Tax Prep and Reduction Strategies: Keeping More of Your Hard-Earned Money

by | Financial Planning, Tax Strategies

As tax season approaches, it’s crucial to implement effective strategies to minimize your tax liability and maximize your financial well-being. Here are some key approaches to consider:

Maximize Retirement Contributions

Contributing to tax-advantaged retirement accounts can significantly reduce your taxable income:

  • 401(k) Plans: For 2025, the employee contribution limit is $23,500, with an additional catch-up contribution of $7,500 for those aged 50 and above, allowing a total of $31,000. ​
  • Traditional IRA: The contribution limit remains at $7,000 for 2025, with a $1,000 catch-up contribution for individuals aged 50 and above, totaling $8,000. ​
  • Roth IRA: While contributions are not tax-deductible, qualified withdrawals are tax-free, providing long-term tax benefits.​

Utilize Health Savings Accounts (HSAs)

If you’re enrolled in a high-deductible health plan, HSAs offer triple tax advantages:

  • Contribution Limits for 2025: $4,300 for individuals and $8,550 for families, with an additional $1,000 catch-up contribution for those aged 55 and above. ​
  • Tax Benefits: Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.​

Harvest Tax Losses

Offset capital gains by selling investments at a loss:

  • Tax-Loss Harvesting: Allows you to deduct up to $3,000 of ordinary income annually, with excess losses carried forward to future years.​

Optimize Charitable Contributions

Charitable giving can provide tax deductions:

  • Donating Appreciated Assets: Avoids capital gains tax and allows for a charitable deduction equal to the asset’s fair market value.​
  • Bunching Donations: Combining multiple years’ worth of donations into one year can help you surpass the standard deduction threshold and maximize itemized deductions.​

Leverage Tax Credits

Tax credits directly reduce your tax liability:

  • Child Tax Credit: Up to $2,000 per qualifying child.​
  • Earned Income Tax Credit (EITC): Benefits low-to-moderate-income workers; the credit amount varies based on income and number of dependents.​
  • American Opportunity Tax Credit (AOTC): Up to $2,500 per eligible student for qualified education expenses.​
  • Saver’s Credit: Provides a tax credit for lower-income individuals contributing to retirement accounts.​

Plan Required Minimum Distributions (RMDs) Strategically

For those aged 73 or older, RMDs from traditional retirement accounts are mandatory:

  • Roth Conversions: Converting traditional IRA funds to a Roth IRA can reduce future RMDs, as Roth IRAs do not require RMDs during the owner’s lifetime.​

Review Tax Withholding and Estimated Payments

Ensure you’re not overpaying or underpaying taxes:

  • Adjust Withholding: Review your W-4 form to reflect your current tax situation accurately, preventing large refunds or tax bills.​
  • Estimated Tax Payments: Self-employed individuals or those with significant non-wage income should make quarterly estimated tax payments to avoid penalties.​

Consider State and Local Tax Strategies

State taxes vary and can impact your overall tax burden:

  • Relocation Considerations: Moving to a state with no income tax can reduce your tax liability, but consider other factors like property and sales taxes.​
  • State-Specific Deductions: Some states offer deductions or credits for retirement income, property taxes, or education expenses.

These strategies may help optimize your tax situation and enhance your financial health. Consider consulting with a tax professional or financial advisor for personalized guidance tailored to your unique circumstances.

Contact our team with any questions. We welcome the opportunity to be a resource to you.

Note: Tax laws are subject to change. Please consult the latest IRS guidelines or a tax professional for the most current information.