There is a common misconception that strategies to minimize taxes are only for the ultra-rich. This couldn’t be further from the truth.
There are a number of simple, easily implementable actions that you can take every day to maximize your wealth by minimizing the taxes you owe. Below, we lay out some of the most overlooked strategies that every American taxpayer should be thinking about as we approach the New Year.
1. Contribute to a Traditional or Roth IRA
Contributing to a Traditional or Roth IRA can not only lower your taxable income but may also provide tax-advantaged growth potential.
2. Bunch your deductions
An often overlooked strategy is to bunch deductions into alternating years. By strategically planning which deductions to take yearly, you may be able to rely on the standard deduction one year, and the itemized deductions the next year.
3. Donate to charity
Charity donations can be deducted from your taxes, so if you are fortunate enough to have the means to give, you should take advantage of the tax relief available. Consider Donor Advised Funds (or DAFs) as they allow you to make a donation and control when you want the money to be dispersed to a charity of your choice.
4. Take an Early Retirement
If you’re nearing retirement age, you may be able to take advantage of the retirement savings credit. This is a tax-favorable arrangement that allows individuals to save a portion of their retirement income in a pre-tax account.
5. Contribute to a Health Savings Account
A Health Savings Account (HSA) is a great way to save for medical expenses and lower your taxable income. Individuals aged 55 or above can also make catch-up contributions to HSAs, which can result in even lower taxable income.
6. Use Tax Loss Harvesting
Tax loss harvesting is an excellent way to reduce your tax bill. You have to essentially sell stocks or mutual funds at a loss to offset gains made from other investments. This strategy can be used to create a hefty tax refund.
7. Invest in Municipal Bonds
Municipal bonds are an ideal tax-saving strategy for those with higher incomes. These bonds are exempt from federal taxation, meaning that any income or interest earned on them is completely sheltered from federal taxes. In addition, this type of investment can potentially earn a solid return.
These are just some of the important tax strategies that people often overlook. By being proactive and strategic, you can potentially save hundreds or even thousands of dollars on your tax bill. So as we head into the New Year, take the time to review your finances and determine which strategies may be beneficial for you.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult your tax professional.