Do you need answers to these top tax questions?

Answers from our tax strategy experts may help give you an edge.

Article published: March 11, 2024

By: Valerie Harman Director, Tax Advisory and Planning, CPA, CFP®
Lamu Dawa Director, Tax Advisory and Planning, CPA
Rich Lahijani Director, Tax Advisory and Planning, CPA

In this article:

  • Our tax strategy experts provide answers to three common tax questions: “How can I reduce my taxes?”, “I have sold my home, so do I need to pay taxes?” and "What are the tax considerations when I move to a different state?”
  • The answers may be a useful jumping-off point for a discussion with a qualified tax professional, either about your 2023 taxes or creating strategies for 2024.


Tax season is here again. It always inspires a wonderful range of responses that run from “sigh” to “%^&!” but never “Oh, goodie!” Even if your taxes are simple and you’re accustomed to getting a nice refund, filing your taxes still can be a bit stressful. Maybe you’re wondering what you’ve overlooked that may reduce your tax liability or perhaps there was a unique tax event that you’re not sure how to handle.

These questions are reasons why it’s always important to work with a tax professional. As tax planning strategists, we want to help you get started providing you with some answers to three common questions we get during tax season. We are a part of Edelman Financial Engines’ team of tax planning strategists who can collaborate with our financial planners to help clients just like you, keeping in mind that we don’t provide tax prep or advice services..

Whether you’re still doing your 2023 taxes (and that’s just fine) or looking for 2024 strategies, you may be able to use these high-level answers as a jumping-off point. Remember, consult with your tax professional to determine how these answers relate to your personal situation.

1

 

How can I reduce my taxes?

Understandably, this is the question we always get the most. There are many ways to reduce one’s tax liability. While we can’t address all of them here, we thought we would provide a refresher on two tax credits, which could be relevant now or in the future. We also want to provide some tax strategies around charitable donations, given the number of charitably minded clients we have (we applaud you).

 

Tax credits – Two to consider if you haven’t already

Energy tax credits

Innovation and the high cost of fossil fuels has resulted in new ways to upgrade your home or transportation and you can save energy costs while getting a tax break in the process. Here are several:

  • The Residential Clean Energy Credit means that you may be able to claim up to 30% of the cost of installing solar panels, windmills or geothermal heat pumps.
  • The Energy Efficient Home Improvement Credit provides a tax credit of up to $1,200 for energy-efficient upgrades to heating, cooling or added insulation, plus up to $2,000 for qualified heat pumps, biomass stoves or biomass boilers.
  • Did you decide to quit fossil fuel (at least for driving) and buy an electric vehicle? You might be able to claim a tax credit of up to $7,500, depending on your income and the type and cost of the vehicle and where it’s made.

Child and dependent care credit

It’s not getting any cheaper caring for young children or for any dependent who is unable to care of themselves. While the care you provide may be out of love, you also may be able to get back at least a portion of the cost.

  • The Child and Dependent Care Credit covers child care expenses for children under 13 (when the care was provided) or the care of a spouse or parent who is unable to care for themselves.
  • The credit covers expenses of up to $3,000 for each qualifying individual.

 

Charitable donation strategies

Many of you donate to charities consistently during the year. Of course, that’s a good thing, and why not use the donations to help reduce your taxes? Here are a couple of strategies:

Bunching

  • If the amount of your donation falls below a certain threshold, you may end up taking the standardized deduction.
  • However, if you have a favorite charity that you give standard amounts to each year, then consider bunching those amounts into one year. That could provide a nice deduction, especially in a year when you have higher income.
  • Keep in mind that the deduction of your charitable cash contribution is limited, and usually only up to 60% your Adjusted Gross Income, so consult a tax professional.

Donor-advised funds

  • Another way of bunching your charitable donations is through setting up a donor-advised fund, which can offer immediate tax benefits while allowing you to distribute funds to charities over time.
  • One way to establish a DAF is through a one-time contribution. You can contribute cash, stocks or other assets and decide later which charities to support.
  • That amount can be eligible for an income tax deduction, depending on the type and value of the assets given to the DAF and your Adjusted Gross Income.

