Year-round tax planning: Simple strategies to boost your refund

Tyler Kert
Tamarack Wealth Management

So, you filed your taxes for 2023. Now, you can sit back, relax, and not even think about taxes until next year. Right? Wrong. The truth is the tax you pay is ultimately a result of decisions that you make throughout the entire year. No matter how good your CPA might be, they are not going to be able to retroactively fix problems that can arise from a failure to plan. Now, the goal is not to try to avoid paying the taxes that you owe. However there are many legitimate ways that you can reduce your tax liability. If you’d like to pay less tax, come next April, the time to start is now.

What should you do from now through the end of the year to be prepared for next tax season? Here are a few ideas that could increase your refund by the time next April rolls around.

Contribute to an IRA

An IRA, or individual retirement account, is one of the most well-known investment accounts when saving for retirement. In addition to offering long-term growth through investing in the market, deductions are available to those who contribute to an IRA. 

If you decide to contribute to an IRA, you’ll have to decide between a traditional IRA and a Roth IRA. The question you need to answer is this: Do I want the tax deduction now or later? If you contribute to a traditional IRA, you can write off that contribution as a deduction in the current year. On the other hand, a Roth IRA offers no deduction now but allows your money to grow and be withdrawn tax-free when you take it out after age 59 ½. If you believe your highest earning years are ahead of you, the Roth option may be the better choice because you will pay a lower tax rate now than you will later, assuming your income increases. On the other hand, if you think you are earning more now than you will in retirement, consider a traditional IRA to maximize your tax savings.

So, how much can contributing to an IRA really save you in taxes? If you were to make the maximum $7,000 contribution (the maximum is $8,000 for investors over age 50) in 2024 and you are paying a 24% effective tax rate, your tax liability would be reduced by $1,680. Essentially, you are putting $7,000 towards your future retirement, and your net cash out of pocket is only $5,320. IRAs are popular for a reason. The tax savings and investment growth potential make them a valuable component of a financial plan. 

Contribute to a Health Savings Account

Health Savings Accounts, or HSAs as they are commonly known, were established in 2003. Many people have heard of HSAs but don’t know their full capabilities. HSAs are often overlooked because you can only contribute if you have a high-deductible health insurance plan. But for those who qualify, HSAs are a great wealth-building tool. Not only that, but HSAs offer a unique triple tax advantage. 

HSAs are tax-deductible when you make a contribution, grow tax-deferred, and can be withdrawn tax-free if the proceeds are used for qualified medical expenses. Initially, this doesn’t sound like a great retirement option because you can only withdraw tax-free money for medical expenses. However, some features can make an HSA much more attractive.

Many people don’t realize that there is no time limit on taking HSA reimbursements. If you save your medical receipts, you can “reimburse” yourself whenever you would like. If you’re willing to save receipts for years or even decades, you can give your HSA time to grow in value. Then, in retirement, that roof replacement won’t force you to take an extra IRA withdrawal and bump you into a higher tax bracket. Instead, grab those receipts, and you can withdraw the money tax-free from your HSA. 

The last fact about HSAs that further enforces their viability as a wealth-building tool is the provision that allows money to be withdrawn penalty-free once you reach age 65. This allows your HSA to essentially turn into a traditional IRA with a tax-free medical expense benefit once you reach age 65. 

Finally, the IRA and HSA are only two of many ways to reduce the tax you owe. If you’re already contributing the maximum amount to your IRA, you might consider looking into tax-deferred annuities or municipal bond strategies to reduce your tax liability. If you would like to be proactive and ensure you are ready for next April, I recommend meeting with your tax advisor to optimize your situation. If your financial advisor doesn’t have a tax background, you might get a second opinion from one that does. If nothing else, consider an IRA or an HSA to put some money away for retirement and keep a little more of your hard-earned money in your own pocket.

Tyler Kert, a licensed financial advisor and CPA, provides financial planning and tax consulting services at Tamarack Wealth Management in Cashmere, WA.