Five ways to reduce your taxable income for 2024

by Andrew Keshner

'By shrinking your income, you're saving money. That's the bottom line.'

During tax season each year, millions of Americans go through the annual ritual of squaring up their income-tax bill with the Internal Revenue Service.

The process pinpoints how much money people still owe the tax collector, or, in some cases, how much the IRS owes you in a refund.

So what if you could change the spot where the IRS drops that pin? Well, you can: It starts by reducing your taxable income.

Taxable income is the amount that emerges after a person's gross income is put through a wringer of tax exemptions and deductions. After that, tax credits shrink the liability with dollar-for-dollar reductions. Ultimately, lowering your taxable income should translate into a lower tax bill.

"By shrinking your income, you're saving money. That's the bottom line," said Barbara Weltman, a tax attorney and author of the book "J.K. Lasser's 1001 Deductions and Tax Breaks 2024: Your Complete Guide to Everything Deductible."

"The more you shrink your income, the lower tax bracket you're in," Weltman said.

And it's not just about tax brackets, Weltman added. Decreasing taxable income can unlock access to tax credits that only apply under certain income thresholds, like the earned income tax credit and the child tax credit. It may also decrease the tax rates attached to capital-gains investments, she noted.

"It's tax efficiency that we are after," said Jo Anna M. Fellon, a tax partner at Marcum, a national accounting and consulting firm. "When we are assembling a cake, we are trying to layer deductions, exemptions and credits to arrive at the most tax-efficient result,"

Of course, taxes aren't a piece of cake. But many of the ways to reduce taxable income can be straightforward - that is, if you know where to look for them.

Tax software and tax professionals can look out for applicable tax breaks. But a little knowledge goes a long way toward finding other ways to reduce taxable income. "No one is going to be your advocate like you will be," Fellon said.

Here are strategies experts recommend for reducing your taxable income.

One big, easy way to reduce taxable income

Taking the standard deduction is a quick, easy way to reduce your taxable income. IRS statistics show that approximately 90% of taxpayers opt for this instead of itemizing their deductions, which requires significantly more paperwork.

For 2024, the standard deduction is $14,600 for individuals and $29,200 for married couples filing jointly. The standard deduction is bigger for taxpayers who are at least age 65, and also for legally blind taxpayers. The sum is indexed to rise each year with inflation.

Choosing between the standard deduction and itemized deductions hinges on which option lets a taxpayer deduct more money.

People who itemize can deduct up to $10,000 in state and local taxes, as well as their charitable contributions, mortgage interest, medical expenses and unreimbursed personal-property losses from a federally declared disaster.

Other itemized deductions include the gains on a home sale, a bad debt that can't be collected and gambling losses.

Rich households are more likely to itemize their deductions, according to researchers. But with taxes, there are always exceptions and catches.

Given the potential tax savings, people of more modest means should consider itemizing if they are staring at big medical bills or digging out from a natural disaster, Weltman said.

And charitable-contribution deductions are usually for itemizers. But if someone's taking a qualified charitable distribution, they can still take the standard deduction. This is a tax-code tweak that lets seniors donate money to charities directly from their IRA; the move reduces taxable income, counts towards required minimum distributions and helps a good cause.

Save for retirement, save on taxes

Contributing as much as possible to retirement plans like a 401(k) are a critical way to trim taxable income, Fellon said.

Technically speaking, it's not a deduction. But that doesn't matter, Weltman said. "It removes what would otherwise be taxable compensation," she told MarketWatch.

This year, people in 401(k) plans, 403(b) plans, 457 plans and the federal government's Thrift Savings Plan can contribute up to $23,000.

People stashing money in an individual retirement account might be able to take a deduction that's worth up to their contribution amount. In 2024, people under age 50 can contribute up to $7,000, while it's an $8,000 maximum for those age 50 and older.

But the deduction rules depend on a taxpayer's income, filing status and whether that taxpayer or their spouse is covered by another retirement plan at work.

Roth IRA contributions, funded with after-tax money, are not deductible.Contributions to health savings accounts - another tax-advantaged vehicle used in retirement planning - are deductible for federal income taxes.

There are tax deductions for specific jobs and financial situations

Beyond the standard deductions and retirement-linked write-offs, there's a variety of deductions related to certain jobs and life situations.

Many student-loan borrowers can deduct up to $2,500 in paid interest from their taxes; investors can deduct up to $3,000 in capital losses after offsetting for gains; and educators can deduct up to $300 in unreimbursed expenses for school.

There are deductions for military service members' moving expenses, military reserve members' unreimbursed travel costs, performing artists, people paying alimony and people penalized for pulling money early from a bank CD.

The good news is you can take many of these deduction while also taking the standard deduction. (That's called an "above-the-line" deduction.)

What to know about business deductions

The array of deductions that are open to business owners, even sole proprietors, is a whole different business from deductions for individual tax returns. They can potentially cover car and truck expenses, certain business-related insurance premiums, rent, the costs for the upkeep of a home office - the list goes on.

The IRS says business operating costs can be deductible, as long as the expenses are ordinary and necessary expenses to run a business.

What's also deductible is the employer side of the 15.3% self-employment tax, which goes toward Social Security and Medicare. Though wage earners have their portion taken out with each paycheck, it's up to independent contractors and sole proprietors to pay both sides. The tax-time deduction is meant to put them back on equal footing with wage employees.

In another nod at equal footing, the 2017 Trump tax cuts lowered the corporate income-tax rate to 21%. It also established a deduction worth up to 20% on qualified business income that's open to small-business owners, self-employed taxpayers and other business entities like partnerships.

The qualified business-income deduction is due to fade away at the end of 2025, though the corporate rate is supposed to be permanent.

Consistent recordkeeping helps when you're looking for ways to reduce your taxable income

Taxpayers need to hold on to their records and receipts for their business-related deductions. (For example, there's a whole range of apps out there tracking mileage for tax purposes.) But proper recordkeeping throughout the year for other deductions is a good idea in case the IRS asks questions.

For example, remember the qualified charitable distribution? That needs a written acknowledgement from the charity in question. Records need to substantiate a casualty-loss deduction and medical-expense deductions, though they don't need to be attached to a return.

"The better recordkeeping you can do, then you are in a position to make an informed decision" about whether to take the medical-expense deduction, Weltman said. That's opposed to scrambling for bills and making a snap decision at tax time, which could misstate or leave out expenses.

Like so much with taxes, Fellon said a little bit of planning throughout the year means a lot. Think of a tax return like a cake - a tasty, tax-efficient result can't be a rush job at the end, she noted. "You have to plan along the way."

-Andrew Keshner

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04-06-24 0543ET

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