Tax Strategies for Individuals

Proper tax planning and documentation are crucial to saving money and ensuring compliance with IRS rules. Many taxpayers miss out on valuable deductions because they fail to track expenses or keep receipts. By staying organized and informed, you can make the most of available tax-saving opportunities.

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January 18, 2025

Reduce Your Taxes by Deferring Income

Deferring income to a year when you expect to be in a lower tax bracket can be an effective tax strategy. For example, you can defer year-end bonuses from your employer. Further, contributions to tax-advantaged retirement accounts, like 401(k)s or IRAs, allow you to postpone income taxes and potentially pay lower tax rates on that income during retirement. Also, deferring income can help you land in the favorable long-term capital gains tax rates if you hold assets for at least a year.

Take full advantage of employer-sponsored retirement plans, such as 401(k)s or 403(b)s. These plans allow you to defer a portion of your income and accumulate retirement assets. If your employer offers a matching contribution, ensure you contribute enough to receive the full match, as this is essentially free money added to your retirement savings.

Plan Capital Gains and Losses

Selling investments at a loss before year-end can offset gains and reduce your taxable income. Losses can offset up to $3,000 of ordinary income annually. Conversely, if you plan to sell an asset with significant gains, deferring the sale until the next year can delay taxes and align with a potentially lower tax bracket. However, if you anticipate being in a higher tax bracket next year, it may be more favorable to recognize your capital gains this year to take advantage of the current rate.

Learn more about capital gains tax.

Take Advantage of Tax-Efficient Investments

Investments such as Treasury securities or municipal bonds can be another effective tax strategy. Interest from Treasury securities is exempt from state and local taxes, while municipal bond interest is often exempt from federal and state taxes. These options are particularly advantageous for high-income taxpayers in states with high income tax rates.

Use the Gift Tax Exclusion

The annual gift tax exclusion allows you to transfer up to $18,000 per recipient in 2024 without triggering gift tax filing and reducing your lifetime gift and tax exemption ($13.61 million for 2024). Exceeding the lifetime exemption results in owing federal gift tax for the donor.

Learn more about gift taxes.

Contribute to Pre-Tax Medical Accounts

Using accounts like Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) can be another strategy to reduce your taxable income. Contributions are made pre-tax, and withdrawals for qualified expenses are tax-free. If you are self-employed with a high-deductible health plan, an HSA is also available.

Maximize your Charitable Contributions

Bunch Donations

If you’re close to the standard deduction threshold, bunching several years’ worth of contributions into one year can help you exceed the limit and claim itemized deductions. Generally, you can deduct cash donations to qualified organizations up to 60% of your adjusted gross income (AGI).

Donate Long-Term Appreciated Assets

Consider gifting appreciated long-term assets (held for more than a year) like stocks, bonds, and mutual funds. This allows you to avoid capital gains taxes while deducting the asset’s full market value. Note that the deduction is limited to 30% of your AGI.

Qualified Charitable Distributions

Another potential effective tax strategy for charitable contributions is to take qualified charitable distributions (QCDs). QCDs allow you to donate up to $105,000 for 2024 to a charity directly from your IRA if you are 70.5 or older. The QCD is tax-free and can satisfy all or part of your required minimum distributions (RMDs). However, QCDs are not tax deductible.

Learn more about QCDs.

Taking Action for Better Tax Outcomes

Achieving significant tax savings requires proactive planning and informed decisions. By deferring income, maximizing deductions, and leveraging tax-efficient strategies, you can minimize your tax liability and retain more of your hard-earned income. Start now by implementing these strategies and seeking professional advice tailored to your unique situation. The earlier you plan, the greater your potential savings.

References

Publication 554 (2023), Tax Guide for Seniors | Internal Revenue Service. https://www.irs.gov/publications/p554

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