10 Tax Tips Middle-Class Earners Need To Know
Written by
Ashleigh Ray, AI Editor
Edited by
Ashleigh Ray
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The complexity of tax laws can often be daunting, especially for middle-class earners striving to maximize their savings while remaining compliant with tax regulations.
Understanding a few key strategies can make a significant difference in your financial health. Here, we explore essential tax tips tailored for the middle class, each aimed at enhancing your tax-saving knowledge.
Use Tax-Advantaged Retirement Accounts
One of the most effective ways to reduce your taxable income is by contributing to tax-advantaged retirement accounts like a 401(k) or an Individual Retirement Account (IRA). Contributions to these accounts are often tax-deductible, which lowers your current taxable income.
For 2024, the contribution limit for a 401(k) is $23,000, with an additional catch-up contribution of $7,500 for those aged 50 and above. IRAs, on the other hand, have a contribution limit of $7,000, with an extra $1,000 for the 50-plus age group.
Make sure to maximize these contributions to benefit from deferred taxes and potential employer matches.
Take Advantage of Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) offer a triple tax advantage – contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are also tax-free.
For individuals with high-deductible health plans, contributing to an HSA is a smart move. In 2024, the maximum contribution for an individual is $4,150 and for a family, it’s $8,300. Plus, there’s an additional $1,000 catch-up contribution for those over 55.
Not only do HSAs help you save on medical costs, but they can also be an additional retirement savings vehicle.
Understand Tax Credits
Tax credits are a powerful tool as they directly reduce your tax bill on a dollar-for-dollar basis. Middle-class earners should particularly look out for the Child Tax Credit, Education Credits and the Earned Income Tax Credit (EITC).
The Child Tax Credit can significantly reduce your tax liability if you have dependent children, while education credits like the American Opportunity Tax Credit and the Lifetime Learning Credit can help offset the costs of higher education. The EITC is a benefit for working people with low to moderate income, especially those with children.
Itemize Deductions When Beneficial
While many taxpayers opt for the standard deduction, itemizing can sometimes lead to greater tax savings, particularly if you have significant mortgage interest, state and local taxes, charitable donations or large unreimbursed medical expenses.
For 2024, the standard deduction is $14,600 for singles and $29,200 for married couples filing jointly. Compare these numbers with your potential itemized deductions to see if itemizing is the right move for your money.
Capitalize on Long-Term Capital Gains
If you have investments outside of retirement accounts, understanding capital gains tax is crucial.
Long-term capital gains, on assets held for more than a year, are taxed at a lower rate than short-term gains. For middle-class earners, this rate is typically 15%, which is lower than the ordinary income tax rates.
Timing the sale of assets to qualify for long-term capital gains can net you significant tax savings.
Pay Attention to Tax Law Changes
Tax laws are not static, and staying informed about changes can impact your tax strategy. For instance, recent changes in tax law have affected deductions, credits and retirement account rules. Staying updated can help you take advantage of new opportunities and avoid pitfalls.
Consider Adjusting Your Withholdings
If you consistently receive large refunds or owe a significant amount at tax time, it might be wise to adjust your withholdings. A big refund might feel like a windfall, but it essentially means you’ve given the government an interest-free loan over the last year.
Instead, adjust your withholdings to better match your actual tax liability. This strategy results in increasing your monthly cash flow or reducing the amount owed when filing.
Seek Professional Advice When Needed
While self-filing is feasible for many, situations like owning a business, having multiple income streams or experiencing significant life changes (such as marriage, divorce or having a child) can complicate your tax situation.
In such cases, consulting a tax professional can provide tailored advice and ensure you’re not missing out on deductions or credits.
Don’t Overlook State and Local Taxes
Besides federal taxes, be aware of your state and local tax obligations. These can significantly impact your overall tax burden and understanding them is crucial for effective planning as some states offer credits and deductions that can lower your taxable income.
Plan for Future Tax Implications
Finally, consider the future implications of your current tax decisions. Actions like converting a traditional IRA to a Roth IRA have upfront tax costs but can lead to tax-free withdrawals in retirement.
Similarly, considering the tax implications of your estate plan can ensure your beneficiaries are not overly burdened by taxes when receiving their inheritance.
While navigating tax laws can be complex, being proactive and informed can lead to substantial savings and a stronger financial position. Remember, the key is to plan ahead and, when in doubt, seek professional advice.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
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