G’day, mates. I hope your February is off to a spectacular start! This month, we’re diving into everyone’s favorite topic—taxes. Okay, maybe not favorite, but an important one nonetheless.

While no one enjoys paying taxes, they do serve a purpose and are an unavoidable part of making money. The good news? Together, we’ll explore ways to better understand the tax system and maybe even discover some new strategies to lower our tax liability! 

TODAY ON REASONED REFLECTIONS:

• Personal finance articles 💰;

• Above-the-line deductions;

• Time to reflect;

• Quote of the Reflection.

Personal Finance Articles 💰

Time for a bit of R&R

• Things to consider this year

  My Take - This article shares a great list of tips to help you get your finances in order this year. One that really stands out—and something we can all work on—is not comparing ourselves to others. We’re all on our own journey, and trying to keep up with the Joneses is not only counterproductive but can also derail your financial goals. Focus on your progress, celebrate your wins, and remember—you’re doing great!

• 80% rule

  My Take - This retirement rule is a solid starting point, but let’s be real—you’ve got to figure out a number that works for you. After all, who knows how much the cost of essentials will rise or what your medical expenses will look like in retirement? Everyone’s situation is unique, so it’s important to plan for the unknown and stay flexible. Retirement isn’t one-size-fits-all!

• To the VOO-N!

  My Take - VOO is a cornerstone of my portfolio. You just can’t beat owning the top 500 companies in the U.S. and the low expense ratio. It’s no surprise that more and more investors are starting to catch on. It’s a simple yet powerful way to invest for the long haul!

• Time to boost your savings

  My Take - There are plenty of factors that can impact your retirement savings—market fluctuations, inflation, unexpected expenses, and more. But even with all these variables, the best thing you can do is start early and save consistently.

• Naughty, naughty

  My Take - Tough news for Vanguard. The overcharging of fees only makes Target Date Funds look worse in my opinion. These investment vehicles are designed to automatically adjust your stock-to-bond ratio as you approach retirement, which, I will admit, can be helpful if you don’t want to check your portfolio frequently or keep close tabs on the market.

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Looking ahead!

Taxes, taxes, taxes. Some say the tax code should be simple enough to fit on the back of a napkin—but that’s far from the reality in the United States. The Tax Code is complex, no doubt about it.

The good news? With February’s focus on all things taxes, my goal is to help us all feel a little more confident and prepared when it’s time to send that 1040 off to the IRS. 

Reflection No. 21: Deductions For All

I - Issue: What are above-the-line deductions? 

R - Rule: Above-the-line deductions reduce your gross income directly, regardless of whether you take the standard deduction or itemize. Section 62 of the Internal Revenue Code outlines these deductions.

A - Analysis: When calculating your tax liability, you start with your gross income—usually found on your W-2. From there, you subtract above-the-line deductions to determine your adjusted gross income (AGI). These deductions are called “above-the-line” because they are subtracted before the AGI line, unlike itemized or standard deductions, which come afterward.

Section 62 of the Internal Revenue Code lists 12 key above-the-line deductions. Common ones include educator expenses, self-employed business expenses, health insurance premiums for self-employed individuals, contributions to traditional IRAs, student loan interest, and contributions to Health Savings Accounts (HSAs).

For most taxpayers, traditional IRA contributions, student loan interest, and HSA contributions are probably the most relevant. 

Traditional IRA

To qualify for the traditional IRA deduction, you generally can’t participate in an employer-sponsored retirement plan like a 401(k). However, if you’re married and one spouse is covered by an employer plan, your modified adjusted gross income (MAGI) will determine how much of the deduction you can claim.

For single filers without a 401(k), you can take the full deduction regardless of income. The contribution limit is $7,000 if you’re under 50 and $8,000 if you’re 50 or older in tax year 2024. 

Student loan interest

With student debt in the U.S. nearing $1.7 trillion, this deduction is a small silver lining. You can deduct up to $2,500 in student loan interest or the actual amount paid—whichever is less.

For 2024, single filers with a MAGI below $80,000 can claim the full deduction. This phases out between $80,000 and $95,000, and if your MAGI exceeds $95,000, you’re out of luck.

HSAs

HSAs offer a triple tax advantage (see Reflection No. 12 for a deep dive). Contributions to an HSA are an above-the-line deduction and reduce your taxable income. To qualify, you must be enrolled in a high-deductible health plan (read Reflection No. 7 to learn the differences between HDHP and PPO). 

Contribution limits are $4,150 for self-only coverage and $8,300 for family coverage for 2024.

Example

Let’s say you earn $80,000 in 2024, don’t have a 401(k), and take the following deductions:

• Contribute $7,000 to a traditional IRA.

• Pay $2,500 in student loan interest.

• Contribute $4,150 to an HSA.

Your $80,000 gross income is reduced to $66,350 for tax purposes—before applying below-the-line deductions like the standard deduction. That’s a significant drop in taxable income! 

C - Conclusion: Above-the-line deductions are a powerful way to lower your taxable income and, ultimately, your tax liability.

Time to Reflect…

I generally try to avoid crossing any lines—but when it comes to tax deductions, I always prefer staying above the line. Why? Because above-the-line deductions can be taken regardless of whether you itemize below-the-line or not.

While they’re not as valuable as a tax credit, they’re definitely better than their below-the-line counterparts. Above-the-line deductions reduce your adjusted gross income, making them a smart way to lower your tax burden.

Quote of the Reflection