As the end of the year approaches, many of us start thinking about taxes. While it might not be the most exciting topic, a little tax planning can lead to significant savings. Think of it like preparing for a fishing trip. You would not just show up at the water with a random lure or fly. You would choose the right fly for the fish you want to catch. Similarly, selecting the right year-end tax strategies can help you secure your financial future and maximize your refund.
We understand that navigating tax laws can feel complicated. That is why we have put together this guide to break down smart, actionable tax-saving ideas. Whether you plan to itemize your deductions or take the standard deduction, there are steps you can take to lower your tax bill.
Key Strategies for Everyone
Certain tax-saving moves are beneficial regardless of whether you itemize or take the standard deduction. These strategies focus on “above-the-line” deductions, which reduce your adjusted gross income (AGI), and tax credits, which directly lower the amount of tax you owe.
Maximize Your Retirement Contributions
One of the most powerful tools for tax savings is contributing to a tax-deferred retirement account. Money you put into a traditional 401(k) or a traditional IRA is often deductible, meaning it lowers your taxable income for the year.
For example, if you are in the 22% tax bracket, every $1,000 you contribute to your traditional 401(k) could save you $220 on your tax bill. It’s a win-win: you save for your future while reducing your taxes today. Check the annual contribution limits and aim to contribute as much as you can before the deadline.
Contribute to a Health Savings Account (HSA)
If you have a high-deductible health plan, an HSA is an incredible triple-tax-advantaged account.
- Contributions are tax-deductible: The money you put in lowers your taxable income.
- The money grows tax-free: Any interest or investment gains are not taxed.
- Withdrawals are tax-free: You can take money out for qualified medical expenses without paying taxes.
An HSA is a great way to plan for future healthcare costs, which can be a significant concern in retirement. By contributing now, you secure funding for future medical needs and receive an immediate tax break.
Harvest Tax Losses in Your Investment Portfolio
Did some of your investments lose value this year? While nobody likes seeing their portfolio go down, you can turn those losses into a tax-saving opportunity through tax-loss harvesting. This involves selling investments at a loss to offset capital gains realized from selling other investments at a profit.
If your losses are greater than your gains, you can use up to $3,000 of the excess loss to reduce your ordinary income. This can be a smart way to manage both your portfolio and your tax liability.
Make a Qualified Charitable Distribution (QCD)
If you are age 70½ or older (yes, even if you are not yet required to take RMDs), you have a unique opportunity to make a big impact while saving on taxes. A Qualified Charitable Distribution (QCD) allows you to donate up to $100,000 directly from your IRA to a qualified charity.
A QCD is especially powerful because the distribution counts toward your Required Minimum Distribution (RMD) but is not included in your taxable income. A QCD can help keep your income lower, which may prevent your Social Security benefits from being taxed or stop you from being pushed into a higher tax bracket.
Strategies If You Take the Standard Deduction
The standard deduction has increased significantly in recent years, meaning more people choose it over itemizing. If you fall into this group, you can still find plenty of ways to save. The key is to focus on the above-the-line deductions and credits mentioned earlier, as they don’t require you to itemize.
Here’s a quick recap of the best moves:
- Contribute to a Traditional IRA or 401(k): This is one of the most effective ways to reduce your taxable income directly.
- Fund Your HSA: Take advantage of the triple tax benefits to save for healthcare costs.
- Look for Tax Credits: Credits are more valuable than deductions because they reduce your tax bill dollar-for-dollar. Explore credits like the Child Tax Credit, education credits (American Opportunity Credit, Lifetime Learning Credit), and energy-efficient home improvement credits.
- Deduct Student Loan Interest: You may be able to deduct the interest you paid on student loans, up to a specific limit.
Strategies If You Itemize Deductions
If your total deductible expenses exceed the standard deduction, itemizing is the way to go. This allows you to deduct a variety of specific expenses, potentially leading to substantial tax savings. Think of it like having more than one type of fly in your tackle box—it gives you more options to get the job done.
Bunch Your Charitable Contributions
One popular strategy is “bunching.” Instead of making smaller annual donations, you can combine several years’ worth of charitable giving into a single year. Bunching can push you over the standard deduction threshold for that year, allowing you to itemize and get a larger tax benefit. In the following years, you can simply take the standard deduction.
For example, if you usually donate $5,000 a year, you could donate $15,000 (paired with a donor-advised fund) in one year and then skip the next two. This larger donation, combined with other itemized deductions, might provide a much greater tax benefit than three smaller, separate donations.
Prepay Deductible Expenses
You can increase your itemized deductions by paying for certain expenses before the December 31 deadline.
- State and Local Taxes (SALT): You can deduct property, state, and local income or sales taxes, up to a combined total of $40,000 per household. Consider paying your fourth-quarter estimated state income tax payment in December instead of January.
- Mortgage Interest: Making your January mortgage payment in December allows you to deduct the interest portion on this year’s tax return.
- Medical Expenses: You can deduct medical expenses that exceed 7.5% of your AGI. If you are close to this threshold, consider scheduling and paying for any needed medical or dental procedures before the end of the year.
Plan for Tomorrow, Today
Tax planning is not just about last-minute scrambling. It’s about making thoughtful decisions throughout the year to put yourself in the best possible financial position. By using these strategies, you can navigate retirement confidently, knowing you are making the most of your hard-earned money.
We recommend reviewing your financial situation with a professional who can provide personalized guidance. With a solid plan, you can reduce your tax burden and secure greater peace of mind for the years to come.
Don’t wait to secure your financial future. To discuss how these tax-saving strategies can work for you. Let’s plan for your tomorrow, together.
Book an appointment with us today