Time to Get Tax-Savvy Managing Your Tax Burden

Though tax preparation may seem daunting, the fact that there are so many rules, limits, and incentives built into the tax system also means there are plenty of legal ways to cut your tax bill. Do You Dread Tax Season? Before you take any specific action, be sure to consult with your tax professional. Becoming familiar with the basics and how to spot opportunities might help simplify the process and make it seem more routine. It’s also wise to keep abreast of recent tax-law provisions, especially those in the Tax Cuts and Jobs Act of 2017, which are scheduled to expire after 2025.

97.7% Top 50% of taxpayers 88.5% Top 25% of taxpayers 73.7% Top 10% of taxpayers Source: IRS Statistics of Income Bulletin, Fall 2022 (most current IRS data available) Breaking Down the Income Tax Burden The top 1% of U.S. taxpayers (adjusted gross incomes of $548,336 or more) paid 42.3% of all federal income taxes in 2020 — totaling roughly $723 billion. Share of total federal income taxes paid, by income group (2020) 42.3% Top 1% of taxpayers 2.3% Bottom 50% of taxpayers

Taking Advantage of Tax Breaks The formula for determining tax liability begins with your gross income, which includes just about everything you earn. Your adjusted gross income (AGI) excludes “above-the-line” adjustments such as pre-tax retirement plan contributions. Finally, any exemptions and deductions are subtracted from your AGI to arrive at your taxable income. Retirement Savings When you participate in an employersponsored 401(k) or 403(b) plan, you can allocate a percentage of your salary to your retirement account every pay period. Because contributions can be made with pre-tax dollars, they are an effective way to reduce your taxable income. The maximum annual contribution is $23,000 in 2024. If you will be 50 or older before the end of the tax year, you can contribute an additional $7,500. (Contribution limits are indexed annually for inflation.) The funds in your account will accumulate tax deferred until withdrawn, when they are taxed as ordinary income. Withdrawals prior to age 59½may be subject to a 10% federal income tax penalty. Some smart financial moves may help reduce your tax liability.

Standard Deduction and Itemized Deductions Most tax filers take the standard deduction, which was nearly doubled by the Tax Cuts and Jobs Act and reaches $14,600 for single filers ($29,200 for married joint filers) in 2024. The tax law repealed the deduction for personal exemptions, raised the child tax credit (for qualifying children under age 17), and made other significant changes to the tax law; provisions affecting individuals are scheduled to expire after 2025. Taxpayers whose deductions exceed the standard deductionmay choose to itemize deductions. However, because of the higher standard deduction, it’s expected that fewer taxpayers will do so. If you do itemize, you may be able to deduct the following types of expenses from your adjusted gross income (within limits). Mortgage interest Property, state, and local taxes Student loan interest Medical expenses Charitable contributions Some taxpayers may be eligible for education tax credits. The American Opportunity Tax Credit offers a maximum annual credit of $2,500 for each of a student’s first four years of post-secondary education. It can be used to pay qualified tuition and fees for a student who is enrolled at least half-time. The Lifetime Learning Credit is an annual nonrefundable credit worth up to $2,000 per year, per tax return. The credit is calculated as 20% of the first $10,000 of qualified tuition and fees. It applies to college undergraduate, graduate, and vocational education in an eligible educational institution. Income eligibility limits apply to both education credits.

Making Sense of Tax Rates Source: Internal Revenue Service, 2023 2024 Tax Tables Tax rate 10% Up to $11,600 Up to $23,200 12% Over $11,600 up to $47,150 Over $23,200 up to $94,300 22% Over $47,150 up to $100,525 Over $94,300 up to $201,050 24% Over $100,525 up to $191,950 Over $201,050 up to $383,900 32% Over $191,950 up to $243,725 Over $383,900 up to $487,450 35% Over $243,725 up to $609,350 Over $487,450 up to $731,200 37% Over $609,350 Over $731,200 Joint filers Single filers Income tax brackets and income thresholds Whether you are finalizing a yearly tax return or making key financial decisions, you might consider the difference between marginal and effective tax rates. The United States has a progressive tax system, whichmeans that tax rates increase as household income rises (see below). For example, if a married couple files jointly and has a taxable income of $100,000 in 2024 (after applicable deductions and exemptions), they fall into the 22% tax bracket. However, they will not pay this rate on all of their income, only on the amount over $94,300. In this case, 22% is their marginal tax rate or top tax rate.

