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- đ° Donât just earn it, keep it: 5 tax strategies for high-earning W2s
đ° Donât just earn it, keep it: 5 tax strategies for high-earning W2s
đ Why let business owners have all the tax savings fun?
âď¸ Good morning.
Welcome back to Making Cents of Your Money, where we eat tax puzzles for breakfast.
You probably finished filing your taxes feeling like youâre paying too much, right?
You're not alone. Many employees, especially those with higher salaries, frequently miss opportunities to optimize their tax returns through legal credits, deductions, and strategic planning.
This is mainly because they assume that the tax code primarily benefits business owners, and there wonât be a high enough ROI for their attention to âscrape the bottom of the barrelâ of tax advantages for W-2 employees.
Well, they couldnât be more wrongâtoday, weâre reviewing five critical tax strategies that prove a piece of the tax relief crop goes unappreciated every year!
It'll only take five minutes to introduce you to five critical tax strategies that could immediately begin shifting the taxing landscape in your favor.
đŞ Beef Up That 401(k): The Tax Shelter Workout
The 401(k) limit is increasing to $23,000 for Tax Year 2024 (and the IRA limit is rising to $7,000), meaning you kill two birds with one stone:
Reduce your current taxable income. For example, if you earn $100,000 annually, contributing the maximum amount could lower your taxable income to $77,000, potentially dropping you into a lower tax bracket and saving you thousands in taxes immediately.
Saving for the future.
What you can do today: Email HR, make sure itâs maxed out, and watch your taxable income drop like enthusiasm at a mandatory team-building day.
đŞ The Mega Backdoor Roth IRA: Supercharge Your Retirement Savings
Backdoor Roths and their Mega big brothers have been the Making Cents of Your Money darlings this month.
Why?
The Mega Backdoor Roth is an entirely legal ninja move that allows salaried employees to slip up to $69,000 (in after-tax money) into a Roth and let it grow tax-free until retirement.
What you can do today: Verify with your employer's HR or benefits manager whether your current 401(k) plan allows for after-tax contributions and in-service withdrawals, both prerequisites for implementing the Mega Backdoor Roth.
â Extra creditâ cozy up with the process in our Mega Backdoor Roth IRA guide.
ââExtra extra creditâ Get a free Financial Analysis to see if a Mega Backdoor strategy works for you.
âŁď¸HSA: The Triple Tax Threat
Got a high-deductible health plan? Perfect.
You may be able to tap into three unique tax benefits with your HSA:
deductions when you contribute
tax-free earnings,
tax-free withdrawals for qualified medical expenses.
For example, if you contribute the family maximum of $7,300 and are in the 24% tax bracket, you could save approximately $1,752 in taxes this year alone.
What You Can Do Today: Open or review your HSA contributions to ensure you're maximizing this opportunity. Consider setting a calendar reminder to make periodic contributions throughout the year.
âExtra credit: Read through the IRSâs Health Savings Accounts. Itâs not exactly âfunâ by even financial planner standards, but it will help you better understand the ins and outs of HSAs.
âď¸Opportunity Zones: Like Monopoly, but This Time Itâs for Real Money
if you enjoy long-term games, hate parting with your gains, and are interested in using your money to make a real-world positive impact, opportunity zones might be perfect for you.
Investing in Opportunity Zones can defer taxes on prior gains until 2026, and if held for ten years, any gains from these investments are tax-free. Imagine investing $50,000 in an Opportunity Zone project today, seeing it grow to $100,000 over ten years, and not paying a dime on the $50,000 gain.
What You Can Do Today: Research Opportunity Zone funds or consult a financial advisor to find eligible investment opportunities that align with your long-term financial goals.
đ Tax-Loss Harvesting: Making Losers Work for You
Got investments that arenât doing too hot?
By selling underperforming stocks, you can realize losses that offset gains in other parts of your portfolio.
For example, if you have $5,000 in gains and $5,000 in losses, they offset each other, making your taxable gains essentially zero.
However, be aware of the wash sale rule, which prohibits selling an investment at a loss and repurchasing the same or a substantially identical asset within 30 days before or after the sale.
What You Can Do Today: Schedule a review of your investment portfolio with a financial planner to identify positions that could be strategically sold to harvest losses, potentially reducing your taxable income for the year.
Making Cents of Tax Advantages for W-2 Employees
Tax planning isn't just about minimizing what you oweâit's about managing and (more importantly) expanding your wealth.
Too many W-2 employees go through their highest-earning years not doing any active tax strategy, only to find themselves at a lackluster retirement fund and investment portfolio.
Why?
Because a meaty chunk of their earnings automatically goes to Uncle Sam every paycheck.
A wise man once said, "Whoever doesnât master their circumstances is bound to be mastered by them.â
By taking a proactive approach to your taxes, you're not merely dodging overpayments but actively redirecting those potential overpayments toward building a more prosperous future.
This sort of planning doesnât have to be a year-end sprint but a series of leisurely strolls year-round if done correctly.
Until next week!
Dan from Tailored Cents