The One Change You Need to Make for Bigger Tax Savings

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Want to lower your IRS bill? Read on to see how. 

Americans tend to be pretty split when it comes to political matters. But if there’s one thing most people can agree on, it’s that paying less money in taxes is better than paying more.

If you wound up owing the IRS money in 2023, then you may be eager to shrink your tax bill in 2024. And there’s one easy change you can make to lower your personal tax burden.

Put more money into tax-advantaged accounts

The IRS has a pesky way of getting its hands on your money. And it’s not just regular wages that are subject to taxes.

If you make money from a side hustle, that income is taxable. So is interest income earned in a savings account or CD.

If you want to enjoy more of a tax break in 2024, there’s really one move it pays to focus on — taking advantage of accounts that allow you to contribute in a tax-free manner. These accounts include IRAs, 401(k) plans, and HSAs (health savings accounts).

Now some of these accounts have eligibility requirements. Unless you’re self-employed, you can only fund a 401(k) if you have an employer that’s sponsoring one of these plans and allowing you to participate.

Similarly, being able to fund an HSA hinges on your health coverage. In 2024, you can fund an HSA if your health insurance plan has a minimum deductible of $1,600 for self-only coverage or $3,200 for family coverage. Your plan must also have an out-of-pocket maximum of $8,050 for self-only coverage or $16,100 for family coverage.

With an IRA, however, the only requirement to fund an account is to have earned income. And it doesn’t matter whether you earn that income as a salaried employee or a gig worker.

Get as close to the limits as you can

With a traditional IRA, 401(k), or HSA, the money you put in is money the IRS can’t tax you on — up to the annual limits associated with these accounts. So the closer you can get to those limits, the more tax savings you get to enjoy.

The 2024 limits for IRAs are $7,000 for savers under age 50, or $8,000 for those 50 and over. For 401(k)s, they’re $23,000 for workers under 50 and $30,500 for those 50 and over.

HSA limits depend not just on age, but on the type of coverage you have. With self-only coverage, your contribution limit this year is $4,150 if you’re under 55, or $5,150 if you’re 55 or older. For family coverage, your limit is $8,300 if you’re under 55, or $9,300 if you’re 55 or older.

To illustrate the benefit of funding one of these accounts, let’s say you contribute $2,000 this year and normally fall into the 22% tax bracket. That means your contribution will result in $440 of tax savings for you.

Plus, do remember that by funding an IRA or 401(k), you’re setting yourself up with income for retirement. And by funding an HSA, you’re giving yourself a pile of money to tap when healthcare expenses arise. So it’s worth contributing to these accounts for reasons beyond just for the tax benefits, even though saving money on taxes is a great thing in its own right.

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