What Happens at the Edges People sometimes worry about being “pushed into a higher tax bracket,” but only the amount of income that is in the next bracket is taxed at the higher rate. The rest of the income is taxed at rates in the lower bracket(s). Looking at your taxes this way may make it easier to assess the true value of potential deductions and the taxability of additional income. For example, once you reach the 24%marginal tax threshold, you would owe $240 in taxes for each additional $1,000 of income up to the 32% threshold. The Bigger Picture Your effective tax rate —the average rate at which your income is taxed—offers a clearer view of the portion of income that goes to Uncle Sam. To determin e your effective rate, divide your total taxes by your taxable income. Returning to the previous example, a marrie d couple (filing jointly) with $100,000 in taxable inco me would have an effective tax rate of about 12.1%. First $23,200 at 10% rate $ 2,300.00 Next $71,100 at 12% rate + $ 8,532.00 Next $5,700 at 22% rate + $ 1,254.00 $12,106.00 $12,106 ÷ $100,000 = 12.1%

One outcome of the Tax Cuts and Jobs Act is that fewer taxpayers will be subject to the alternative minimum tax (AMT) in the future. New Era for the AMT The AMT Tales The AMT is a parallel tax system that eliminates many of the deductions and credits often used by taxpayers to reduce their tax bills under the normal rules. Consequently, more income may be taxable under the AMT. When the original law was passed in 1969, Congress wanted to ensure that taxpayers with high incomes pay at least a minimum amount of taxes. However, because lawmakers failed to index AMT exemption levels for inflation, the tax grew to affect millions of taxpayers over time. For a number of years, lawmakers used temporary “patches” to help prevent more middle-income households from being hit, but the AMT’s reach continued to expand. Two Ways to a Tax Bill The American Taxpayer Relief Act of 2012 permanently indexed the AMT exemption levels annually for inflation, but didn’t change the income threshold at which exemptions begin to phase out, which resulted in more people subject to the tax. The Tax Cuts and Jobs Act significantly increased the AMT exemption amounts and the income phaseout threshold for tax years 2018 through 2025. Taxpayers with incomes above the AMT exemption amounts ($85,700 for single filers and $133,300 for married couples filing jointly in 2024) must calculate their taxes under both sets of rules and pay the higher of the two. For 2024, taxpayers pay a tax rate of 26% on Alternative MinimumTaxable Income (AMTI) up to $232,600 (for single filers and married couples filing jointly). The tax rate increases to 28% on AMTI above this amount.

Deductions Are You at Risk? The more deductions that taxpayers claim, the more vulnerable they may be to the AMT. If your taxable income, with certain adjustments, is above the AMT exemption amount (based on your filing status), you should complete Form 6251, Alternative MinimumTax, to see whether you owe the AMT. Another way to determine whether you owe the AMT is to complete the worksheet for line 45 in the Form 1040 Instructions. Any of the following circumstances could trigger AMT liability: • Substantial income • Incentive stock options exercised during the year • Passive income or losses • Interest income from private-activity bonds • Significant itemized deductions, including state & local taxes and unreimbursed medical expenses Source: Internal Revenue Service

The overall limit on itemized deductions that applied to higher-income taxpayers was repealed by the Tax Cuts and Jobs Act, and the following changes were made. (Unless otherwise noted, most provisions expire after 2025.) Itemized Deductions State and local taxes. The combined itemized deduction for state and local property taxes and state and local income taxes (or sales taxes in lieu of income) is limited to $10,000 ($5,000 if married filing separately) annually. Home mortgage interest. Qualified mortgage interest can be deducted on up to $750,000 of mortgage debt ($375,000 for married couples filing separately). The prior $1 million limit still applies for debt incurred on or before December 15, 2017. Interest on home equity loans is deductible only when the proceeds are used to acquire or substantially improve a home. Medical expenses. The AGI threshold for deducting unreimbursed medical expenses was permanently reduced from 10% to 7.5% by the Consolidated Appropriations Act, 2021. Charitable contributions. The top AGI limitation percentage that applies to deducting certain cash gifts to qualified charitable organizations was raised from 50% to 60%. Casualty and theft losses. The deduction for personal casualty and theft losses was eliminated, except for casualty losses suffered in a federally declared disaster area.

