Maximizing tax benefits during the holiday season can significantly lower taxable income for 2024. Strategies include utilizing retirement savings plans, understanding contribution limits, and being cautious about over-contributing. While higher contributions can yield tax deductions, it’s essential to assess financial capabilities and consider long-term investment impacts. Maintaining some contribution capacity for future years might also be wise, especially if higher tax obligations are anticipated. Balancing immediate tax benefits with future financial needs is crucial.
Maximize Your Tax Benefits This Holiday Season
The festive season brings an opportunity for thoughtful gifting, including strategic tax gifts! Up until December 31, individuals can utilize several strategies to lower their taxable income for 2024, potentially easing the tax burden when filing in spring 2025. One effective method is to leverage your retirement savings plan (PER) to minimize taxable income.
Just like with holiday presents, it’s crucial to avoid last-minute decisions: certain insurers or PER providers may impose deadlines before the year’s end. Additionally, be mindful of the payment limits: each year, you can only deduct up to 10% of your taxable income using this approach. For instance, if your annual income is 50,000 euros, you could deduct up to 5,000 euros, assuming you contribute that amount to your PER before the year concludes.
Understanding Contribution Limits for 2024
This year, there is a general ceiling of 35,194 euros for higher income earners. If your income exceeds this threshold, you won’t be able to deduct more than this specified amount. Conversely, taxpayers with lower incomes have a minimum deduction limit of 4,399 euros for 2024, even if 10% of their income is less than this amount.
Moreover, if you haven’t fully utilized your deduction limits from the past three years, you can combine those unused amounts with your current year’s ceiling! This means that until the end of the year, in addition to your contribution limit for 2024, you can incorporate any unused amounts from 2023, 2022, and 2021.
For example, if your income of 50,000 euros has remained constant since 2021 and you’ve never claimed your deduction limits, you can deduct 5,000 euros for 2024 and add the 15,000 euros from the previous three years, totaling 20,000 euros, provided you contribute that amount to your PER.
Weighing the Pros and Cons of High Contributions
While the theory sounds appealing, is it truly beneficial to maximize your PER contributions to hit both your current and previous limits? Keep in mind that the higher your marginal tax rate (TMI), the greater the tax benefit. For instance, if you’re in the 41% TMI bracket and contribute 1,000 euros to your PER, you’d see a tax reduction of 410 euros, compared to a 300 euro benefit in the 30% bracket.
To achieve optimal tax savings, consider contributing enough to fall just below your highest tax bracket limit. For example, if your TMI is 41% due to an income of 85,000 euros, you would only need to contribute 2,658 euros to your PER to offset that bracket and save 1,098.78 euros on your tax bill. Contributions beyond that will yield lower tax reductions as the lower TMI (30%) will be applicable.
While this approach provides a tax reduction, maintaining some of your ceiling for future years might be a more prudent strategy, especially if you foresee an increase in your tax obligations later. “Sometimes it’s better to conserve your ceilings if you expect a tax hike in subsequent years, even without a change in income, such as when children leave your tax household,” advises Olivier Rull, co-founder of Caravel, a digital PER distributor.
Be Cautious About Over-Contributing
Before you rush to “max out” your PER for the sake of tax benefits, it’s essential to assess your financial capability to invest in a locked savings vehicle. The PER is essentially a long-term investment until retirement, so for short- or medium-term savings goals, it might be wiser to consider more accessible options, such as life insurance.
While there are instances of early withdrawals, particularly for purchasing a primary residence, be cautious of potential drawbacks. If you take a tax deduction at the time of contribution, you will incur taxes upon withdrawal. If you need these funds for your home purchase, the tax implications can be significant: you may face a flat tax (PFU or 30%) on your gains and income tax on the total of the deducted contributions, which could potentially push you into a higher tax bracket!” cautions Olivier Rull.