Disclaimer: Tax evasion is illegal; tax avoidance is not. I am not a CPA, financial advisor or tax attorney. Please consult a professional for personal advice.
Who doesn't want to save money on taxes? Here are a few ways we can do this!
Health Savings Account (HSA). If you have an option to do this, it is a good idea. Why? Because you can put money in pre-tax, and invest it until you need it for medical costs. If you spend it on medical, it is tax-free on the way out too. It also rolls over, so you never lose it, and you can transfer it if you leave a job. Some jobs offer this, but even if others do not, you can still get one on your own and get a tax write off at the end of the year. For 2024, you can put up to $4,150 for singles or $8,300 for families. If you do not use it on medical by the time you are 65, you can withdraw it with no penalty for any reason, but you do have to pay tax. You can also pass it on when you die; for a spouse it will be tax free, but if it is to another, they will have to pay income tax on the proceeds.
Who can invest in an HSA? If you have a high deductible health plan (HDHP), you can invest, even if your employer does not offer this. You can open an account at Fidelity or various other brokerages fairly easily. Once opened, you can transfer money in, and they will keep track of how far you are from the cap.
Donations. If you donate regularly, it may be worth doing it all in one year rather than year after year, especially if that amount is higher than the standard deduction. For example, if you donate $3,000 a year, consider donating $30,000 this year and nothing for the next ten years. I know this is a lot, but it could save you money on taxes if you can afford to make a bigger contribution in one year. You can also open an investment account (called a DAF) where you can put all of the money this year and then donate a little bit each year to the charity or charities of your choice.
The other thing you can do is donate stock. Let's say for instance you bought $1,000 worth of Nvidia ten years ago, and now it is worth over $300,000 (don't you wish?) If you sold $30,000 worth, you would have to pay capital gains taxes on somewhere around $29,900 in profits. But if you donated $30,000, you would get to write off a $30,000 donation, and you would still have $270,000 worth of NVDA. So you would kind of "save twice" on being taxed.
Speaking of capital gains. For those of you who don't invest, there are many good reasons to do so. One of them is that you can play the system in several ways.
Way #1: Harvest losses. You can sell any stock that has a loss and claim up to $3,000 in losses each year against your ordinary income. What does this mean? This means that if your taxable income is $50,000, by having a loss of $3,000, it brings this down to $47,000, thus lowering your taxes by roughly $1,000 if you are getting taxed 30%. You can buy the stock back after 30 days and still keep it, but you can "harvest" the loss first. Many people do this every year!
Way #2: Step up in basis. If you have stock, like NVDA, that has gone up in price a lot, you can save this for your heirs, and when you pass it on to them, it is as if they bought it on the day of your death. This means that if your heir gets your NVDA and they sell it a day after you die, they do not have to pay any taxes on the gains.
This is also a rule for property, so if you pass on your property to your heirs, they will also get a step up in basis, and the "price they paid" or their "cost basis" will be as of the day of your death.
On the flip side, if you have something that has a big loss, this may be used to offset a gain you have somewhere else, so may be worth selling before you pass away rather than giving this to your heirs. Capital gains on sales net off, so if you needed some income for example, you could sell one thing with a loss and one with a gain so that you have proceeds but don't have any tax implications. Also, losses carry over, so if you sell something and get a $10,000 loss but only take $3,000 against your income, you will have $7,000 in losses left for next year (and beyond).
Way #3: Harvest gains. If you have a stock like NVDA, and you cannot afford to pass it on to your heirs, it may make sense to wait until you are not working any more to sell it. By doing this, you don't have any (or have very little) income coming in and you can sell it little by little so that you don't get into a higher tax bracket. Also, if you make less than a certain amount (for 2024 this is $47,025 for singles and $94,050 for married people), your capital gains are taxed at 0%. So basically, if your social security is $2,000 a month ($24,000/year), as a single, you could sell enough (to have less than $23,025 in gains) to stay below the cap and you would not pay taxes on any of those gains (you will still pay tax on your SS income, but this is beyond the scope of this post).
Last but not least, in investing, it is good to have a little of each account type (IRA/401k, Roth IRA, regular taxable brokerage account, regular savings account) so that you can make the most of them depending on your situation. Especially if you are going to stop working before 59.5 which is the age you can usually take from your retirement accounts without penalty. However, there are ways to make it all work, and to save money on taxes too by having one of each account and taking from each depending on your particular timing.
The other thing you may not realize is that at a certain point you are required to withdraw from your retirement account (currently it is 73 but it keeps changing and is supposed to change to 75 in 2033). This is called an RMD (requirement minimum distribution); depending on how much you have in your retirement account, it may make sense to withdraw a little each year after you are 59.5 so that you are not hit by a larger amount later on. This may not be an issue, but it is worth keeping an eye on.
Do you do any of the above things? Do you have any investment accounts? At what age do you plan on retiring?
I just want you to come and manage all my finances, Kyria.
ReplyDeleteWe donate about 10% of our net income, so definitely do maximize the charitable donation deductions.
I didn't know you could donate stock, though! Smart.
We have some RRSP's (get a tax break now, pay later) but most of our money is in TFSA's which gains interest on already taxed income, so there is no tax on interest. Rates are pretty good right now, so we've tossed a chunk into a 1-year GIC at 4%. That said, we do need to be more strategic with taxes and how we move money around and invest. We're working with an investment banker and will make some changes. We have quite a bit of control since we are self-employed and get to invest both corporate and personal money...but it's also tricky because we have to navigate the different tax rates, weigh benefits of salaries vs. dividends...
Our current accountant is fine, but will never take us to the next level, so that's yet another to-do. Sigh.
Again...just move here, please? Haha.
Yeah, if you play it right, you can save by putting money into a TFSA (Roth) when your tax bracket is lower and into an RRSP (401k) when your bracket is higher (and hopefully you will withdraw when it is lower), so most of us should do both! By working for yourself you have more moving pieces, but also more opportunities to save on taxes if you do it right! Definitely it is important to have someone who knows what they are doing helping you, even if it "costs" you. You need to get to the next level!
DeleteDonating stock is a good idea, and some charities will let you donate the stock right to them, and they will of course sell it afterward. Or you may have to open an account for that if you want to donate to many smaller charities. But even some churches will let you donate stock!
We max out our HSA donations and also have tax loss harvested although we don't have any tax loss opportunities this year as our fixed income funds have done quite well this year. You didn't mention buying municipals for non-qualified accounts! That is something we have focused on for the last several years. The FA we met with told us we needed to focus on investing in qualified accounts since we've maxed out our qualified investments for many years. So in our brokerage accounts, we mostly buy equities, municipals, and preferreds. I manage the fixed income investments, Phil manages the equity ones for the most part. We do not own any individual stocks, though, or not that I know of. It's extremely hard to trade them since we need compliance approval from both firms. It's easy for Phil to get an ok, it's nearly impossible for me. They had a trading holiday a few years ago when we went through a reorg so Phil took that opportunity to move out of nearly all of his individual stock positions. Before we were acquired by TIAA, you could trade a certain number of shares for large cap companies but TIAA had a far more restrictive policy so now it's just impossible to trade stocks.
ReplyDeleteWe also make donations as well. I think the change in the standard deduction has meant that we haven't ended up itemizing the last several years, though? But Phil entirely handles our taxes so I am not 100% sure about that. But no matter what, our tax bill is SO HUGE.
I hope to retire in my early 50s!