Average Itemized Deductions Based on IRS data for tax year 2021 These averages take into account only those individuals who claimed an itemized deduction for that type of expense. Source: Calculated from IRS data for tax year 2021 (filing year 2022) (most recent data available). Charitable contributions $1,849 $4,008 $5,140 $5,941 $8,627 $13,208 $125,370 Interest $10,842 $9,685 $9,409 $9,103 $11,000 $14,889 $18,705 Medical expenses $18,657 $18,897 $18,310 $18,963 $19,811 $34,448 $84,165 Adjusted gross income Under $15,000 $15,000 to $30,000 $30,000 to $50,000 $50,000 to $100,000 $100,000 to $200,000 $200,000 to $500,000 $500,000 or more Taxes $4,384 $4,361 $4,940 $6,791 $8,621 $9,558 $9,726

Your investing strategy is primarily influenced by such factors as your financial goals, time horizon, and risk tolerance. Even so, it might be wise to consider the tax implications of your investment decisions, especially when they involve assets that are not held in tax-advantaged retirement accounts. Tax-Conscious Investing The tax code treats long-term capital gains and qualified dividends more favorably than ordinary income (wages or interest from bonds and savings accounts). Generally, dividends on stocks that are held for at least 61 days within a specified 121-day period are considered “qualified” for tax purposes. Long-term capital gains are profits on investments held longer than 12 months. Nonqualified dividends and short-term capital gains are taxed as ordinary income. High-income taxpayers may also be subject to a 3.8% net investment income tax on capital gains, dividends, interest, royalties, rents, and passive income if their modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (joint filers). Realizing a large gain not only could trigger capital gains taxes but might push an investor’s adjusted gross income into a higher tax bracket.

Investment Tax Tally Taxpayers who are thinking about selling appreciated investments could benefit by planning ahead and using certain strategies that may help minimize their overall tax burdens. Timing asset sales to split gains over two or more tax years, or selling losing investments to offset gains, may help keep your income from crossing critical thresholds. With property or business interests that are generally sold in a single transaction, it might be advantageous to arrange an installment sale in which the seller receives smaller payments over a period of years. Married couples who sell a principal residence (one they have lived in for at least two of the last five years) can typically exclude up to $500,000 in gains from their taxable incomes. Consider making charitable donations with appreciated assets such as shares of stock instead of cash. Within certain limits, donors could avoid capital gains taxes and take a deduction that may help lower their taxable incomes. *The 3.8% net investment income tax (also called the unearned income Medicare contribution tax) applies to the lesser of (a) net investment income or (b) the amount by which modified AGI exceeds the thresholds. The tax does not apply to municipal bond interest or IRA withdrawals. Short-term capital gains on investments held 12 months or less are taxed as ordinary income, so investors in the top 37% tax bracket could owe up to 40.8% on short-term gains. Source: Internal Revenue Service, 2023 (table shows 2024 AGI thresholds) Married Single filer filing jointly Married filing separately Head of household Tax rate Long-term capital gains & dividend tax (2024 taxable income thresholds) Up to $47,025 Up to $94,050 Up to $47,025 Up to $63,000 0% $47,026 up to $518,900 $94,051 up to $583,750 $47,026 up to $291,850 $63,001 up to $551,350 15% More than $518,900 More than $583,750 More than $291,850 More than $551,350 20% Net investment income tax (modified AGI thresholds) Over $200,000 Over $250,000 Over $125,000 Over $200,000 3.8%*

