Tax Planning Basics: Keep More of Your Money

Introduction

Tax planning is often overlooked until tax season arrives, but proactive tax planning throughout the year can save you thousands of dollars. Understanding the basics of tax planning, deductions, and credits can help you keep more of your hard-earned money and make smarter financial decisions.

Understanding Your Tax Situation

Types of Income

Earned Income:

• Wages and salaries
• Self-employment income
• Bonuses and commissions
• Tips and gratuities

Investment Income:

• Dividends
• Interest
• Capital gains
• Rental income

Maximizing Tax-Advantaged Accounts

401(k) Plans

Traditional 401(k):

• Pre-tax contributions: Reduce current taxable income
• Employer matching: Free money from employer
• 2024 limit: $23,000 ($30,500 if 50+)
• Tax-deferred growth: No taxes until withdrawal

Roth 401(k):

• After-tax contributions: No current tax deduction
• Tax-free growth: No taxes on qualified withdrawals
• Same contribution limits as traditional
• No income limits

Individual Retirement Accounts (IRAs)

Traditional IRA:

• 2024 limit: $7,000 ($8,000 if 50+)
• Tax-deductible if under income limits
• Tax-deferred growth
• Required minimum distributions at 73

Roth IRA:

• Same contribution limits as traditional
• After-tax contributions
• Tax-free qualified withdrawals
• Income limits for contributions

Common Tax Deductions

Above-the-Line Deductions (Adjustments to Income)

Educator expenses: Up to $300 for teachers Student loan interest: Up to $2,500 Self-employment tax: 50% of SE tax Health insurance premiums: For self-employed IRA contributions: Traditional IRA contributions HSA contributions: Up to annual limits

Itemized Deductions

Medical expenses: Over 7.5% of AGI State and local taxes: Up to $10,000 Mortgage interest: On qualified home loans Charitable contributions: To qualified organizations Casualty losses: From federally declared disasters

Conclusion

Tax planning is an ongoing process that requires attention throughout the year, not just during tax season. By understanding the basics and implementing smart strategies, you can significantly reduce your tax burden and keep more of your money working for you.

Remember, the goal isn't to avoid paying taxes—it's to pay your fair share while taking advantage of all legal opportunities to reduce your tax burden. Start planning now, and your future self will thank you.

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