7 Tax-Saving Strategies That Could Keep More Money in Your Pocket

We get it: No one likes doing taxes. (Sorry accountants!) But navigating the complexities of federal income taxes can actually be financially rewarding with a careful review of your situation and strategic planning.

At Advance Capital Management, our financial advisers are dedicated to uncovering tax-saving opportunities throughout the year and collaborating with your tax professional to keep you from overpaying. It's all part of our financial planning services.

So, we want to share seven strategies to consider with the guidance of a financial adviser that could help reduce your tax bill.

This article covers:

• Engage in Year-Round Tax Planning
• Leverage Retirement Account Contributions
• Maximize HSA Contributions
• Make Qualified Charitable Distributions After Age 70 ½
• Optimize Deductions Through Itemizing
• Capitalize on Tax Credits
• Utilize Tax-Loss Harvesting to Offset Investment Gains

Engage in Year-Round Tax Planning

Planning throughout the year can allow you to better understand your expected tax bracket and devise methods to minimize your taxable income.

The earlier you think about the tax consequences of certain financial decisions or possible opportunities, the more options you’ll have to implement effective tax-saving strategies.

Then, reevaluating your situation as the year closes can uncover additional ways to lower your tax liability. For instance, increasing your pre-tax contributions to a 401(k) can significantly reduce your taxable income. This kind of adjustment, when timed right, can lead to substantial savings. Can't decide between pre-tax and Roth? Check out this article on how to decide.

Leverage Retirement Account Contributions

Investing in your retirement is a win-win, offering long-term financial benefits and possible tax advantages.

Here’s how different retirement accounts can lead to tax savings:

Traditional 401(k): Contributions to a traditional 401(k) are made with pre-tax dollars, directly reducing your taxable income. This reduction can be particularly beneficial if you’re on the edge of moving into a higher tax bracket, as it might keep you in a lower bracket and reduce your overall tax bill for the year.

Traditional IRA: Depending on your income and whether your employer offers a retirement plan, your contributions to a traditional IRA may be tax-deductible. This can lower your taxable income and, consequently, your tax liability.

Roth IRA: Contributions to a Roth IRA are made with after-tax money, meaning they won’t reduce your tax bill now. However, the benefit comes later, as you can enjoy tax-free withdrawals in retirement, provided certain conditions are met. This can be a powerful way to manage your tax burden in the long term.

Maximize HSA Contributions

If you’re eligible for a Health Savings Account (HSA) through a high-deductible health plan, increasing your contributions can offer triple tax benefits: your contributions lower your taxable income today, your account grows tax-free, and you can make tax-free withdrawals for qualified medical expenses.

This makes HSAs a powerful tool for saving on taxes now and in the future, all while preparing for healthcare costs. Learn more about the advantages of HSAs for retirement.

Make Qualified Charitable Distributions After Age 70 ½

For those aged 70 ½ or older, a Qualified Charitable Distribution (QCD) offers a tax-savvy way to donate. By directly transferring up to $100,000 from your IRA to a charity, you can achieve several tax benefits. A QCD doesn't count towards your adjusted gross income (AGI), potentially lowering your tax burden. This advantage applies whether you itemize deductions or opt for the standard deduction.

Moreover, a QCD can satisfy your Required Minimum Distribution (RMD) obligations, making it an efficient strategy for both philanthropy and tax planning. But that's not all. This article provides additional ways to lower RMD taxes.

Optimize Deductions Through Itemizing

Deciding whether to take the standard deduction or to itemize is a pivotal choice in reducing your taxable income. If itemizing offers the greater benefit based on your financial situation, early planning can enhance these advantages.

Itemizing allows for specific deductions unavailable to those taking the standard deduction, so recognizing and acting upon these opportunities can significantly lower your tax bill.

Potentially tax-saving itemized deductions:

Charitable Donations: Qualified contributions to charity not only support good causes but also can reduce your taxable income.

Medical and Dental Expenses: Expenses exceeding 7.5% of your adjusted gross income can be deducted, helping to lower your tax obligation for significant out-of-pocket health costs.

Mortgage Interest: Deducting the interest you pay on your mortgage can lead to substantial savings, especially in the early years of a mortgage when interest payments are highest.

Capitalize on Tax Credits

Tax credits are a powerful tool, offering a dollar-for-dollar reduction in your actual tax bill. Unlike deductions, which reduce the amount of income subject to tax, credits reduce your tax liability itself.

To maximize your savings, it's crucial to stay informed about the latest tax credits introduced by the government. Annual reviews of your tax situation can help you identify and take advantage of these opportunities.

For example, you may be able to receive a tax credit for making energy-efficient home improvements or purchasing a qualified electric vehicle, benefiting both the environment and your finances.

Utilize Tax-Loss Harvesting to Offset Investment Gains

Tax-loss harvesting is a sophisticated strategy that turns investment losses into opportunities for tax savings. By selling off investments that have lost value, you can offset the capital gains taxes due on profits from other investments. Essentially, this approach uses the natural ebbs and flows of the investment market to your tax advantage.

While tax-loss harvesting can significantly mitigate the impact of investment losses on your tax bill, it requires careful execution to align with IRS rules and maximize its benefits.

Given its complexity, consulting with your financial adviser for tailored advice is crucial. This proactive step can ensure you’re leveraging every possible avenue to reduce your tax obligations.

Bottom Line

Strategically managing your finances with an eye toward tax savings can make a significant difference in your tax bill. By considering the tax-saving strategies above, you may be able to position yourself for better financial health.

Ready to uncover tax-saving opportunities?

An Advance Capital Management financial adviser can collaborate with you and your tax professional to explore how you might benefit from these and other strategies.

For personalized guidance, reach out to an Advance Capital Management financial adviser for a free financial review and consultation.

During your complimentary consultation, consider asking: Which immediate actions can reduce my tax bill this year? Are there loss or gain harvesting opportunities in my portfolio? What tax strategies should I prioritize now?

Schedule your free consultation right now!

The tax planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as tax advice. Always consult a tax professional regarding your specific legal or tax situation.