For Better or Worse Many middle-income couples could receive a tax benefit from being married. When one spouse makes significantly less money than the other or doesn’t have a job, their combined income — while taking advantage of deductions and exemptions for both spouses —may fall into a lower tax bracket, so the family may actually pay less in taxes overall. Couples with similar incomes are more likely to encounter a penalty — generally once their combined taxable income rises above the 32% tax bracket — simply because the joint income thresholds of the highest two brackets are less than double the amounts for single filers. Income taxes rarely play a major role in decisions about marriage, but most couples eventually consider how their official union affects their finances. Will You Pay the “Marriage Penalty”? Depending on their income, state of residence, and tax credits and deductions used, some married couples discover that they pay more in taxes than they would as unmarried individuals. Although recent changes to the federal tax code have eliminated the marriage penalty for most households, high earners may still pay more as a married couple. It’s important for married taxpayers to arrange employer withholding to cover taxes based on their combined incomes; otherwise, they could end up paying out of pocket at tax time. In most cases, filing separately is unlikely to ease the situation.

Newlywed couples may find it helpful to estimate their taxes at least once before year-end, when there might still be time to make adjustments.

When a Child Should File a Return You might assume that a young person doesn’t have to file a tax return until he or she has reached adulthood, moved out of the family home, and is generally self-supporting. Yet IRS rules regarding who must file are based on the amount and source of income rather than age. Source: Internal Revenue Service, 2023 Here are the general filing requirements affecting dependents—meaning someone else pays more than half of their support (including tuition, room, and board)— such as teens and college students, as well as their parents. Generally, a tax return must be filed if an individual has earned income above the standard deduction ($14,600 in 2024), unearned income from interest or dividends above $1,300, or a combination of earned and unearned income totaling more than $1,300 with at least $450 unearned. The filing threshold for net self-employment income is $400. In the past, a dependent’s unearned income had to be reported on a parent’s tax return. In 2024, a dependent’s unearned income above $2,600 is taxed at the parents’ tax rates, which range from 10% to 37%. Many young workers who earn less than the filing threshold will want to file if they had income tax withheld from pay and are eligible for a tax refund.

The IRS audited 625,973 tax returns in FY 2022, which resulted in nearly $12.6 billion in additional tax. The majority of these audits (85%) were conducted via correspondence. Facing Audit Fears The IRS probably won’t come knocking; it’s more common to find a letter from the tax collector in the mailbox. Receiving a notice from the IRS is not always as bad as it seems. It’s possible that the understaffed agency is trying to resolve a discrepancy between a line itemnoted on a return and what was reported by a third party. Youmay be asked to provide an explanation and/or specific documentation. Unfortunately, jargon and legalese could make it difficult to understand exactly what the agency is requesting. Before you take any specific action, youmight consult with your tax professional. Source: Internal Revenue Service, 2022 (most current data available)

What factors increase the odds of an audit? Audit Rates Rise with Incomes Overall, under 1% of wage earners had their tax returns examined by the IRS in fiscal year 2018. Income Percentage audited Source: Internal Revenue Service, 2019 (most current data available) Under $200,000 0.57% $200,000 and higher 1.00% $1 million and higher* 3.23% *Included in $200,000 and higher number Making a lot of money Failing to report all taxable income Taking higher-than- average deductions, losses, or credits Taking large charitable deductions Running a business 123 Source:, 2024

It normally takes about six to eight weeks for the IRS to issue a refund if you file a “complete and accurate” paper tax return, but it may take less than three weeks if you file electronically. Either way, even minor mistakes could delay the processing of your return. Here are a few of the most common errors the IRS finds on taxpayer forms. Mistakes People Make 1 2 3 4 Incorrect or missing Social Security numbers Misspelled last name (it must match Social Security card) Incorrect filing status for the taxpayer’s situation Math or computation errors (less common when returns are filed electronically) Source: Internal Revenue Service, 2023

5 6 Entering the wrong bank account numbers for direct deposit Forgetting to sign and date the return — both parties must sign joint returns

