1 week Ago
Among the many oddities of income tax regulations is the ability to take actions until April 15, 2025, to reduce one's taxable income for 2024. Doing so allows people to capture tax benefits almost immediately, through a larger refund or smaller tax bill, rather than waiting a year. It could also allow a person to drive their taxable income below a particular threshold that opens the door to more benefits.
The first case is the most simple. Two examples: By making a 2024 contribution in 2025, the savings will come back right away through either a reduction in income tax owed or through larger refunds. In both cases, those savings make it less costly to set aside money for school or retirement.
Federal tax deductions are more valuable because they reduce taxable income for both U.S. and South Carolina taxes.
And, of course, the higher one's top tax bracket is, the larger the savings. For example, for federal income tax for 2024, a single person would pay 10 percent on their first $11,600 of taxable income, 12 percent on the next portion up to $47,150, 22 percent on the next portion up to $100,525, and so on. So for every $1,000 contributed to a traditional IRA that person would save $220 if they had $50,000 in taxable income, or $120 if they had $40,000.
They would also save up to $62 on their South Carolina tax return. For a married couple filing jointly, the 22 percent federal tax bracket begins at $94,301 in taxable income. Contributions to traditional IRAs are tax-deductible, but eventual withdrawals are subject to income tax — and penalties, too, if withdrawn before age 591⁄2.
Contributions to Future Scholar are only deductible from state income, but withdrawals aren't taxed at all so long as they are spent on qualifying expenses such as tuition. For some people, reducing taxable income through contributions to a traditional IRA can have an added benefit. That's because some federal and state tax credits are income-based, and could become available if an IRA contribution lowered income below certain thresholds.
In South Carolina, for example, lowering one's taxable income could make it easier for a homeowner to qualify for the Excess Insurance Premium Tax Credit — worth up to $1,250 for those whose cost of insuring their legal residence exceeds 5 percent of their income. Income in that case means federal adjusted gross income. My favorite example is the Retirement Savings Contribution Credit , or Saver's Credit for short.
It's a federal tax credit meant to reward people with low to moderate incomes who set aside money for retirement. It's worth between 10 and 50 percent of up to $2,000 in retirement contributions, per tax filer, depending on income. So if both people in a married couple filing a joint federal return contributed at least $2,000 to a retirement plan in 2024, together they could get a $400 (10 percent) tax credit — if their adjusted gross income is no higher than $76,500.
But what if their AGI just a little too high, say $78,000? In that case, a $1,500 contribution to a 2024 IRA would do the trick. That couple could reduce their federal and SC taxes by making that deductible contribution, and by lowering their AGI they could claim the Saver's Credit for another $400 in savings. For single filers, the Saver's Credit is available for incomes up to $38,250.
For heads of households (generally single filers with children), the limit is $57,375..
