Tax Planning Tips for Individuals
You may not think about taxes often, but they can prove to be a large expense. That's why it's important to make the most of any opportunities you may have to lower your tax liability. Here's a look at some of the factors you may want to consider in your planning.
Standard Deduction or Itemizing
The Tax Cuts and Jobs Act (TCJA) contained many provisions that will be in place through the 2025 tax year. For example, there are significantly higher standard deductions for each filing status and various itemized deductions have been reduced or eliminated. As a result, many people who previously itemized are now better off taking the standard deduction. But don't automatically rule out itemizing, especially if you expect to make a large charitable contribution or will have a lot of medical and dental expenses. By bunching these items in one tax year, to the extent possible, you may have enough to make itemizing worthwhile that year.
Home/Work Tax Breaks
If you are a traditional full-time employee and work from home, home office expenses are not deductible, even if you itemize. The deduction for unreimbursed employee business expenses (and various other miscellaneous expenses) won't be restored until 2026. However, if you are a self-employed/gig worker, you may qualify to deduct your home office expenses. Certain requirements apply.
Work-related moving expenses may now be deducted only if you are an active-duty member of the Armed Forces and the move is per a military reassignment. This deduction is available whether you itemize or claim the standard deduction.
Health Savings Accounts (HSAs)
HSAs continue to offer tax breaks. If you are covered by a qualified high-deductible health plan and meet other requirements, you can contribute pretax income to an employer-sponsored HSA or make deductible contributions to an HSA you open on your own. An HSA can earn interest or be invested, growing in a tax-deferred manner similar to an individual retirement account (IRA). And HSA withdrawals for qualified medical expenses are tax free. You can also carry over a balance from year to year, allowing the account to grow.
Family Related Tax Credits
The TCJA expanded tax credits for families, doubling the child credit and adding a family credit for dependents who don't qualify for the child credit. Credits include one for each child under age 17 at the end of the tax year (under age 18 for 2022) and another for each qualifying dependent who isn't a qualifying child. The latter category includes an older dependent child or a dependent elderly parent.
The adoption credit and the income exclusion for employer adoption assistance are still in place. You'll want to check into the details if you are adopting a child.
Section 529 Plans*
These tax-advantaged savings plans assist in paying for education. While initially used to pay for a college education, 529 plans may now cover elementary through high school education as well. Some states offer tax breaks for 529 plan contributions. However, contributions are not deductible on your federal return. Growth related to 529 contributions is tax deferred, and withdrawals for qualified education expenses -- including elementary and secondary school tuition of up to $10,000 per year per student -- are free of federal income taxes.
A special break allows you to front-load five years' worth of gift tax annual exclusions and make up to a $80,000 contribution per beneficiary in one tax year free of federal gift tax. If you make the contribution with your spouse, the total can be extended to $160,000. (These limits may be inflation adjusted.)
Other Education Tax Breaks
As before, you may be able to take advantage of either the American Opportunity credit or the Lifetime Learning credit for higher education costs. The first credit can be up to $2,500 per student per year for the first four years of college. The second credit is limited to $2,000 per tax return and is available for qualified expenses of any post-high school education at an eligible educational institution, including graduate school.
In addition, if you are paying off your student loans, you may be able to deduct the interest, up to $2,500 per year. This deduction is available whether you claim the standard deduction or itemize.
Keep in mind that there are income limits for these tax breaks.
To help reduce the taxes you pay on investment gains in taxable accounts, you may want to consider:
- Selling securities with unrealized losses before year end to offset realized capital gains.
- Choosing mutual funds** with low portfolio turnover rates that tend to generate long-term capital gains, since the lower long-term rates offer a tax savings.
- Factoring in that you can deduct only $3,000 of net capital losses per year against other income ($1,500 if you're married filing separately), but you can carry forward excess losses to subsequent tax years.
You should also be aware that if you have modified adjusted gross income of over $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately), you may owe a 3.8% "net investment income tax," or NIIT.
While the TCJA made only minimal changes in the area of retirement planning, there are still issues to consider. The main one is whether you want to pay taxes on your retirement account contributions later (when you eventually take distributions from your account) or pay taxes on them now (which means potentially tax-free distributions when you retire). It all depends on the type of savings vehicle you use.
Traditional 401(k), 403(b), and 457 plans and traditional IRAs allow you to save for retirement on a tax-deferred basis. Your employer may also choose to make contributions to your plan account. Salary deferrals to 401(k) and similar plans are generally pretax, while traditional IRA contributions are tax deductible under certain circumstances.
Roth alternatives - available in some employers' 401(k), 403(b), and 457 plans, as well as through a Roth IRA you open on your own - provide no tax break on contributions. However, investment earnings accumulate tax deferred. And, when requirements are met, distributions from your account are tax free. Since Roth accounts in employer plans lack income restrictions, you may be able to make larger contributions to an employer's Roth plan than to a Roth IRA.
As always, make sure that you obtain professional advice before making tax-related decisions. Your tax professional can provide detailed information and help you evaluate what might be appropriate for your personal tax situation.
*Certain 529 plan benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used.Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer's official statement contains more information about municipal fund securities, and you should read it carefully before investing.
**You should consider a fund's investment objectives, charges, expenses, and risks carefully before you invest. The fund's prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.
This communication is not intended to be tax advice and should not be treated as such. Each individual's tax circumstances are different. You should contact your tax professional to discuss your personal situation.