Tax Day 2024: Deduct The Stress

By Zach Bergthold, CPA | Mar 20, 2024 |

The arrival of tax day often brings a wave of anxiety. Control the worry by taking charge: Optimize your deductions, streamline your financial documentation, reassess your retirement contributions, and successfully file on time.

And breath.

Optimize deductions

Grasp eligible deductions and credits: Take the time to familiarize yourself with the various deductions and credits you’re entitled to. These could include deductions for mortgage interest, state and local taxes, medical expenses, and more. Often, our clients are unaware of what is or isn’t deductible in nuanced situations, especially with law changes over the past years; this time of the year is perfect to work with a CPA to educate yourself and understand how to maximize deductions.

Maintain a record of business expenses: If you’re self-employed or a small business owner,  accurately tracking your expenses is vital. This includes keeping receipts, invoices, and other supportive documentation for your claims. Accurate tracking of your expenses ensures you’re claiming all eligible deductions and minimizing your taxable income. We often help clients by providing helpful summary worksheets to use during the year, which help summarize a lot of useful information. We also help clients determine deductions that are specially allowed through the tax code, such as depreciation on business assets or eligible contributions to a self-employed 401(k), which requires specific computation.

Factor in charitable contributions: Your charitable contributions benefit the causes you’re passionate about and provide potential tax deductions. Keep a record of all the donations you’ve made throughout the year, whether in cash, property, or goods. Getting proper documentation from the charitable organization to support your deductions is essential.

Optimizing your deductions can lead to substantial savings. However, consulting with a tax professional or financial advisor is crucial to ensure compliance with all laws and regulations. They can provide tailored guidance to your situation and help maximize your deductions.

Streamline financial documents

Collect all necessary tax documents. Ensure you have all relevant documents, such as W-2 forms, 1099 forms, and any other income or expense records. This guarantees you all the information required for accurate filing.

Organize your receipts and records efficiently for year-round organization. Consider using an accordion file or a filing cabinet to keep your documents organized and easily accessible. Categorize different expenses, such as medical, business, and charitable donations.

Digitize essential documents. Consider scanning or photographing necessary receipts, invoices, and other records. Store them in a secure digital location, like a cloud storage service or an encrypted folder on your computer. You can access them whenever required without rummaging through physical files.

Reassess retirement contributions

Maximize contributions to tax-advantaged retirement accounts. Make the most of retirement accounts like 401(k)s and IRAs. These accounts offer tax benefits, such as tax-deferred growth or tax-free withdrawals in retirement. While these changes must occur before the end of the calendar year, we encourage clients to review their contributions and consider increasing them if possible to fully benefit from these advantages. Depending on company retirement options, your current portfolio, your age, and your tax bracket, you can defer $23,000 to $30,000 of income at your marginal tax rate. For high-earning clients in the Portland area, this can provide a 50% marginal rate on savings, resulting in $11,500 to $15,000 of deferred taxes.

Consider catch-up contributions if eligible. If you’re 50 or over, you might be eligible to make catch-up contributions to your retirement accounts. Catch-up contributions allow you to contribute additional funds beyond the regular contribution limits, helping you boost your retirement savings.

Evaluate Roth IRA conversions. Another strategy to consider is converting traditional IRA funds to a Roth IRA. While a traditional IRA offers tax-deferred growth, a Roth IRA provides tax-free withdrawals in retirement. Review your financial situation and consult a financial advisor to determine if a Roth IRA conversion suits you. We advise our clients to execute this strategy by December 31st, but we work with many clients to determine if a Roth conversion is right for them. Depending on a client’s current portfolio, tax rates, and expected future income, we have found 10-20% tax arbitrage opportunities by strategically accelerating income via Roth conversions to decrease required minimum distributions and tax liabilities.

Maximize your savings potential and secure a comfortable financial future by reassessing and optimizing your retirement contributions.

Explore tax planning strategies

Consult with a tax advisor for personalized advice. An advisor can provide invaluable guidance tailored to your specific circumstances. They can help you identify potential deductions, credits, and other opportunities you might not know about.

Review your investment portfolio for tax-efficient strategies. Your investment portfolio can significantly impact your tax liability. Collaborating with a financial advisor can help you explore tax-efficient investment strategies, like tax-deferred accounts or tax-efficient funds, which can help minimize your burden.

Consider tax-loss harvesting. Tax-loss harvesting involves selling investments that have declined in value to offset capital gains, thereby reducing your tax liability. While this is another December 31st requirement, this strategy can be particularly beneficial when you have realized capital gains and wish to minimize what’s owed.

While these strategies can be useful, it’s important to remember that planning should be a year-round effort. By staying proactive and seeking professional guidance, you can maximize your benefits.

Filing promptly

If you cannot file by the deadline, don’t worry. You can file for an extension. Filing an extension gives you extra time to gather all the necessary documents and accurately complete your return. Remember that while an extension gives you more time to file, it doesn’t extend the deadline for paying what you may owe. Estimating and paying any due taxes by the original deadline is important to avoid potential penalties and interest.

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