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?
