The 5 Tax Savings Tips Every Individual Can Implement

Following are 5 tax savings tips that you can implement regardless of whether you own a business or not. 

1. Traditional and Roth IRA

2. HSA Account

3. Child and Dependent Care Credit

4. Bunching itemized deductions in one year that would otherwise be spread over multiple years

5. Making charitable contributions prior to year-end

If you would like to learn more about tax savings tips applicable to you as a business owner, check out this article.

1. Traditional and Roth IRA

• An IRA is an account set up with a financial institution that allows an individual to save for retirement, with tax-free growth or on a tax-deferred basis.
• With a traditional IRA, you get a tax deduction when you contribute to the account and will pay taxes when you withdraw the money. Most people find themselves in a lower tax bracket once they retire. Therefore, the funds will be taxed at a lower rate when withdrawn. 
• In a Roth IRA, you don't get the deduction when you contribute, but the money grows tax-free. The income from the growth is not taxable. 
• For 2023 The IRA contribution limit is $6,500; for 2024, the limit has been increased to $7,000.
• Learn more about IRAs and pensions in general here. 

• A HSA is a tax-advantaged savings account created for people who get their insurance coverage through high-deductible health plans. It allows you to contribute pre-tax money to pay for qualified medical expenses. However, unlike a flexible spending account (FSA), it is not a 'use it or lose it' account. Funds can roll over from year to year.
• HSA contribution limits for 2023 are as follows: $3,850 for single filers and $7,750 for MFJ.
• Learn more about the specifics of setting up a HSA account here. 
  

• This credit is available to taxpayers who paid expenses for the care of "qualifying individuals" which generally include dependent children to enable the taxpayer to work or actively look for work.
• Age limit for children: While the IRS allows this credit for children up to the age of 13, in most cases the expenses related to children over the age of 5 are costs related to schooling which is not permissible. However, expenses for children age 5 and older may still qualify if they are not for schooling. For example, after-school care or summer day camp as as long as they are necessary enable parents/taxpayers to work.
• Credit amount: The maximum amount you could claim for 2023 is 35% of  $3,000 for one child or up to 35% of $6,000 for multiple children. In addition to the IRS, some states, including New York, offer a credit of their own. 
• Earned income requirement: To qualify, you and your spouse must have earned income.

4. Bunching deductions in one year that would otherwise be spread over multiple years.

• As a result of the increase in the standard deduction, $27,700 for Married Filing Joint   2023, some taxpayers are no longer getting a benefit for “itemizing” their deductions. However, before you just take the standard deduction, it may be worth your time to do a little math to see if bunching itemized deductions -  basically itemizing every other year - could save you money over the long term.
• Here’s how bunching itemized tax deductions works: You bunch as many tax-deductible expenses as possible into a single tax year. In the year you have bunched your itemized deductions, you itemize on your taxes. The following year, you take the standard deduction. Moving forward, you then alternate the years you itemize.
• Examples of the most common deductions that qualify are property taxes, health expenses, and charitable contributions using a donor-advised fund (item 5 below). 

• The law now allows taxpayers to apply up to 60% of their AGI for calendar-year 2023 qualified contributions. There are multiple options for you to designate money for charity before year-end without fully relinquishing control of where the charity will be distributed to.
• Here is a quick summary.

  • Donor-Advised Funds- DAF

    A donor-advised fund (DAF) is beneficial when you want to donate a lump sum to charity but are not sure where to distribute it. You can distribute it at any time, there is no minimum, and the account doesn't close after a designated amount of time. A DAF is subject to the 60% limit of your adjusted gross income in 2023. Check out this video for an explainer in Yiddish. 

  • CL(A)T and CR(U)T - A Charitable Lead Annuity Trust and a CRUT - Charitable Remainder Annuity Trust is a trust in which you make a one-time contribution such as property, stocks, and cash. With a CLAT, a percentage of the initial donation is donated every year over the course of 20 years. Once the 20 years are over, the remaining assets go to the beneficiary. A CRUT is a Remainder Trust, which means it does not have to give charity every year. Once the CRUT closes, it has to give the full or remaining amount from the initial contribution to charity.

↔️ Related; Do you know that you can avoid capital gains when donating stocks to charity? Learn more here. 

Disclaimer: This article was written in an oversimplified manner designed to help you as an individual. You should discuss this with a tax professional prior to implementing these steps.