The mere mention of “April 15” stirs financial anxiety for many. No matter how many years you’ve been paying taxes, they can still be a stressful part of the year, especially since the rules change frequently. It’s important to read the fine print, do your research, and if you need to, hire a professional to guide you through the process.
We checked in with experts on their best, most cost-effective recommendations for tax strategies:
MAXIMIZE YOUR CHARITABLE GIVING
Many charities struggled in 2023, as donations for many were down. In fact, by some estimates, Americans are giving to charity at the lowest level in nearly 30 years. This is in large part due to the Tax Cuts and Jobs Act which, in 2017, substantially increased what’s called the “standard deduction” — the dollar amount each person can deduct from their taxable income every year, in order to reduce how much they pay in taxes to the IRS. Prior to the passage of that law, many people “itemized” on when they filed their taxes. They added up all of their deductions (not just for charitable contributions, but qualifying medical bills, mortgage interest, state and local taxes and other things) and if they exceeded what was then a smaller standard deduction, they itemized. After the law passed? Not so much.
For the 2024 tax year, the standard deduction for single filers will be $14,600, a $750 increase from 2023, and for those married filing jointly, the standard deduction for 2024 is $29,200, a $1,500 increase from 2023. This means that you’d need to have more than that amount in itemized deductions for the year in order to make it worthwhile for you to itemize things. So, the fact that smaller charitable contributions no longer “count” as tax deductible write-offs has hurt charities. This is where a new strategy has come into play, where you batch your donations and deductions into a a single year so that it is worth it to itemize.
Essentially, with this strategy, you’d look to make big charitable gifts in alternate years — or even every 3-5 years — in order to donate enough so that you climb over the standard deduction threshold, which allows you to itemize your deductions for a bigger tax break. This strategy used to be called “lumping” or “clumping” and is now often referred to as “batching” or “bundling.” If this is something you’d like to explore to ensure you’re seeing the most benefit for your charitable contributions every year, chat with your accountant or tax preparer ASAP so you can strategize for the years to come.
IF YOU’RE SELF-EMPLOYED, CONSIDER A SEP IRA
Did you start a new business last year? If so, congrats! If you’re self-employed, you should think strategically about retirement. Josh Zimmelman, the managing partner at Westwood Tax & Consulting, suggests opening a SEP IRA, rather than a Roth IRA since a SEP allows you to contribute more on an annual basis. For the 2023 tax year, an employer (that’s you!) can contribute as much as 25% of an employee’s gross annual salary, or up to $66,000. (For the 2024 tax year, which you’ll pay in 2025, that number goes up to $69,000.) Also, another benefit is that you have up until tax day — April 15, 2024 — to make the transfer.
STAY IN (OR HEAD BACK TO) COLLEGE
If you’ve been on the fence about going to graduate school to advance your degree, now might be the time to dig your heels in and do it… And, if you earn less than $90,000 annually, there are tax breaks to make it easier on your finances. The lifetime learning tax credit (LLTC) can help pay for tuition and related expenses for undergraduate, graduate, and professional degree courses. “Generally, one would use the lifetime learning tax credit for graduate school and continuing education,” says Mark Kantrowitz, a financial aid expert and author of bestselling books about paying for college.
Like many tax credits, the LLTC phases out for higher-income taxpayers. For the 2023 tax year, it phases out between $80,000 and $90,000 of earnings for single taxpayers.
IF YOU’RE A BUSINESS OWNER, START USING THE OFFICE-IN-HOME DEDUCTION
Even though you may be a work-from-home warrior, keep in mind that only sole proprietors or self-employed individuals are eligible for the office-in-home deduction. If you are part of this crew, it’s essential to take advantage of this tax savings, since, when done, correctly, this deduction can be quite substantial. Just make sure you’re following the rules, with the biggest being the space you deduct must be used exclusively for conducting business. “That means you use the space exclusively and regularly for administrative or management activities, such as billing customers, setting up appointments and keeping books and records,” Zimmelman explains. It can’t be part of a playroom, spare bedroom, living room, or any other space since it must genuinely be an office.
As far as what the office-in-home deduction entails, it’s basically any and all expenses pertaining to your home, apartment or condo. There are two ways to calculate your deduction. With the first option, you calculate the percentage of your home’s square footage that you use for work. That percentage of your mortgage, rent, property taxes, utilities, repairs and maintenance, etc., becomes deductible. “One thing to keep in mind about this method is that you’re required to depreciate the value of your home, which can be a tricky calculation,” he says.
The second — and more straightforward — approach lets you deduct $5 per square foot of home used for business, up to 300 square feet, or about a 17-by-17-foot space. “You won’t have to keep as many records with this option, but you might end up with a lower deduction, so consider calculating it both ways before filing,” Zimmelman recommends.
MORE ON HERMONEY:
- 5 Free Or Cheap Ways To File Your Taxes
- HerMoney Podcast: Talk Taxes To Me
- Do I Have To Pay Taxes On Side Hustle Income?
- When To Do Your Taxes Yourself Or Hire An Expert
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