While many people think of their salary as their income, it can also include any money, property or even services you receive. In general, your taxable income is any amount included on your tax return unless it is specifically exempt by law. This is the portion of your total annual income that is subject to federal, state and local taxes, and you must report the full amount.
14 TAX SAVING STRATEGIES TO MINIMIZE YOUR EXPENSES
Here’s how you can reduce your taxable income this season.
Article published: November 17, 2024
For high-income earners, managing taxes at the federal, state and local levels each year can be a daunting task. And the higher your tax bracket, the more complicated and costly it becomes. Of course, we’re all prepared to pay our fair share, but nobody wants to find out they owe more money than they thought.
While taxes are inevitable, there are plenty of strategies you can employ to help avoid that unexpected bill each year. So, what’s the key to minimizing your liability and maximizing your tax savings? We’ll show you 14 different tax planning strategies you can use to help reduce what you owe at tax filing time.
1. TAKE ADVANTAGE OF EMPLOYEE BENEFITS
Your employer likely offers numerous benefits that can help lower your overall tax bill. First, check to see whether your company offers commuter benefits to help pay for transportation costs using pretax dollars. Otherwise, you could be missing out on up to $315 each month for travel costs, transit passes and parking.1
Flexible Spending Accounts (FSA) are another popular example of a tax-advantaged employee benefit. These accounts allow you to set aside pretax dollars for eligible medical expenses. Contributing to an FSA can help reduce your overall taxable income, potentially bumping you into a lower tax bracket.
Some employers also offer a Dependent Care FSA for dependent care expenses, such as day care or elder care. For 2024 FSA contributions are limited to $3,200 per year while DCFSAs (Dependent Care FSA) have a maximum of $5,000 per household ($2,500 for those who are married but filing separately).2
2. USE A HEALTH SAVINGS ACCOUNT
Similar to an FSA, an HSA (Health Savings Account) also allows you to set aside pretax income to pay for health care expenses. However, while FSA funds are typically “use it or lose it,” you can carry over HSA contributions indefinitely. These accounts also have the potential to grow your money through investments with tax-free earnings, though distributions are only exempt for qualified medical expenses.3 Depending on how much you contribute to your HSA fund, you also have the potential to lower your tax rate. Keep in mind that HSAs are only available to taxpayers who have a High-Deductible Health Plan.
3. MAXIMIZE RETIREMENT PLAN CONTRIBUTIONS
Another excellent tax planning strategy is to contribute the maximum amount toward your retirement plans. If your employer offers a 401k or 403b plan, you can add up to $23,000 for the 2024 tax year ($500 more than in 2023). If you are age 50 or older you can contribute an additional $7,500, bringing the total to $30,500. For traditional IRAs, contribution limits are set at $7,000, or $8,000 if you are age 50 or older, for 2024.4
For example, let’s say you’re at the top of the federal marginal tax bracket, you earn $695,000 per year, you’re married filing jointly, and you pay 37% in federal income tax. If you were to contribute the max amount to your 401k and IRA, you could reduce your taxable income to $665,000 per year, which would put you in the slightly lower tax bracket of 35%.
4. START A BUSINESS WITH YOUR SIDE GIG
Outside of your primary job, you can also use self-employment to help save on your tax return. Whether you have a side hustle doing freelance work or selling art, you can potentially claim a business deduction on all manners of expenses. You can write off almost anything you purchase for the business, from shipping fees and supplies to advertisements and websites. However, before you can receive any tax deduction benefits, you must prove that your business has been profitable for at least three out of the last five years.5
5. CLAIM YOUR HOME OFFICE
For those who already have a side business, are working from home or are self-employed, a home office deduction can provide a small tax benefit to help you cover some expenses. For instance, you can claim a portion of your monthly internet and utility bills on Form 8829 when you’re filing your tax return. It’s important to note, however, that you must use your home office regularly and exclusively for business purposes. So a spare room might qualify, but a shared space likely won’t.
6. SEE WHETHER YOU QUALIFY FOR TAX CREDITS
The IRS has many tax credits that can help reduce your overall liability. If you’re in a lower tax bracket, the Earned Income Tax Credit can provide a tax break of up to $7,830 for you and three or more qualifying children in 2024.6You can apply these credits to not only reduce the taxes you owe but potentially increase your refund. There is also the American Opportunity Tax Credit, which offers up to $2,500 annually for eligible students through the first four years of their higher education.7
7. CONTRIBUTE TO A 529 COLLEGE SAVINGS PLAN
Speaking of students, if you or your children plan on going to college or university, consider a 529 plan. Unfortunately, these plans don’t offer a federal tax break, but some states do allow you to deduct contributions. Distributions from 529 college savings plans are also tax-free as long as the withdrawal is used for a qualified educational expense. The SECURE 2.0 Act has also made these vehicles even more enticing by allowing you to convert some of the savings to a Roth account.
