Author: Tom O’Rourke, Counsel

As the end of the year approaches, people look for strategies that will help reduce tax liability. Some of the common year-end suggestions include:

• Deferring income to the extent you can.
• Sell any assets that have declined in value and use the losses to offset income.
• Make expenditures that will reduce tax liability (i.e. charitable contributions).
• If you are age 73 or older, take Required Minimum Distributions (RMD) from any tax qualified plan.
• Consider making a Qualified Charitable Distribution (QCD) from any IRA you may have.

While taking year-end steps to minimize taxes is prudent, the best way to minimize liability is to view tax planning as an ongoing endeavor. Implement an approach that will allow you to make prudent investments that also reduce taxes. The benefits package available to Federal employees provides significant opportunities to accomplish these goals.

The Federal Thrift Savings Plan (TSP) allows active Federal employees to both accumulate a retirement nest egg and reduce income tax liability. A person enrolled in the Traditional TSP can make pre-tax contributions of as much as $23,000 ($30,500 for persons 50 or older)[1] per year. A contribution at this maximum level can reduce annual income tax liability by $7,500 per year or more depending on the person’s tax bracket. Earnings on funds invested in the Traditional TSP are not taxed until withdrawn.

Contributions to the Roth TSP are made on an after-tax basis and do not result in any immediate tax savings, but qualified withdrawals from the Roth TSP are tax-free. A qualified withdrawal is one that is taken after the Roth account has been in existence for at least five years and after the person making the withdrawal has attained the age of at least 59 ½. Income earned on a Roth TSP account accumulates tax free and is never subject to income tax if taken as a qualified withdrawal.

The Federal health benefits program allows an active Federal employee to provide health coverage in a tax efficient manner. All premiums paid to the Federal Employee Health Benefits Plan (FEHB) are withheld from an employee’s salary on a pre-tax basis. Paying premiums on a pre-tax basis can save annual taxes by as much as $2,000 to $7,000 per year depending on the amount of the premiums paid and the person’s tax bracket.

The Federal Flexible Spending Account (FSA) allows an individual to set aside as much as $3,200 per year on a pre-tax basis to be used to reimburse the employee for medical expenses not paid by insurance. This can save approximately $1,000 in income taxes. The FSA is, however, a “use it or lose it” program. If the amount set aside is not used, it is forfeited. An individual may, however, carry over up to $640 in unused funds from 2024 to 2025.

The Federal Health Savings Account (HSA) is available to employees who are enrolled in a High Deductible Health Insurance Plan (HDHP). A plan is high deductible if the deductible in 2024 is at least $1,600 for a Self-Only plan or $3,200 for a Family plan.

If you are enrolled in an HDHP and establish an HSA in 2024, you will be allowed to make tax deductible contributions of as much as $4,150 if you are enrolled in a Self-Only plan, or $8,300 if you are enrolled in a Family plan. Persons who are 55 or older may contribute an additional $1,000. Contributions to an HSA can reduce your current tax liability by as much as $2,500 or more depending on the amount contributed and your tax bracket

The tax saving opportunities discussed above are not available to retirees.

Taking steps to save taxes is prudent, but never make an investment merely to save taxes. Remember, the ultimate tax strategy is don’t make any money.

[1] All figures mentioned in this article are 2024 amounts and are adjusted for inflation.

Tom O’Rourke began his legal career with the Internal Revenue Service, where he served in the Office of Chief Counsel for a period of 10 years and has been in private law practice since 1983. Mr. O’Rourke has been with NITP since 1989.

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