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A Smarter Tax Season Strategy Focus on High-Interest Debt

Focus on high-interest debt first and then optimize your taxes.


Meme of baby paying taxes

If people feared high-interest debt as much as they fear taxes, then we would likely be in a different financial situation in this country. During this time of year, I’m often asked by clients how to lower their tax bill, some of whom are struggling with credit card debt, high-interest student loans, and personal loans. One of the best ways to reduce your tax bill is to invest in tax-advantaged accounts; however, before you start investing you should pay off any high-interest debt.


Credit Card Debt: The average credit card interest rate is approximately 24 percent and I recently had a client who was paying 31 percent. You will never find a better guaranteed investment than paying off credit card debt at these rates. Start here.


Soccer meme of player being dragged down by credit card debt

Student Loans: Student loans are cheap by comparison, but private loan interest rates may still be upwards of 15 percent. If your student loan interest rate is double digits, I would be hard pressed not to focus on paying it off before worrying about taxes.


Personal Loans: Personal loans have become all too common with interest rates ranging from 10 to 21 percent. Similar to the student loans above, if you are paying a double digit interest rate, I would focus on paying it off. This high-interest debt may have been used for frivolous spending, to fund your education, or to start your own small business. Regardless of the reason, it’s the first place to start.


Now, if you are through the above gauntlet of debt above and are still fearful of your tax filing, below are a few ways to reduce the amount you may owe in the future:


Health Savings Account: If you are healthy and can afford to pay out-of-pocket for the rare non-preventative medical visit, you should prioritize investing in a Health Savings Account (HSA). These accounts allow you to defer taxes on your contributions, similar to a 401(k), but then withdraw money tax-free, similar to a Roth IRA, as long as the money is used for qualified medical expenses. In summary, you may never have to pay taxes. The HSA contribution limits for 2024 are $4,150 for individuals and $8,300 for families.


Tax-Deferred Accounts: If you are earning enough to be in a high tax bracket, then it’s key to reduce your current tax expense as much as possible. This may include maximizing your employer sponsored retirement plan (e.g., 401(k), 403(b)) as well as your Health Savings Account. As an entrepreneur, it may mean establishing a Solo 401(k) or a SEP IRA. These accounts allow a maximum contribution of $69,000 in 2024 through a combination of employee and employer contributions.


Catch-up Contributions: If you are older than 50, you should maximize retirement account catch-up contributions. These special contributions allow you to add additional money to retirement accounts, such as $7,500 in 401(k) catch-up contributions, raising your account limit to $76,500 for 2024.


Bottom line is that no one wants to pay too much in taxes, but attempting to lower your tax bill by investing in tax-deferred accounts while drowning in high-interest debt is a losing battle.


File your taxes and then take control of your financial future by taking your first step below:



Disclaimer: The information in this post is provided for your convenience only and is not intended to be treated as financial, investment, tax, or other advice. The information is intended to be educational and is not tailored to the investment needs of any specific individual.  It is also not intended to be relied upon as a forecast and is not an offer or solicitation to buy or sell any securities or to adopt any investment strategy.  The opinions expressed are those of the author.  Reliance upon the guidance and information in this presentation is at the sole discretion of the individual.

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