Picture this: You, armed with the ultimate arsenal of tax-saving strategies, navigating the complex maze of tax codes like a fearless explorer.
With every deduction and credit unlocked, you’re not just saving money – you’re outsmarting the taxman at his own game!
But how do you make this dream a reality?
Check out our top smart money tactics for your taxes.
1. Remember Retirement
Contributing to tax-advantaged accounts like 401(k)s or IRAs not only helps secure your finances after you retire but also provides immediate tax benefits. These contributions are often tax-deductible. That reduces your taxable income for the year.
The investment growth within these accounts is tax-deferred. That allows your savings to compound without the drag of annual taxes.
Retirement accounts provide tax-deferred or tax-free growth on investments, depending on the type of account. This means that individuals can benefit from compounding returns without having to pay taxes on investment gains each year.
Over time, this tax-deferred or tax-free growth can significantly enhance the growth of retirement savings. That lets you accumulate a more substantial retirement fund.
2. Take Advantage of Tax Credits
Smart money tactics for saving on personal taxes often involve leveraging available tax credits to reduce your overall tax liability.
Tax credits are valuable because they directly decrease the amount of tax you owe. That makes them highly effective in lowering your tax bill.
One example is the Child Tax Credit, which gives a credit for each qualifying kid under the age of 17. By claiming this credit, eligible taxpayers can reduce their tax bill by up to a certain amount per child, depending on their income level.
Another useful credit to consider is the Earned Income Tax Credit. This is designed to assist low-to-moderate-income individuals and families. The EITC can result in a significant refund, even if you don’t owe any taxes.
It’s a refundable credit, meaning you could receive a refund that exceeds the amount of tax you paid throughout the year.
3. Tax-Loss Harvesting
Tax-loss harvesting is a savvy strategy for minimizing tax liabilities on investment gains. This tactic involves strategically selling investments that have experienced a loss to balance capital gains from profitable investments.
By realizing losses, investors can reduce their overall taxable income. That lowers the amount of taxes owed to the government.
Tax-loss harvesting is particularly advantageous in taxable investment accounts. By strategically timing the realization of losses and gains, investors can effectively manage their tax liability over time.
It’s essential to execute tax-loss harvesting with careful consideration of the IRS’s “wash-sale” rule, which prohibits investors from claiming a tax deduction if they repurchase a similarly identical security within a month of selling it at a loss.
By adhering to this rule and incorporating tax-loss harvesting into a broader tax planning strategy, investors can optimize their investment returns while minimizing their tax burden.
4. Think About Estate Taxes
Estate taxes, also known as inheritance taxes, are levied on the transfer of assets from one individual to another upon death. These taxes can majorly lower an estate’s value.
That leaves heirs with a smaller inheritance. But, there are ways to get around it.
Proper estate planning helps reduce these taxes. This may involve setting up trusts to hold assets outside of the taxable estate. Irrevocable trusts, including irrevocable life insurance trusts or charitable remainder trusts, can help remove assets from the taxable estate.
That helps reduce the overall estate tax liability. By transferring assets into these trusts, individuals can ensure that their beneficiaries receive the largest amount of money possible while minimizing estate tax exposure.
5. Get Professional Help
You don’t have to figure out paying taxes on your own. Professionals can ensure you don’t mess anything up and leave money on the table.
Tax professionals have specific knowledge and expertise in tax laws and regulations. They stay up-to-date with the latest changes. They understand how these changes can impact individuals’ tax situations.
They can look at the different types of taxes, and see what strategies are available for you to save money when you’re filing taxes.
For example, professionals can let you know when filing separately might be a good idea for you and your partner.
6. Don’t Forget Charity
Charitable donations can result in valuable tax deductions. When individuals donate to qualified charitable organizations, they can typically deduct the value of their contributions from their taxable income.
This effectively lowers their overall tax liability, allowing them to keep more of their hard-earned money while supporting causes they care about.
Certain types of charitable donations, such as appreciated assets like stocks or real estate, can give you even greater tax benefits.
When individuals donate appreciated assets, they not only receive a tax deduction for the fair market value of the assets but also avoid paying capital gains taxes on the appreciation. This can end with big tax savings and allow individuals to support charitable causes while minimizing their tax liabilities.
7. Manage Asset Location
You should also be paying attention to where you’re actually keeping your money.
Asset location involves strategically allocating different types of investments across various types of accounts to minimize taxes.
For example, placing tax-efficient investments such as index funds or municipal bonds in taxable brokerage accounts can help minimize the tax burden on investment gains.
Holding tax-inefficient investments like taxable bonds or actively managed funds in tax-advantaged accounts such as IRAs or 401(k)s can shield their income from current taxation.
8. Think About Clean Energy
Many state governments offer tax incentives and credits to encourage investments in renewable energy projects.
These incentives can take different forms, including tax credits for solar panel installations, wind farms, or energy-efficient upgrades to residential or commercial properties.
By taking advantage of these tax incentives, investors can offset a portion of their upfront investment costs and accelerate the return on their clean energy investments.
Try These Smart Money Tactics Today
These smart money tactics will save you a lot of money on your taxes. But, it’ll depend on what your financial situation is. So sit down, and figure out what suits your needs.
Do you need more financial help? Scroll through some of our other helpful posts.
