Financial planning—for retirement, health care, and beyond—may offer tax-saving strategies to help trim what you owe.
Can you save on taxes? That depends on a lot of factors, including when you file, how much you make, and what financial goals and plans you have for the year. These eight strategies may help you keep more of your hard-earned money.
1. File on time.
The consequences of filing late or not requesting an extension by April 15, 2024, may be a hefty fine. State tax filing deadlines vary, so check with your state’s department of revenue.
2. Increase retirement account contributions.
Traditional IRA and 401(k) or 403(b) contributions are typically made with pre-tax dollars, so adding to either can result in tax savings by reducing taxable income. Options include:
- Establish a SEP or Simple IRA if you are self-employed or a business owner.
- Make catch-up contributions (if allowed by your plan) to a 401(k) or 403(b) if you are age 50 or older.
- Boost contribution levels to a 401(k) or 403(b).
Two tax terms you should know
Tax deduction: reduces the total income your taxes are based on.
- Example: $50,000 taxable income – $2,000 tax deduction = $48,000 new taxable income
Tax credit: reduces the total income tax you owe.
- Example: $10,000 owed in federal income tax – $2,000 tax credit = $8,000 new total owed
3. Add to 529 college savings.
529 plans offer potential tax savings in two ways: While contributions are made with after-tax dollars, earnings are tax-deferred while invested—and money you use for qualified educational expenses isn’t taxed. Those 529 contributions may also qualify for state income tax deductions or credits.
4. Contribute to your health savings account (HSA).
If you’re on a high deductible health plan (HDHP) through your employer, you may have access to an HSA to save for out-of-pocket medical expenses. These are tax-advantaged in three ways:
- payroll HSA deductions are pre-tax,
- growth is tax-free, and
- withdrawals for qualified medical expenses aren’t taxed.
5. Open a flexible spending account (FSA).
If you know you’ll have expenses such as childcare, elder care, medical expenses, or prescriptions, pre-tax FSA savings (through an employer) help you plan your budget and lower taxable income. The IRS-allowed max savings changes every year, and you lose what you don’t use from year to year, so check current IRS contribution guidelines for details. (Typically, an FSA is not available if you are using an HSA.)
6. Fine tune your paycheck withholdings.
The average tax refund in 2023
7. Take advantage of all the tax credits and deductions you’re eligible for.
A tax professional can help evaluate:
- home mortgage and a portion of home property taxes, either itemized or a standard deduction,
- home energy efficiency improvements such as windows and solar hot water,
- an expanded child tax credit for any dependent under the age of 17 at the end of the year, and
- electric-powered vehicle credits.
8. Review mutual fund and stock performance.
A tax professional can help you determine options should you have capital gains to report on your yearly return.
As a reminder: When you sell something you own, like an investment or piece of artwork, for more than you bought it for, you incur capital gains. Capital gains are taxed at a rate determined both by how long you held the asset and your filing rate. One strategy that may be used to offset capital gains is tax-loss harvesting. Tax-loss harvesting is selling something you own at a net loss to reduce capital gains taxes.
What’s next?
Ready to check your retirement account contributions to help lower your taxable income? Log in to your account and adjust your contributions. First time logging in? Get started by creating an account. Or, consider an individual retirement account if you don’t have retirement savings at work.
