Guidance for Tax Season

Every spring, taxpayers race to gather their tax documents to make sure they have everything ready for the April 15th filing deadline. Even though anyone can file an extension, this does not give you the ability to delay paying any underpayments. If you know that you are in an overpayment position, be sure you complete your taxes in a timely manner to get that money back.

Important note, just because you are eligible to participate in some of the below strategies does not always make it the right choice. Knowing which ones are right for you is a matter of Trust. Please consult with one of our relationship managers if you have questions above different tax strategies.

What to Consider When Finalizing Your Taxes

1. Health Savings Account (HSA)

What is an HSA? An account created to cover eligible out-of-pocket health care expenses for those who participate in a high-deductible health plan. Unlike a Flexible Spending Account (FSA) it is not a use it or lose it account. It can be used year over year and moved from company to company.

Why it may be Important: Contributions made by the employee and employer are put in pre-tax environment, meaning that individual contributions are tax-deductible. These funds can then be used to offset future healthcare costs or invested for growth, like in an IRA or 401k. One key distinction from a qualified retirement account is that any distributions (so long as eligible expenses) are not taxed as ordinary income. Therefore, you receive what most call a triple tax advantage—deduction for contributions, growth in the account is not taxed, and distributions are not picked up as taxable income.

Key limitations for 2024 contributions if you are eligible to contribute:

• Family HSA: $8,300
• Individual HSA: $4,150

Two additional notes on these accounts. They can be funded for the prior year up until the April 15th tax deadline and if you are 55 or older you can add an additional $1,000.00 per year as a catch-up. Click here for a full list of the IRAs eligible HSA expenses.

2. Flexible Spending Account (FSA)

What is an FSA? Another type of pre-tax account that is sometimes available through your employer is a Flexible Spending Account. While there are some similarities to a Health Savings Account, there are also some very key differences. FSAs are dedicated to help offset anticipated health costs, and contributions are made tax-deductible to the employee. However, if the money is not used in the calendar year, the employee would forfeit the funds. Employers may add a grace period up to 2.5 months after the end of the year to use up the remaining funds, but this is not always the case. There are also special FSAs, known as dependent-care flexible spending accounts that may be set up to accommodate expenses related to care of children 12 and under or qualified adult dependents.

Key limitations for 2024 contributions if you are eligible to contribute:

• Health Care FSA: $3,200
• Dependent Care FSA: $5,000

Click here for a full list of the IRAs eligible FSA expenses.

3. Roth Conversions

What is a Roth Conversion? Roth conversions are the conversion of your pre-tax retirement accounts, such as Traditional IRA, to a Roth IRA. When you take a distribution from your Traditional IRA, it is taxed at ordinary income tax rates. This is because you received a tax deduction at the time the contribution was made. Roth IRAs, on the other hand, offer tax-free growth while also offering tax-free distributions. This is because all contributions to these accounts did not receive a tax deduction at the time of the initial contribution.

Why it may be important: When going into retirement, most individuals have a large balance in their pre-tax accounts. This can make it tricky when making distributions for discretionary spending in retirement, due to the large balances that will eventually need to be taken out at ordinary income tax rates. 

During your Pre-Required Minimum Distribution (RMD) age there is sometimes an opportunity to make Roth Conversions. This is because because during this time period you are typically in lower tax bracket, you are not forced to take out distributions subject to ordinary income tax rates. If you can pre-pay taxes on a Roth conversion at a lower rate than what you would pay later on when RMDs are established, it can help greatly lower your taxes during your retirement period while also diversifying your savings over the course of retirement. We suggest working directly with your CPA or financial advisor to determine if this makes sense for you and what amounts you would be comfortable converting.

4. Traditional IRA/Roth IRA/401(k) savings

While you are completing your 2023 taxes from January 1 to April 15, you have the opportunity to lower your tax liability for the prior year, while also reducing your tax liability for 2024. 

Traditional IRA: A great way to do this is by making contributions to a Traditional IRA. You have until April 15 of the following year to make contributions to a Traditional IRA. There are limits to which you can contribute based on the IRS and income limitations. If you should have further questions, please seek the advice from your CPA or financial advisor.

Roth IRA: While making contributions to a Roth IRA will not lower your tax bill, it is still a great vehicle to utilize when diversifying your savings buckets for retirement. Similar to the Traditional IRA, there are IRS and income limitations to what you can contribute.

401(k): 401(k) savings are an integral part of your tax liability in any given year. Not only do you want to utilize a savings rate to participate in a company match, but you also want to take into consideration how much you are putting in for a reduction of taxes. Most 401(k) plans offer a pre-tax and Roth deferral component. This allows participants to utilize savings based on their effective tax rate.

Typically, when you are in a lower effective tax bracket, you want to be utilizing the Roth component, and when you are in a higher effective tax bracket utilizing pre-tax. Working directly with a CPA or financial advisor can help you determine what amount would be appropriate to put into each to be the most tax efficient.

5. Qualified Charitable Distributions (QCDs)

When you turn 73, you are required to take Required Minimum Distributions (RMDs) on any money that is in a pre-tax environment such as a Traditional IRA. Beginning in 2033, this will adjust to age 75. 

When taking a distribution, regardless of need, you are generally taxed at ordinary income tax rates. If you are above the age of 70.5, it can often be advantageous to give charitably from your IRA rather than your personal checking account. When giving from you IRA directly, you are reducing dollar for dollar the amount of taxable income that would otherwise be picked up on your tax return.