New Year Tax Savings

Personal Tax Savings: Practical Strategies to Keep More of What You Earn

Paying taxes is inevitable, but smart planning can significantly reduce the amount you owe and help you keep more of your income. This article explains practical, legally sound strategies for personal tax savings, organized for both short-term benefits and long-term financial planning.

1. Know your filing status and maximize standard/itemized choices

• Choose the correct filing status. Your filing status (single, married filing jointly, married filing separately, head of household, qualifying widow(er) with dependent child) affects tax brackets, standard deduction amounts, and eligibility for credits. Review changes in life circumstances each year.

• Compare standard deduction vs. itemizing. Claim the higher of the standard deduction or itemized deductions (mortgage interest, state and local taxes up to limits, charitable contributions, medical expenses exceeding the threshold, certain unreimbursed employee expenses in limited cases). Use recordkeeping and a quick year-end comparison to decide.

1. Use retirement accounts to lower taxable income

• Contribute to employer-sponsored plans (401(k), 403(b), 457). Pre-tax contributions reduce taxable income now and grow tax-deferred. Aim to contribute at least enough to get any employer match — it’s free money.

• Traditional IRAs. Contributions may be tax-deductible depending on income, filing status, and participation in an employer plan. Even if not deductible, a Traditional IRA still offers tax-deferred growth.

• Roth accounts for tax-free future withdrawals. Roth IRAs and Roth 401(k)s don’t reduce current taxable income, but qualified distributions are tax-free in retirement — beneficial if you expect higher tax rates later.

• Consider a backdoor Roth conversion if your income exceeds direct Roth IRA limits.

1. Harvest tax losses and manage capital gains

• Tax-loss harvesting. Sell investments with losses to offset realized capital gains. Excess losses (up to $3,000 per year) can offset ordinary income; remaining losses carry forward.

• Long-term vs. short-term. Hold investments for more than one year to benefit from lower long-term capital gains rates. Time sales to manage taxable events across tax years.

• Be mindful of the wash-sale rule. Selling a security at a loss and repurchasing the same or substantially identical stock within 30 days disallows the loss deduction.

1. Maximize tax credits

• Child tax credit and dependent credits. Make sure eligible dependents are claimed; phaseouts apply for higher incomes.

• Earned Income Tax Credit (EITC). Low-to-moderate income workers may qualify; eligibility rules are complex but can yield significant savings.

• Education credits. The American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) can reduce tax liability for qualifying education expenses. Only one can be claimed per student per year; rules differ.

• Saver’s Credit. Low-to-moderate income taxpayers contributing to retirement accounts may be eligible for this credit.

1. Reduce taxable income with flexible spending accounts (FSAs) and HSAs

• Health Savings Account (HSA). For those with high-deductible health plans, HSA contributions are pre-tax or tax-deductible, grow tax-free, and withdrawals for qualified medical expenses are tax-free. HSAs offer a triple tax advantage and can be used as a retirement healthcare fund.

• Flexible Spending Account (FSA). Contribute pre-tax to pay for eligible medical or dependent care expenses. Be aware of plan use-it-or-lose-it rules or limited carryovers.

1. Use employer benefits and pre-tax perks

• Pre-tax commuter benefits, dependent care FSAs, and adoption assistance reduce taxable income when offered through your employer.

• Take advantage of tuition assistance programs and flexible benefits that reduce overall tax liability.

1. Plan for major life events and timing strategies

• Bunch deductions. If you’re close to itemizing, bunch deductible expenses (medical procedures, charitable gifts, state and local taxes within legal limits) into a single year to exceed the standard deduction, then take the standard deduction the next year.

• Time income and deductions. Accelerate or defer income or deductible expenses depending on expected future tax rates and cash flow needs. Evaluate opportunities like deferring a bonus to next year or accelerating deductible charitable contributions.

1. Charitable giving strategies

• Donate appreciated securities. Gift long-term appreciated stocks or mutual funds to charity to avoid capital gains taxes and receive a charitable deduction for fair market value if you itemize.

• Donor-advised funds (DAFs). Contribute cash or appreciated assets to a DAF in a year you want large deductions, then recommend grants to charities over time.

• Qualified charitable distributions (QCDs). If you’re 70½ or older and must take required minimum distributions (RMDs) from IRAs, a QCD from the IRA directly to a