Time to Adjust Your Withholding? About 65% of taxpayers received a refund in the 2023 tax filing season; the average tax refund was $3,167. Taxpayers essentially loaned the government more than $335 billion without earning any interest in return. It feels good to get a refund, but it might make more sense for some people to increase their take-home pay. The extra money could be used to save more each month for retirement (which in some cases could trigger a larger employer match) or to pay down high-interest debt faster. Many people prefer to withhold more so they will receive a large tax refund, believing they will spend the windfall more wisely than they would with a larger paycheck. Other taxpayers simply fill out their W-4 Forms once and then fail to make adjustments as time passes. You may want to reconsider your withholding decisions if you received a large refund or paid a tax bill last year, or if you’ve recently experienced a major life change such as marriage, divorce, a promotion, retirement, the birth of a child, or are paying for college. The IRS has an online tool to help taxpayers determine their appropriate federal withholding ( You may need to refer to your latest income tax return and pay stubs. Source: Internal Revenue Service, 2023

Americans’ Plans for Their Tax Refunds 50% 33% 28% 11% 10% Source: National Retail Federation 2023 Tax Return Study (multiple responses allowed) Add to savings Pay down debt Cover everyday expenses Use for home improvement Make a major purchase

Funding an IRA Did you know you can make IRA contributions for the previous year up to the April tax filing deadline? The maximum annual contribution to all IRAs combined is $7,000 ($8,000 for those age 50 and older) in 2024. This hypothetical example is used for illustrative purposes only. The actual net savings in federal income taxes owed will vary. Contribution Current-year tax savings by tax bracket 12% 22% 24% 32% 35% 37% $6,000 $720 $1,320 $1,440 $1,920 $2,100 $2,220 $7,000 $840 $1,540 $1,680 $2,240 $2,450 $2,590 Incentive to Save Potential tax savings for maximum allowed traditional IRA contributions Cut Taxes Today Contributions to a traditional IRA are generally tax deductible, but deductibility is limited for higher-income workers who are active participants in an employer-sponsored retirement plan. For the 2024 tax year, the phaseout ranges are $77,000 to $87,000 (single filers) and $123,000 to $143,000 (joint filers). 4 Whether you owe taxes or expect a refund at tax time, the reduction in your tax liability could help fund your retirement contribution (see below). There may also be a reduction in your state income taxes. And don’t forget the potential for tax-deferred growth over the coming years.

You must have earned income from wages to contribute to a Roth IRA or a traditional IRA. IRA withdrawals taken prior to age 59½ may be subject to a 10% federal income tax penalty, with certain exceptions such as those mentioned above. Withdrawals from traditional IRAs are taxed as ordinary income. Required minimum distributions must begin once traditional IRA account holders reach age 73 (age 75 if they reach age 73 after 2032). Set Up Tax-Free Income for Later A Roth IRA is funded with after-tax dollars, so there is no up-front tax savings. However, Roth IRA owners can look forward to a time when their qualified distributions will be tax-free, regardless of howmuch growth the account experiences (under current tax law). A qualified distribution is one that meets the five-year holding requirement and takes place after age 59½ or results from the owner’s death or disability. A Roth IRA can be a flexible way to save for retirement as well as other needs. Contributions (not earnings) can be withdrawn without penalty at any time, for any reason. There are also some convenient exceptions to the 10% penalty for early withdrawals of earnings. For example, a penaltyfree IRA distribution could be used to purchase a first home ($10,000 lifetime maximum), to pay qualified higher-education expenses, or to pay unreimbursed medical expenses that exceed 7.5% of adjusted gross income. Eligibility to contribute to a Roth IRA phases out at higher modified AGI levels. In 2024, the phaseout starts at $146,000 and ends at $161,000 for single filers; for joint filers, the phaseout starts at $230,000 and ends at $240,000.

Preparing your tax return can be time-consuming, so it’s no wonder people often turn to professional tax preparers. Still, you must make appropriate decisions throughout the year to avoid paying more taxes than necessary, especially when the money might be put to better use, such as a home purchase, college savings, or your retirement nest egg. Written and prepared by Broadridge Advisor Solutions. © 2024 Broadridge Financial Solutions, Inc.