Tax season might only come around once a year, but saving on taxes is a year-round endeavor. By considering tax saving strategies throughout the year, you can minimize your tax burden and keep more of your hard-earned money in your pocket.
- Stay Organized: Good recordkeeping is the foundation of effective tax planning. Keep track of all relevant financial documents throughout the year, including receipts, invoices, bank statements, and investment records. This is most needed for those of you who own your own businesses or own rental properties. This will not only ensure that you’re able to claim all eligible deductions and credits but also make tax filing much smoother.
- Contribute to Retirement Accounts: Contributing to tax-advantaged retirement accounts such as 401(k)s, IRAs, or SEP-IRAs is one of the most powerful tax-saving strategies available. Not only do these contributions lower your taxable income for the year, but they also allow your investments to grow tax-deferred or tax-free, depending on the type of account. Keep in mind that while IRA contributions can be made by the filing date, employer accounts only factor in by year end.
- Utilize Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs): If you have access to an HSA or FSA through your employer, take advantage of these accounts to pay for eligible medical expenses with pre-tax dollars. Contributions to HSAs are tax-deductible, and withdrawals for qualified medical expenses are tax-free. FSAs operate similarly but typically have a “use it or lose it” provision, so plan your contributions accordingly.
- Tax-Loss Harvesting: Throughout the year, review your investment portfolio for opportunities to realize capital losses. By strategically selling investments that have decreased in value, you can offset capital gains and potentially reduce your tax liability.
- Plan for Estimated Taxes: If you’re self-employed or have significant investment income, you may need to make quarterly estimated tax payments to avoid underpayment penalties. Keep track of your income throughout the year and make timely payments to the IRS and state tax authorities. Working with a tax professional can help you determine the appropriate amount to pay each quarter.
- Review Your Withholding: Periodically review your withholding to ensure that you’re having the appropriate amount of taxes withheld from your paycheck. If you have more than one job or if one spouse earns much more than the other, you may find that you aren’t withholding nearly enough taxes throughout the year. This can hurt if you aren’t expecting it. Consult with your employer to update your W4 if this applies to you.
- Charitable Giving: Giving away your money can be a way to reduce taxable income as well. Qualified Charitable Distributions (QCD’s) from your IRA will not be taxed. Keep in mind that there are some rules you must defer to. You must be age 70 ½ or older, the donation must be made directly from the trustee to a qualified charity, and there is a $100,000 annual limit per person. Regular charitable giving can be used for itemized deductions as well. One tax strategy is to lump your giving into one tax year by utilizing a Donor Advised Fund to store your money for a period of years before officially donating.
- Education Savings: Lastly, if you are planning on saving towards your children’s or grandchildren’s education, a 529 plan is a fantastic way to accomplish this daunting task. For tax purposes, these contributions must be made by year end to count towards any state benefit you may receive.
Effectively navigating these strategies can take a lot of effort, but if done correctly can provide a tremendous benefit year over year. Consult with a tax professional to tailor these strategies to your specific financial situation and ensure compliance with ever-changing tax laws. With proactive tax planning, you can set yourself up for financial success both now and in the future.
