts (IRAs) provide additional tax-advantaged saving options beyond employer-sponsored 401(k)s. In 2024, you can contribute up to $7,000 to an IRA, with an additional $1,000 catch-up contribution if you’re 50 or older.

Traditional IRAs offer tax-deductible contributions and tax-deferred growth, but withdrawals in retirement are taxed as ordinary income. The U.S. government charges a 10% penalty on early withdrawals from a Traditional IRA, and a state tax penalty may also apply. Roth IRAs are funded with after-tax dollars but offer tax-free growth and tax-free withdrawals in retirement.

Your choice between Traditional and Roth IRAs depends on your current tax bracket and expected tax bracket in retirement. A Roth IRA might benefit you more if you expect to be in a higher tax bracket in retirement. Conversely, a Traditional IRA could be the better choice if you’re in a high tax bracket now and expect to be in a lower bracket in retirement.

Maximizing Your Tax-Advantaged Accounts

To make the most of these accounts:

1. Contribute the maximum amount allowed to your HSA if you have a high-deductible health plan.
2. Use your FSA for predictable healthcare or dependent care expenses.
3. Consider opening an IRA in addition to your 401(k) to further reduce your tax burden.

These tax-advantaged accounts can significantly reduce your current tax burden while building a strong financial foundation for the future. However, they’re just one piece of the tax planning puzzle. The next chapter will explore additional deductions and credits that can further reduce your tax bill.

How to Maximize Your Tax Deductions and Credits

Understanding Standard vs. Itemized Deductions

The IRS offers two main options for deductions: standard and itemized. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. You should choose the option that provides the larger deduction. If your itemizable expenses exceed the standard deduction, itemizing will maximize your tax savings.

Common itemizable deductions include mortgage interest, state and local taxes (capped at $10,000), and charitable contributions. Maintain detailed records of these expenses throughout the year to simplify tax preparation.

Overlooked Deductions for Salaried Employees

Several valuable deductions remain available for salaried employees:

1. Unreimbursed educator expenses: Teachers can deduct up to $300 for classroom supplies purchased out of pocket.
2. Student loan interest: You can deduct up to $2,500 in student loan interest payments (subject to income limitations).
3. Moving expenses for military personnel: Active-duty military members can deduct unreimbursed moving expenses for military-ordered moves.
4. Health Insurance Premiums for Self-Employed: Self-employed individuals can deduct 100% of their health insurance premiums.

Tax Credits That Reduce Your Tax Bill

Tax credits directly reduce your tax bill dollar-for-dollar, making them particularly valuable. Here are some credits you shouldn’t overlook:

1. Earned Income Tax Credit (EITC): This credit benefits low to moderate-income workers. For 2024, the maximum credit ranges from $4,328 to $8,046 (depending on filing status and number of children).
2. Child Tax Credit: This credit is worth up to $2,000 per qualifying child under 17 for 2024. It’s partially refundable, allowing you to receive up to $1,500 even if you don’t owe taxes.
3. American Opportunity Tax Credit: This education credit provides up to $2,500 per eligible student for the first four years of higher education.
4. Retirement Savings Contributions Credit (Saver’s Credit): Low to moderate-income taxpayers can claim a credit for contributions to retirement accounts. The credit is worth up to $1,000 ($2,000 if married filing jointly).

Strategies to Maximize Deductions and Credits

To optimize your tax situation:

1. Track all potential deductible expenses throughout the year.
2. Contribute to tax-advantaged accounts (e.g., IRAs, HSAs) to reduce your taxable income.
3. Time your expenses strategically. For example, you might bunch charitable donations in one year to exceed the standard deduction threshold.
4. Review your eligibility for various credits annually, as your situation may change.
5. Consider working with a tax professional to identify all applicable deductions and credits for your unique situation.

Final Thoughts

Effective tax planning empowers salaried employees to retain more of their earnings. The strategies we discussed can significantly reduce your tax burden and enhance your financial well-being. Tax laws change frequently, so you must stay informed about updates to optimize your tax situation each year.

Clear View Business Solutions understands the complexities of tax planning for salaried employees. Our experts can help you navigate the tax landscape and ensure you don’t miss opportunities to reduce your liability. We offer personalized strategies tailored to your unique financial situation, helping you make informed decisions aligned with your long-term goals.

Effective tax planning creates a solid financial foundation for your future. You can minimize your tax burden and maximize your financial potential with the right strategies and support. Take control of your financial future by implementing these tax planning tips and partnering with a trusted advisor.