Below are practical, widely applicable strategies that align with current best practices.
Maximize tax-advantaged accounts
– Retirement accounts: Prioritize contributions to employer-sponsored plans (especially to get any employer match) and IRAs. Pre-tax contributions lower taxable income now, while Roth accounts offer tax-free withdrawals later—consider a balance based on your expected future tax bracket.
– Health Savings Accounts (HSA): An HSA offers triple tax benefits—pre-tax contributions, tax-free growth, and tax-free distributions for qualified medical expenses. Use it as a long-term medical cost hedge by paying current bills out-of-pocket and letting the HSA grow if you can afford to do so.
– Flexible Spending Accounts (FSA): Use FSAs for predictable medical or dependent-care expenses. Keep track of plan rules and grace periods to avoid forfeiture.
Harvest tax losses and manage gains
– Tax-loss harvesting: Offset capital gains by selling underperforming investments to realize losses. Losses in excess of gains can often offset ordinary income up to an annual limit, with remaining losses carried forward. Avoid wash sale rules by waiting an appropriate period before repurchasing substantially identical securities.
– Capital gains timing: Long-term capital gains typically receive preferential rates. When possible, hold appreciated assets more than the short-term threshold to benefit from lower rates, or time sales across years to manage taxable income brackets.
Use deduction timing and bunching
– Bunching itemized deductions: If you’re close to the standard deduction threshold, consider grouping deductible expenses—charitable gifts, medical costs, or property tax payments—into a single year to exceed the standard deduction, then take the standard deduction the next year.
– Prepaying or deferring expenses: For deductible business or medical expenses, prepay or defer based on anticipated income levels to optimize the tax impact.
Charitable giving strategies
– Donor-Advised Funds (DAF): A DAF allows an immediate tax deduction when you contribute assets while letting you distribute donations to charities over time—helpful for bunching and for donating appreciated securities to avoid capital gains.
– Qualified distributions from retirement accounts: For those who meet eligibility criteria, certain retirement-account distributions can be directed to charities to satisfy minimum distribution requirements without increasing taxable income.
Small business and self-employment planning
– Entity selection and payroll planning: Choosing the right business entity and managing payroll can optimize self-employment and payroll tax exposure.
Consider reasonable compensation strategies and take advantage of retirement plans designed for business owners.
– Tax credits and deductions: Research industry-specific credits (research, energy, hiring incentives) and deductions like depreciation, home-office expenses, and qualified business income. Keep meticulous records to substantiate claims.
Stay compliant and proactive
– Estimated tax payments: If you’re self-employed or have significant investment income, make timely estimated tax payments to avoid penalties. Use safe-harbor rules to guide payment amounts.
– Documentation and software: Maintain organized records and use modern tax and accounting tools to simplify tracking and filing. Documentation is essential in the event of an audit.
Working with a professional can help tailor these strategies to your situation and navigate complex rules and eligibility thresholds. Run scenarios before making big moves, keep good records, and revisit your plan as income, family circumstances, and laws evolve. These practices create a tax-aware financial plan that preserves wealth while staying compliant.