Qualified charitable donations

  • If you’re age 70 1/2 or older and you have a substantial IRA, then you may be looking at material Required Minimum Distributions (starting at 73), which will drive up your income and can mean you pay more in taxes.
  • You can donate a part of your IRA to charities tax-free before your RMD age with qualified charitable donations, and, thereby, could reduce future RMDs and related taxes.
  • You can also use a QCD to satisfy some or all of your RMDs each year.
  • The annual QCD limit is $105,000 for 2024.

2

 

I’ve sold my home that I have lived in for years. What are my taxes?

Selling a family home you have lived in for years starts a new chapter in your life and can result in a nice profit as well. What does this mean for your taxes? Here are some basics:

  • If the title company issues you a 1099-S after the sale, you must report the gross proceeds on the form and file it with your taxes, regardless of whether the gain is taxed.
  • Up to $250,000 of capital gains on the sale is excluded from tax for individuals and up to $500,000 for married couples filing jointly.

Here’s the “fun” part. The capital gains exclusion has several criteria:

  • You have owned the residence for two out of the last five years before the sale.
  • It has been your main residence for two out of the last five years before the sale.
  • You have not excluded another sale of a residence from tax within two years of the sale.

 

Also, if you ever operated the home as a rental property, you may have to pay taxes on a portion of the gain, even if you meet the requirements.

3

 

When I move to a different state, what are my tax considerations?

State taxes vary widely, so research the tax impact of your move in depth with a tax professional. In general, you are either moving to a state with higher or lower taxes, overall, than where you live now, but how much higher or lower they are will vary depending on your personal situation.

Before you move to a state with no income taxes or with a reputation as a low-tax state, look closer.

There are a variety of elements to state taxes. For example, a state with no income taxes may have higher property taxes than you are paying now – and those property taxes may vary within the state itself. The state may also have a higher sales tax. Small-business owners or owners of rental properties may be subject to state business income or excise taxes, even if the state does not have an individual income tax.

If you’re retired or near retirement, there is another layer of considerations. For example, if you live in a state like Pennsylvania, you generally won’t pay any state taxes on your retirement income, including income from tax-deferred accounts like a 401(k), as well as pensions and Social Security. You may lose this benefit if you move, as most states do tax retirement income. Moreover, some states have estate or inheritance taxes while others don’t, so you need to consider your estate plan when moving.

We’re here for you

We hope you have found our answers to common tax questions informative. When doing your taxes with a tax professional, consider collaborating with your financial planner as your taxes must incorporate your full financial picture.


Psst – don’t forget these

It would be hard for us to write an article about tax season without a friendly reminder of these basic ways to help reduce your taxable income:

  • Max out you’re your 401(k) contributions. That’s $23,000 in 2024 (up from $22,500 in 2023) and for $30,500 for those 50 and over (up from $30,000 in 2023).
  • If you have a high-deductible health plan, consider opening a Heath Savings Account, which allows you to contribute money to pay for a variety of qualified medical expenses. Like a 410(k), these contributions are pretax, with a limit of $4,150 for individuals and $8,300 for individuals with family coverage for 2024. A catch-up contribution of $1,000 is also allowed if you are age 55 and over. You can retain any money left over in the HSA at the end of the year in the account.
  • If your health plan makes you ineligible for an HSA, you may want to consider flexible spending accounts, with a pretax contribution limit of $3,200 in 2024, but you’re only allowed to carry over up to $640 left over the in the account into 2025 – provided your plan allows carry-overs.

 

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This content recommends that you work with your financial planner who can partner with your CPA or tax professional. Neither Edelman Financial Engines nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances. Tax strategies is just one aspect of your overall financial plan.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.


Valerie Harman

Director, Tax Advisory and Planning, CPA, CFP®

Being versed in both tax compliance and financial planning is an advantageous intersection from which to assist clients with planning for their financial goals. Since 2011, I have served in tax compliance, with an emphasis on financial planning since 2014. Additionally, I am experienced in assisting privately held businesses with accounting and managerial finance.

Lamu Dawa

Director, Tax Advisory and Planning, CPA

I love working with complex assignments and projections. I have experience in a variety of roles, preparing and reviewing all types of returns. I love working with individuals, but I am particularly passionate about helping small-business owners – especially since I am one myself!

Rich Lahijani

Director, Tax Advisory and Planning, CPA

I have a few passions in life: federal taxation matters, teaching and mentorship. I am a tax geek at heart and love to continue to learn and develop my tax technical skills, and inspire the next group of tax accountants. I love guiding teams and helping clients navigate the uncertain tax world.



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