8. MAKE CHARITABLE CONTRIBUTIONS
Depending on your financial situation, a charitable donation could be an excellent tax strategy to employ. Whether you’re deducting money from paychecks or donating goods and gifts directly, you can claim your good deeds through an itemized deduction. One common method is to donate assets or property that has appreciated over time. That way, you can receive a tax deduction for the fair market value without paying for capital gains from the sale. Take note, this only applies for assets that were held for more than one year. Additionally, there may also be adjusted gross income limitations that can apply.
9. DO YOUR DUE DILIGENCE ON OTHER DEDUCTIONS
For many high income earners, finding deductions you qualify for can seem like more work than it’s worth – but each one adds up. For instance, you can deduct the interest on any mortgage payments for houses you own. Keeping in mind that recent tax legislation reduced the amount of borrowings that can be deductible (limited to principal borrowings of up to $750,000).8 You can also look at tax strategies at the state and local levels. If you’re a small-business owner, there are more than 34 states that allow you to reduce your federal income tax through optional pass-through entity taxes. Check with your local and state tax authorities to see what other deductions you might be able to qualify for. Keep in mind this only applies to assets that were held for more than one year.
10. INVEST IN MUNICIPAL BONDS
Moving on to your financial portfolio, bonds can be a great investment option for a taxable account if you’re looking to minimize your tax liability. When you buy a bond, you’re essentially giving the government a loan. In return, you get a set number of interest payments and if held to the maturity date, you receive the full amount of your initial investment. The interest you accrue on municipal bonds is tax-free at the federal level and, depending on where you live, might be exempt from state and local taxes. Bonds may also have an attractive tax-equivalent yield, especially if you’re in a higher tax bracket. All investments have risk, so discuss this with your financial advisor.
11. PRIORITIZE LONG-TERM CAPITAL GAINS
Whether you’re investing in bonds, stocks, mutual funds or even real estate, you should aim for long-term capital gains. Why? Assets held for less than a year are taxed at ordinary income rates. On the other hand, those held for longer than a year can benefit from a capital gains tax rate of 0%, 15% or 20%, depending on your income level. To qualify for 0% capital gains tax in 2024, your income must be less than or equal to $44,625 for single taxpayers.9
12. REVIEW YOUR PORTFOLIO’S ASSET ALLOCATION
As you’re tweaking your investment strategy, be sure to reevaluate your portfolio’s asset allocation. It’s important to ensure you have a proper balance, but you should also look for ways to make your investments more tax-efficient. For example, funds with a higher tax rate should go into your 401k or IRA, whereas lower-rate exchange-traded or mutual funds are better kept in a taxable account. These funds typically incur long-term capital gains, which are currently taxed at preferential tax rates.
In addition to tax-efficient investing, you should also consider tax loss harvesting. This strategy is designed to sell off investments at a loss to offset the capital gains incurred in your portfolio.
13. PERFORM A ROTH CONVERSION
Unlike distributions from traditional IRAs, Roth IRA distributions are exempt from taxes because you pay before you contribute. But many high-income earners aren’t able to make Roth IRA contributions if they earn above a certain threshold. However, you can perform a Roth conversion, wherein you move traditional IRA assets to a Roth account. While you will have to pay higher taxes on the conversion up front, you may be able to make future withdrawals without paying income tax. Be aware that you must hold on to these Roth conversions for at least 5 years. Also, keep in mind that there are no limitations for the dollar amount of conversions, but federal income tax would be incurred immediately upon conversion.
14. PARTNER WITH A FINANCIAL ADVISOR
Absorbing and implementing all these tips can feel overwhelming, but don’t worry – a financial advisor can guide you through every step of the way. They’ll work with you and your tax advisor to understand your current financial situation and can create a forward-thinking tax planning strategy that can help minimize your liability while helping you achieve your goals.
At Edelman Financial Engines, we take a fully integrated wealth management approach to help you build, grow, protect and preserve your wealth through tax-efficient strategies. If you’re interested in getting started, contact a financial advisor today.
Frequently asked questions
In a traditional IRA, you can contribute pretax dollars to the account and the money will grow tax-deferred. That means any withdrawals you make after the age of 59½ will be taxed as normal income.
A Roth IRA is the inverse of this. With these accounts, your contributions are taxed and your money grows tax-free; however, after the age of 59½, any withdrawals you make will be tax-exempt and penalty-free.
In contrast to a tax deduction, which reduces your taxable income, a tax credit is the amount of money you can subtract directly from the total taxes you owe. This makes them particularly attractive, especially to high income earners. Different credits will have different values and criteria for qualifying, but they generally fall into three categories: refundable, partially refundable and nonrefundable. Refundable credits are generally the best because they are paid out in full (even if the amount is more than you owe in taxes).
A charitable donation can be any gift of cash, assets or property made to a qualified charitable organization. By definition, you cannot receive anything of value in return for your donation. However, donations contributed with cash or checks allow you to deduct up to 60% of your annual adjusted gross income.
