If there’s one thing you can count on to be there, it’s taxes. But depending on your situation, you may be able to reduce the amount of taxes you need to pay. North Carolina has a few programs and opportunities that, if you qualify, can significantly help you reduce the taxes you owe each year.
Reducing Current Taxes Through Retirement Planning
First, one of the best ways to reduce taxes is by using tax-advantaged retirement and savings accounts. Workers have a few options when it comes to tax-advantaged accounts. And those over 50 have some extra benefits not available to younger professionals.
One way to reduce your taxes is by reducing your taxable income. By contributing to a workplace 401(k) plan, you reduce your taxable income for that year. The 401(k) deferral limit for 2024 is $23,000, but those over the age of 50 can contribute an additional $7,500 catch-up contribution. (1) That’s a total of $30,500 you can put toward retirement and defer paying taxes on.
A health savings account (HSA) offers a way to save for medical expenses in retirement and is another tool to help you reduce your current taxable income. These accounts are referred to as triple tax-advantaged because your contributions, growth, and withdrawals are all tax-free. Those aged 55 and older have additional benefits because you can contribute an extra $1,000 per year on top of the normal limit. (2)
Reducing Future Taxes Through Retirement Planning
A Roth IRA is an additional retirement planning tool that can help you reduce your taxes. You won’t get a tax break today, but your contributions grow tax-free. So when you go to withdraw from your Roth IRA account in retirement, you don’t have to pay any taxes on the growth.
And professionals over 50 have an advantage over younger professionals. The IRS allows those 50 and older to contribute an extra $1,000 on top of the $7,000 limit. (3) Thus, you can invest up to $8,000 into your Roth IRA each year, and receive tax-free income when you retire. This tax-free income in retirement helps you stay in a lower tax bracket.
One hurdle with Roth IRAs is that federally set income limits restrict high-income professionals from contributing to them. A way around this is the backdoor Roth IRA. You create a backdoor Roth by converting a traditional IRA (which has no income limit) or 401(k) into a Roth IRA. Through rolling the funds over, the backdoor Roth IRA allows high earners to indirectly contribute to a Roth IRA, so you can benefit from tax-free growth. A backdoor Roth IRA is a great workaround if your income is too high to qualify for a Roth IRA. But as with all good things, there are some caveats to consider. If you convert too much, it can push you into a higher marginal tax bracket. If you do the wrong transfer type, you could end up paying penalties and taxes on your entire withdrawal.
An even bigger and better option for high income earners is the mega backdoor Roth. If you have a 401(k) plan that allows after-tax contributions and in-service rollovers you may be able to take advantage of this strategy. With the mega backdoor Roth, you can put aside up to $46,000 in a Roth IRA or Roth 401k. (4) If this option sounds almost too good to be true, it’s because creating a mega backdoor Roth is complex; it’s absolutely doable, but it can be a very complicated process. To avoid any unexpected tax hits and to ensure a smooth process, consider consulting with a financial professional. A certified financial planner will save you the headache of trying to figure it out alone.
Having tax diversification in the form of tax-deferred and tax-free accounts allows you to have more control over your tax bracket when you decide to retire.
North Carolina Property Tax Relief Programs
North Carolina offers a few property tax relief programs for those who qualify. Homeowners 65 and older with an income of no greater than $36,700 can claim the North Carolina low-income homestead exclusion. (5) For those eligible, it can mean big savings in property taxes each year. If you are a disabled veteran or a surviving spouse, you can also take an exemption on your property taxes.
In the Circuit Breaker Tax Deferment program, individuals 65 and older making equal to or less than $33,800 can defer property taxes for later, typically when the property is sold.
Deductions During Tax Time
When you do your taxes, you need to determine if it makes sense for you to take the standard deduction or use the itemized deductions. Unfortunately, you can’t do both.
One benefit of the standard deduction is that if you or your spouse are 65 or older, you can claim a larger standard deduction. For 2024, if one spouse is over 65, you can increase your standard deduction by $1,950. If you are both 65 and older, then you can increase it by $3,900.
Deducting charitable contributions is another way to help you reduce your taxes, especially when using the strategy of bundling charitable donations. By clumping several years’ worth of charitable donations into a donor-advised fund, you can maximize your tax benefits for a given year. This strategy helps give you more control over the timing of your deduction and increases your likelihood of exceeding the standard deduction.
How We Can Help You
Knowing about the programs and opportunities to reduce taxes can help set yourself up for more money today and in the future. However, we know that navigating how to optimize your taxes can be complicated. The strategies that will work for you depend on your needs, goals, and circumstances.
Our team at Calamita Wealth Management can help you come up with a plan that you feel good about. To make sure you’re taking advantage of the tax breaks available to you, feel free to schedule an introductory phone call using our online calendar, or reach out to us at (704) 276-7325 or todd@calamitawealth.com.
About Todd
Todd Calamita is the founder and managing principal of Calamita Wealth Management, an independent, fee-only wealth management company located in Charlotte, NC, serving people locally and across the country, that focuses on providing wealth management solutions to affluent individuals over age 50 and their families. Todd has more than 20 years of experience in the financial services industry and is passionate about helping people have a better life by designing and implementing customized financial plans that bring clarity and confidence. Todd is a CERTIFIED FINANCIAL PLANNER™(CFP®) and CERTIFIED DIVORCE FINANCIAL ANALYST® (CDFA®) and holds a Bachelor of Business Administration from Ohio University and a Master of Business Administration from the Weatherhead School of Management at Case Western Reserve University. He has authored a book, Plan Smart: Conquering 10 Common Money Traps, as well as numerous articles on wide-ranging personal finance topics, from taxes to retirement accounts. He has also been featured in a Financial Boot Camp TV series as a volunteer showing people how to make smart decisions with their money. When he’s not working, you can find Todd spending time with his wife, Teresa, and their two sons, Colin and Cameron. He enjoys rock climbing, swimming, and traveling, and he has a black belt in Tang Soo Do, a Korean martial art. To learn more about Todd, connect with him on LinkedIn.
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(2) https://www.irs.gov/publications/p969
(4) https://money.usnews.com/money/retirement/iras/articles/what-is-a-mega-backdoor-roth
(5) https://www.pittcountync.gov/471/Tax-Relief-for-Seniors-Disabled-and-Vete
(6) https://www.buncombecounty.org/governing/depts/tax/circuit-breaker.aspx
