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Welcome, Future Early Retirees.

I’m going to be honest, I don’t find taxes to be particularly fun… and I’m an accountant! The rules are complex and as a result an entire industry has been created just to file them. Maybe the Department of Government Efficiency (DOGE) can do something about this, but in the meantime, there are strategies you can adopt that will help you minimize what you owe when you go to file.

In today’s newsletter:

• Share Money Bags 💰

• Understanding how minimize your taxes

• Things I found interesting

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Understanding how minimize your taxes

Understanding the Standard Deduction:

What It Is: The standard deduction is a fixed dollar amount that reduces your taxable income. For tax year 2024, it stands at $14,600 for single filers, $29,200 for married couples filing jointly, and $21,900 for heads of household.

Who Should Take It: If your itemized deductions (like mortgage interest, charitable donations, state and local taxes, etc.) don't exceed this amount, claiming the standard deduction simplifies your tax filing process and ensures you're not missing out on any tax benefits.

Considerations:

• Simplicity: Choosing the standard deduction means less paperwork and no need to keep detailed records of your expenses.

• Standard Deduction Increase: The standard deduction often increases each year due to inflation, potentially making it more appealing if your itemized deductions do not keep pace with inflation.

When Advanced Strategies Might Be Better:

• Itemizing Deductions: If the sum of your itemizable expenses (mortgage interest, property taxes, medical expenses over 7.5% of AGI, charitable contributions, etc.) exceeds the standard deduction, itemizing can save you more on taxes.

• Strategic Bunching: For those whose itemized deductions hover around the standard deduction amount, consider bunching expenses. This means accelerating or delaying certain expenses to maximize itemized deductions in alternate years, thereby exceeding the standard deduction in those years.

Detailed Advanced Strategies to Consider:

1. Retirement Account Contributions:

Max out contributions to retirement accounts like a 401(k) or IRA. By contributing to these accounts, you can lower your taxable income for the year. For 2024, the maximum contribution for an IRA is $7,000 for individuals under 50, and $8,000 for those 50 or older. 401(k) contributions can go up to $23,000, with an additional $7,500 catch-up for those over 50. This reduces your taxable income now while allowing your investments to grow tax-deferred.

2. Tax Loss Harvesting:

If you've experienced losses in your investment portfolio, consider selling those assets before the year ends. This strategy, known as tax loss harvesting, allows you to offset any capital gains you might have realized. If your losses exceed your gains, you can use up to $3,000 of that loss to reduce other income, carrying forward any remaining losses to future years

3. Charitable Giving:

If you itemize, consider making your charitable contributions before year-end. For those over 70½, a QCD from your IRA can satisfy RMDs without increasing your taxable income. Donating appreciated securities can also provide a deduction for their full fair-market value without recognizing capital gains.

4. Health Savings Accounts (HSAs):

If you're enrolled in a high-deductible health plan, contributing to an HSA can provide triple tax advantages: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. For 2024, you can contribute up to $4,150 for self-only coverage or $8,300 for family coverage.

5. Year-End Business Deductions:

Business owners should look at purchasing necessary equipment or supplies before the year ends to claim depreciation or immediate expense deductions.

6. Last-Minute Retirement Account Moves

Consider a Roth IRA conversion if you anticipate being in a lower tax bracket in the future. The conversion will be taxed now, but future growth will be tax-free. For high earners, a backdoor Roth IRA (more on this next week) might be an option if you've exceeded direct contribution limits.

Decision-Making Process:

Calculate Your Deductions: Start by estimating your itemized deductions for the year. If they're close to or less than the standard deduction, consider strategic timing of expenses:

• Accelerate: Pay for next year's deductions now if it pushes you over the standard deduction.

• Delay: If you're over the standard deduction now but expect fewer deductions next year, consider delaying some expenses.

Consider Multi-Year Planning: Sometimes, what's optimal for one year might not be for the next. Look at your financial situation over several years to see if bunching or spreading out deductions makes sense.

Seek Professional Advice: Tax laws are complex, and individual circumstances can significantly alter the best approach. A tax professional can provide personalized guidance.

Review Life Changes: Life events like purchasing a home, having major medical expenses, or changes in income can affect whether itemizing or taking the standard deduction is more beneficial.

By understanding these principles, you can make informed decisions not just for tax year 2024 but also set a strategic path for future years. Remember, the goal is not just to minimize taxes for one year but to optimize your overall financial strategy. Always weigh the simplicity of the standard deduction against the potential savings from itemizing and advanced strategies, keeping in mind both short-term benefits and long-term financial health.

Thank you for reading!

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