Don’t Forget to File! 8 Tax Filing Tips to Help Mitigate the Stress

April 02, 2024

Have you heard of HENRYs? “High Earners, Not Yet Rich.”

HENRYs are people who earn a lot, and spend what they earn. In case you may be a HENRY, here are eight tips that might help you mitigate some of your tax-reporting stress by modifying your strategy.

1.      Don’t file late

If you don’t file on time or request an extension by April 15, 2024, you could be subject to a penalty. The punishment is typically five percent of the tax owed for a part of or the entirety of each month that your return is late, up to 25% of the taxes owed. Even if you are “just” 60 days late, there is also a minimum late filing penalty, the lesser of $85 (for returns filed in 2024) or 100 percent of the tax owed.

2.      Take advantage of tax credits and deductions

You may be eligible for one or more of a slew of tax deductions and credits. Understanding how can become complex. A software product like those offered by TurboTax and HR Block, and/or a financial professional, might be useful in helping you evaluate what would be available and useful to you.

  • Tax credits are subtracted directly from the total income tax you would otherwise owe. A hypothetical example would be if you owed $8,000 in income taxes and were entitled to a $1,000 tax credit. You would owe $7,000.

 

  • Tax deductions lower the total income on which your taxes are calculated. For example, if you have $40,000 taxable income and $2,000 of deductions above “the standard deduction”, your taxable income would be $38,000.

3.      Increase contributions to your retirement accounts

You can contribute pre-tax dollars or after-tax dollars to an “Individual Retirement Arrangement” (“IRA”) or an employer-sponsored plan like a 401(k) or 403(b).

The benefit to using pre-tax dollars is the tax savings that results in the year of your contribution by your deduction of that contribution from your taxable income, so you pay less taxes now but maybe more taxes later. For example, consider this hypothetical. You earn $60,000 annually and contribute 6% to your tax-deferred 401(k). 6% of $60,000 is $3,600. Therefore, you lower your taxable income to $56,400. For some taxpayers, this change may even lower their tax bracket.

On the other hand, the benefit to using after-tax dollars to fund a Roth IRA (if you meet eligibility requirements) or employer-sponsored plan (if your 401(k) or 403(b) allows for Roth contributions) is that your federal income taxation is out of the way forever: your investments can build toward a source of future tax-free income.

4.      Maximize your 529 plan contributions

If you have children or grandchildren, establishing a 529 plan and making regular contributions also can help to reduce your tax burden as your contributions will grow tax-free in contrast to a savings account that generates taxable income.

529 plan distributions for qualified private, public, or religious K-12 and college educational expenses are tax-free, so any investment growth inside a 401K plan may never be taxed; contributions to the plan, however, are after-tax and not federally tax deductible.

While each 529 plan may have only one beneficiary, you can change that beneficiary from time to time as needs and goals change. You can even name yourself as the beneficiary – or, if there’s money left over, you can after 15 years roll unused 529 Funds into a Roth IRA to help fund your own retirement.

5.      Consider contributing to a health savings account (HSA)

 

An HSA is a tax-advantaged way to save money to pay for qualified medical expenses. Depending on your age and Medicare status, you may be able to establish a Health Savings Account if you have an employer-sponsored high deductible health plan (HDHP).

 

Similar to employer-sponsored retirement plans like 401(k)s and 403(b)s, HSAs have annual contribution limits. But unlike IRA and Roth IRA accounts, HSAs have no income limits that might bar your annual contribution. HSA tax benefits include pre-tax deductions, tax-free growth, and tax-free distributions for qualified medical expenses.

 

6.      Donating more than just money

Of course, you can donate items of value like real estate, stock, used clothing, airline miles, and even the cash flow from investment accounts that you don’t want to give away. Or you can give away investment accounts, take a present-year deduction, but keep the income.

Regardless the kind of gift you make to a qualified charitable organization, the charity can benefit—and you can too by deducting from your taxable income in the year of the gift part or all of the present value of a charitable lead or remainder trust, or the fair market value of donated clothing or furniture.

When tangible goods like books or clothing in good condition are donated, IRS will want an itemized list showing the fair market value at the time of contribution –and an IRS Form 8283 if you are going to claim more than $500 for non-cash contributions.

7.      Manage your paycheck withholding

Within limits, you can decide how much your employer will withhold from each of your paychecks. But keep in mind that too little tax withholding can subject you to a tax penalty.

8.      Consult a financial professional

Enlisting the help of a tax professional can help reduce some of the stress of calculating, documenting, and preparing income tax returns. What credits and deductions are available? How must they be documented? What other tax-advantaged strategies might help reduce your overall taxation expenses? Yes, most tax professionals do charge fees. But might they help you save enough in taxes to cover their fees and more? With less stress?

 

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.

 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

 

Sources:

Topic no. 653, IRS notices and bills, penalties, and interest charges | Internal Revenue Service

The Tax Benefits of Your 401(k) Plan - TurboTax Tax Tips & Videos (intuit.com)

5 Tax Strategies for High Net Worth Individuals | MB Group LLC (mbgcpa.com)

8 ways you can save on taxes in 2024 | Principal

Goodwill Tax Deduction - Donation Tax Write Off's (ccgoodwill.org)

Media Relations Office (irs.gov)