When you’re filing your tax return, you can either choose a standard deduction or an itemized deduction. Most people choose the first option because it’s faster, but reporting itemized deductions can help you save more depending on your financial situation. In an itemized deduction, you can claim things such as charitable donations, mortgage interest, property taxes, state or local income taxes, certain medical expenses and more.
Capital gains taxes are a levy imposed on the profits you make when you sell an investment in a given tax year. Short-term capital gains for assets held less than a year are taxed as ordinary income. However, long-term capital gains are taxed at varying rates depending on your income. This incentivizes investors to hold onto their assets for longer to grow their wealth over time.
A stock is an equity or share you buy of a given company that can be sold on a stock exchange. Stocks generally offer the potential for growth, but they also come with additional risk and volatility.
Bonds are debt securities you purchase from an organization like a government entity. Generally, once you buy the bond, the organization pays interest on the investment for a set period of time until the maturity date. Then, you receive the full amount of the initial investment. Bonds with longer durations will be more sensitive to changes in interest rates, while corporate bonds will be riskier than those issued by the U.S. Treasury.
Tax planning is integral to helping maximize and manage your wealth. Tax considerations shouldn't be reactive; you need a tax-savvy partner who can help you understand the tax implications of the financial decisions you make so you can keep more of the money you work hard to earn.
Tax planning should happen every year and every time you make a major financial or life decision. Don't just consider what you want to plan for in the next year, but also many years into the future. Awareness of annual tax filing deadlines and requirements imposed by the IRS is only one small component of the tax planning equation. Our tax laws are also more complex than ever. Forward-looking tax planning should account for both our evolving tax laws and changes to your financial situation.
By working with your financial planner and your tax professional, you can better understand how the choices you make today may impact your future wealth. With your goals and overall life intentions in mind, we'll work with you to understand your complete financial picture. Then we can better assess potential tax benefits and identify opportunities for tax optimization.
Potentially, just like when markets are pulling back and there may be opportunities to harvest losses – the other end of the spectrum also exists where capital gains may be offset in the same year by losses in other investments.Potentially, just like when markets are pulling back and there may be opportunities to harvest losses – the other end of the spectrum also exists where capital gains may be offset in the same year by losses in other investments.
We offer education and guidance on tax planning with a forward-looking view of tax considerations for your investments, including tax-efficient strategies that can help you preserve and elevate your wealth. Tax planning sits alongside your overall financial planning and helps to maximize the efficiency of your investments as well as the financial decisions you make over your lifetime.
Your financial planner can bring in our experts from the tax planning team to collaborate on your tax planning as a part of our integrated wealth management approach. We work as an orchestrated team to help ensure you are matched with resources for your needs.
We don’t offer tax preparation or compliance at this time. We provide forward-looking tax planning to help you stay informed about the potential tax impacts of your decisions so you can work to preserve and elevate your wealth. We can work collaboratively with your tax preparer to help ensure there is a comprehensive review of your overall long-term planning.
1 IRS (2024, August 16). Publication 15-B (2024), Employer's Tax Guide to Fringe Benefits. Retrieved August 29, 2024, from https://www.irs.gov/publications/p15b#en_US_2023_publink1000193743
2 National Institutes of Health (2024). Flexible Spending Accounts Program – New 2024 Limits For The HCFSA And LEX HCFSA. Retrieved August 29, 2024, from https://hr.nih.gov/about/news/benefits-newsletter/2023/12/flexible-spending-accounts-program-new-2024-limits-hcfsa-and
3 IRS (2024, February 16). Publication 969 (2023), Health Savings Accounts and Other Tax-Favored Health Plans. Retrieved August 29, 2024, from https://www.irs.gov/publications/p969
4 IRS (2023, November 1). 401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000. Retrieved August 29, 2024, from https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
5 IRS (2007, April 18). Business or Hobby? Answer Has Implications for Deductions. Retrieved April 11, 2023, from https://www.irs.gov/pub/irs-news/fs-07-18.pdf
6 IRS (2024, August 26). Earned Income and Earned Income Tax Credit (EITC) Tables. Retrieved August 28, 2024, from https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income-and-earned-income-tax-credit-eitc-tables
7 IRS (2024, August 20). American Opportunity Tax Credit. Retrieved September 9, 2024, from https://www.irs.gov/credits-deductions/individuals/aotc
8 IRS (2024, March 25). Publication 936 (2023), Home Mortgage Interest Deduction. Retrieved September 9, 2024, from https://www.irs.gov/publications/p936
9 IRS (2024, January 30). Topic No. 409, Capital Gains and Losses. Retrieved September 9, 2024, from https://www.irs.gov/taxtopics/tc409
Investing strategies, such as asset allocation, diversification or rebalancing, do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies.
Past performance does not guarantee future results.
Neither Financial Engines Advisors L.L.C. nor any of its advisors sell insurance products. Edelman Financial Engines affiliates may receive insurance-related compensation for the referral of insurance opportunities to third parties if individuals elect to purchase insurance through those third parties. You are encouraged to review this information with your insurance agent or broker to determine the best options for your particular circumstances.
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