Hi everyone, Bette Hochberger, CPA, CGMA here, and today, I’m going to be discussing taxable income and ways to reduce it. Tax time can be difficult, especially when it comes to understanding taxable income. Whether you’re a first-time filer or a expert taxpayer, knowing what taxable income is and how to reduce it can make a significant difference in what you owe. Let’s break it down!
What is Taxable Income?
Taxable income is the portion of your income that is subject to taxation. It includes wages, salaries, bonuses, rental income, dividends, and any other income you earn. Essentially, it’s your total income minus any deductions or exemptions you qualify for. Understanding this is important because it determines how much you owe to the government.
How is Taxable Income Calculated?
To calculate your taxable income, follow these steps:
1. Start with Total Income: This includes all sources of income such as wages, interest, dividends, and any side hustle earnings.
2. Subtract Adjustments: Some adjustments, like contributions to a traditional IRA or student loan interest, can reduce your total income.
3. Apply Deductions: You can choose to take the standard deduction or itemize your deductions, whichever is higher. Deductions reduce your taxable income.
4. Consider Exemptions: If applicable, personal exemptions (though mostly eliminated in recent tax laws) can also help reduce your taxable income.
Ways to Reduce Taxable Income
Now that you know what it is, let’s explore some strategies to reduce it!
Contribute to Retirement Accounts
Contributions to retirement plans like a 401(k) or a traditional IRA can lower your taxable income. For 2024, the contribution limits are $23,000 for a 401(k) and $7,000 for an IRA, plus catch-up contributions if you’re over 50.
Take Advantage of Health Savings Accounts (HSAs)
If you have a high-deductible health plan, you can contribute to an HSA. Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
Utilize Flexible Spending Accounts (FSAs)
Like HSAs, FSAs allow you to set aside pre-tax dollars for healthcare expenses. This reduces your taxable income while saving for medical costs.
Claim Deductions for Student Loan Interest
If you’re repaying student loans, you can deduct up to $2,500 of interest paid on qualified student loans, depending on your income level.
Explore Education Credits
Tax credits like the Lifetime Learning Credit or the American Opportunity Credit can help you save on taxes if you’re taking college courses or pursuing education.
Consider Itemizing Deductions
If you have significant deductible expenses, such as mortgage interest, property taxes, or charitable donations, itemizing may be more beneficial than taking the standard deduction.
Invest in Tax-Advantaged Accounts
Look into accounts like 529 plans for education savings, which allow you to save for education expenses with tax-free growth.
Understanding taxable income and how to reduce it can empower you to take control of your finances. Remember, every little bit helps, and being proactive can lead to significant savings in the long run. Feel free to schedule a meeting with us to get started on your tax planning today!
I’ll see you next time.
