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You’ve probably already considered and implemented some of the various tips you can use to save money in your budget throughout the year. But what about saving money on your taxes?
While you can’t avoid taxes entirely, there are strategies you can adopt to reduce what is probably one of your biggest annual expenses. To help you save money on your taxes this year, we spoke with five financial experts to get their top tax-saving tips—and they go well beyond taking advantage of tax deductions and credits.
Read on for some lesser-known tips you may not have heard of.
Key Takeaways
- Protecting your assets from the Internal Revenue Service (IRS) can take some strategizing beyond simply taking advantage of tax deductions and credits.
- To avoid an audit, be sure you have excellent documentation and a good tax preparer so that you can be as aggressive as you like in your tax planning.
- You can minimize your lifetime taxes by taking advantage of low-income years you experience to move income in and deductions out during those years.
- Consider strategies, like opening a Roth individual retirement account (Roth IRA), that incur taxes now but can save you much more in taxes later in life.
Josh Bennett: Keep a Paper Trail
“Always ‘CYA’ with your tax strategy,” says Josh Bennett, founder and chief executive officer (CEO) of Vincere Wealth Management and Vincere Tax. “This is something that is incredibly important when trying to cut your tax bill. The more aggressive you are, the more likely you are to be on the IRS’s radar.
“The tax codes are loaded with ways to save on taxes if you play within the rules of the game. You can be very aggressive with minimizing your bill, but the best-laid tax savings plans are useless if you lack good bookkeeping or documentation. It can be all taken away from you in the blink of an audit. Plus you can get massive penalties, too.
“No one likes doing tax organization and paperwork, but good documentation (such as holding onto receipts) allows you to be much more confident while being aggressive in your tax planning. Don’t assume you know enough to protect yourself on your own; get a good bookkeeper and/or tax preparer.”
Joe Calvetti: Consider a Low-Income Year
“There is value in not only looking for ways to reduce your tax liability each year, but also in minimizing your lifetime taxes,” says Joe Calvetti, certified public accountant (CPA) and founder of Still River Financial Planning. “So if you are in a temporarily low-income year, consider how you can move income into that year or move deductions out of that year to take advantage of your new, lower tax bracket.
“You may find yourself in a low-income year if you have a spouse who leaves the workforce to care for children, or if you take a sabbatical, start a business, or retire, for example.
“In this case, you’ll want to consider moving income into the current year—for example, by exercising stock options—to benefit from the lower tax rate. You may also be able to take advantage of capital gains harvesting, where you sell investments within a brokerage account that have increased in value and immediately repurchase them. This creates a taxable event, allowing you to pay a potentially lower tax rate on the gain and increasing your cost basis, which means less taxable gain to be realized in the future.
“In a low-income year, you should also consider contributing to Roth retirement accounts, where the contributions are made after tax, as opposed to traditional pretax accounts. You might even consider converting some pretax retirement savings to one of the best Roth IRA accounts to pay taxes on the amount converted while your tax rate is low.”
Amy Irvine: Always Think Long Term
“Don’t be shortsighted on your tax picture and look long term,” says Amy Irvine, owner and principal of Rooted Planning Group.
“What I mean by this is that sometimes it makes sense to pay more tax now, because it will save you significant taxes in the future. We know right now that the current tax rates are scheduled to sunset in 2025, which will lead to higher tax rates in 2026. If you are going to be in a higher tax bracket in the future (which, based on these rules, most will be), then it might make sense to contribute to a Roth IRA or 401(k) now at today’s rate, so that you will not pay at a higher rate in the future.
“For many clients, they’ve done what they’ve thought was the right thing and they have maximized their 401(k) pretax withholding. But then when they retire, they have large required minimum distributions that affect their tax rates, their property tax credits, and their Medicare premium.
“If your company has a Roth component, consider contributing to that, and if they don’t, consider a Roth IRA (this may need to be a backdoor Roth) or a Roth conversion of current IRA money at today’s tax rates, so that in the future, you will have a tax-free resource.
“Also consider putting some money into a general brokerage account; yes, you may pay tax on that money now, but it may only be at capital gain tax rates (which are 15% for most people, or a maximum of 20%). [This is] still a lower tax bracket and less impactful than a distribution from a tax-deferred vehicle if you need a lump sum for something.”
The annual contribution limit for IRAs and Roth IRAs is $7,000 in 2024. The catch-up contribution for people ages 50 and older remains $1,000.
Troy Sharpe: Take Advantage of IRAs
“Non-working spouses can save for retirement, too,” says Troy Sharpe, founder and CEO of Oak Harvest Financial Group. “If the other spouse is working and the couple files a joint federal income tax return, the non-working spouse can open and contribute to their own traditional or Roth IRA.
“In 2023, the annual contribution limit for IRAs is $6,500 [rising to $7,000 in 2024], and if you’re age 50 or older, you can contribute an additional $1,000 annually. If you contribute to the traditional IRA, that’s up to an additional $7,500 tax deduction while also saving for retirement. If you choose to contribute to the Roth IRA, you’ll pay taxes on that income now, but it will grow tax-free forever as long as you don’t withdraw any interest within five years or until age 59½, whichever is longer.”
Rebecca Walser: There’s More to Tax-Loss Harvesting than You Think
“Many people think of tax-loss harvesting at the end of the year to shelter investment gains,” says Rebecca Walser, principal and CEO of Walser Wealth Management. “However, don’t forget about the double tax whammy of equity distributions to charities that achieve two tax advantages. First, it counts dollar-for-dollar as a charitable deduction as long as you still itemize on Schedule A. Second, it deducts the fair market value (FMV) of the donation, even if that exceeds your basis.
“For example, if you bought stock in 2020 for $100,000 (so, a basis of $100,000) and today that stock is worth $250,000, you can donate the stock to a charity and deduct the $250,000 on your Schedule A itemized deductions, even though you never recognized the $150,000 gain as income and will never pay tax on that $150,000. Tax-loss harvesting is just the beginner’s club for tax strategy.”
How Can I Reduce My Taxable Income?
How Can I Reduce My Taxes on Investment Gains?
You can lower your taxes on investment gains by holding your stocks or other capital assets for longer than a year before you sell them. These so-called long-term capital gains are taxed more favorably—at rates of 0%, 15% or 20%, depending on your income—than short-term capital gains, which are taxed at ordinary income rates if you hold the asset for less than a year before selling it. And if you sell securities at a loss, tax-loss harvesting can also offset a capital gains tax liability.
How Do I Avoid Capital Gains Tax by Reinvesting?
When you have investment real estate that you decide to sell, the entire gain amount must be claimed on your taxes in the year when the property is sold unless you use Internal Revenue Code Section 1031 to recognize a like-kind exchange when selling. In that case, capital gains can be deferred by reinvesting, or purchasing a similar investment property, and the gain won’t be recognized until the newly acquired property is sold. Consult a tax expert to be sure you understand all of the rules governing a 1031 exchange.
The Bottom Line
There is a lot more to saving on your taxes than you might think. Financial professionals like the experts above can help you to recognize strategies that go beyond ordinary tax deductions and credits.
These strategies include donating equity distributions to charities to get double the tax benefit of your gift, and opening an IRA for a non-working spouse to get the tax deduction while also saving for retirement. It helps to have a good tax preparer or financial planner to help you find additional ways to save on your taxes.