5 key tax tips you should know

1. Maximize contributions to tax-advantaged accounts

2. Check your withholdings

The next key tax tip to keep in mind throughout the year is to review your tax withholdings and adjust them as needed. Withholdings are the money that an employer withholds from your paycheck to pay federal and applicable state income taxes; however, this may not always match the taxes you owe. It is important to review your withholdings, especially after receiving a tax return, and ensure that you have the proper amount withheld.

When it comes to adjusting withholdings, your goal should be to minimize your year-end tax return without owing money to the IRS at the end of the year. While a big tax refund may seem appealing, it is essentially acts as a year-long, interest-free loan to the IRS. Instead of getting a year-end tax refund, it is often better to minimize your return and invest the money for financial growth. Additionally, any major life changes like a new job, marriage or children may also result in the need to update your withholding. Use the IRS’s Tax Withholdings Estimator to make any necessary adjustments and avoid penalties or contact your employer to help adjust your withholdings via a W4 or state tax form.

3. Utilize tax credits and deductions

Tax credits and deductions are simple yet often overlooked ways to reduce your overall tax liability. Tax credits generally provide a reduction in your tax bill, while deductions simply reduce the amount of income (AGI) on which you pay taxes. There are many different tax credits; however, the primary difference between credits comes in the form of refundable vs. nonrefundable.

Refundable Credits mean that even if a taxpayer’s bill is less than the amount of the credit, they can receive the difference back in their tax return. Non-refundable credits, on the other hand, only reduce a tax to $0 and do not provide any leftover amount back in the form of a return. There are many different tax credits, so make sure you review the IRS’s guide on tax credits for individuals and ensure which credits you qualify for before filing your year-end taxes.

Tax deductions, like tax credits, have various qualifiers such as student loan interest, mortgage interest and even charitable contributions to name a few. When filing year-end taxes, the IRS lets you choose between a standard deduction and itemized deduction, and it is worth noting that the IRS’s Standard Deduction limit is $14,600 for single individuals in 2024. Choosing between the standard deduction and itemized deduction largely depends on whether you can exceed $14,600 through itemized deductions. Check out this page by the IRS for more info on credits and deductions to help you decide what route is the best for you.

4. Consider timing for income and expenses

Strategically timing your income and expenses based on their tax bracket can play a significant role in reducing your year-end tax liability. For example, if you anticipate moving up a Tax Bracket right before the end of the year, it may be wise to defer a portion of your income until January or increase your deductible expenses, like mortgage payments or medical bills, before year-end. Both tactics would play a role in reducing your income, potentially keeping you in a lower tax bracket for that year’s filing.

Here's a real-life example: say you are on track to earn $195,000 this year, putting you in a tax bracket with a 32% tax rate for income over $191,000. If you deferred $10,000 of your income to January, none of your income would be subject to the 32% tax bracket, ultimately saving you around $2,700 in taxes. While this tax strategy can be effective for minimizing tax rates, it is essential to do the math before deferring income to ensure the savings make financial sense.

5. Take advantage of tax-loss harvesting

If any of your investments saw a decline in value during the tax year, then tax-loss harvesting may be a wise strategy to consider. This strategy involves selling underperforming investments to offset capital gains from your successful investments, in turn reducing your overall taxable income. If your losses are larger than your gains, you can use the remaining losses to offset up to $3,000 of your ordinary taxable income. Additionally, any amount over $3,000 can be carried forward to future tax years.

It is important to be aware of the wash-sale rule, which prohibits claiming any losses on a security if you plan to repurchase that same security within 30 days. This rule prevents taxpayers from deducting paper losses without significantly changing their market position. Ultimately, tax-loss harvesting can be an effective year-end tax strategy for investors seeking to minimize their tax liability. For more in-depth information, review Charles Schwab’s guide on cutting your tax bill through tax-loss harvesting.

Are you a high-net-worth individual? Review our article on the Top Tax and Investment Strategies for high-net-worth individuals and families.

Conclusion

Incorporating these 5 key tax tips will help you prepare for year-end tax planning and ensure you make maximize your tax savings. These tax strategies aim to provide a foundation for smart tax planning, ultimately helping you take control of your finances come tax season. Remember, effective tax planning isn’t just about saving on this year’s tax return, but it’s about building the framework for long-term financial health.

Interested in recent tax changes? Check out our article for further information regarding Navigating the Changing Tax Landscape.