If there’s one thing we can all agree on, it’s that the less you owe the IRS, the better. Unfortunately, taxes are one of those guarantees in life that none of us can escape. However, that doesn’t mean there’s nothing you can do to minimize what you owe, thanks to some strategic tax planning.
Charitable giving is a common option for lowering your taxable income, but it isn’t the only tax-efficient strategy you should be utilizing. Here are a few tips you may not know about for lowering your taxable income this year.
Consider Tax-Loss Harvesting
If you sell stocks that have performed exceptionally well this year, there’s a good chance your taxable income will be quite a bit higher, cutting into your profit. Tax-loss harvesting is a useful strategy to offset those capital gains. If you invest through tax-sheltered accounts like a 401(k), IRA, or 529, the growth on those assets is already tax-exempt, so this isn’t for you. However, if you invest in individual stocks, exchange-traded funds, or niche mutual funds in a regular brokerage account, tax-loss harvesting can help you offset the capital gains taxes you’ll owe, which for most people is 15% for federal taxes.
So, how does it work? If you know some of your shares have done well enough this year that you’re headed for a hefty tax bill because you plan on selling some or all of them, you can sell other underperforming shares at a loss. This negative balance can act as a counterweight to the more profitable shares, lowering your capital gains overall and reducing your tax bill.
It’s important to note that there are some rules to follow, most notably that the deadline for tax-loss harvesting is December 31st, not Tax Day. Additionally, If you’re in a lower tax bracket, but anticipate bumping up in the next few years, you may want to save this strategy for when it can have a greater impact.
Lastly, you have to be careful to avoid wash sales. After investors realized they could carry capital losses in excess of $3,000 into the following year to minimize taxes, they started selling stocks at a loss and buying back the same or substantially similar shares within a short period of time, exploiting the rule. This led to the IRS instituting the Wash Sale Rule, which disallows the tax write-offs of any losses reported from shares sold within 30 days before or after the purchase of the same security or a substantially similar security. If you want to make sure tax-loss harvesting works out for your benefit, it’s a good idea to consult your financial planner.
Make Catch-Up Contributions
If you’re at least 50 by the end of the year, and if your plan is eligible, you may be able to make catch-up contributions of up to $7,500 to your retirement plan. The idea is that the early years of saving for retirement often coincide with lower-earning or high-expense years. Individuals in their 20s, 30s, or even 40s are juggling multiple financial goals, from buying a house to raising kids and sending them to college, making it difficult to maximize retirement contributions. These extended contribution limits allow pre-retirees to boost their retirement savings while lowering their taxable income.
Under the SECURE Act 2.0, individuals with qualifying plans who will be 60-63 in 2025 may be eligible for even greater catch-up contributions. You can check here to see current limits by tax-filing year and plan type.
Take Advantage of High Gift Tax Exemptions
The Tax Cuts and Jobs Act of 2017 doubled the federal lifetime gift tax exemption amount, raising it to $11.18 million per individual. However, the limit is set to drop down to $5 million, indexed to inflation, per individual starting with the 2026 tax year. While legislation could change this, it’s best not to trust your tax strategy to chance. Whether you plan to lower your estate tax by gifting to charities or to loved ones, it may be a good idea to adjust your strategy and give heavily this year and next to make the most of these tax exemptions while they last.
Defer Some of Your Income
If you anticipate being in a lower tax bracket next year or receiving a significant influx of cash before the year’s end (like a bonus), you may want to defer some of your income to lower your tax obligation for this year. If you’re in for a holiday bonus, you can ask your employer to delay it until January. Similarly, you can apply some of next year’s deductions to this year through a strategy called “bunching.” Essentially, you pre-pay anticipated expenses for next year or make multiple years’ worth of charitable donations in the current year in order to minimize taxes this year. However, there are certain criteria you have to meet in order for these strategies to work, so it’s a good idea to work with your CPA or financial advisor.
It Pays to Plan Ahead
As I said earlier, there’s more than one way to save on taxes this year. In fact, there are quite a few. The keys to using these strategies effectively are planning ahead and looking at your overall financial strategy, not just getting tax-reduction tunnel vision. Some strategies might seem like a good idea for this year’s taxes, but understanding the ripple effects of your financial decisions is the foundation of wise money management. Fortunately, that’s what I do best, and I’d love to help you. If you’re ready to get your big-picture plan in place, schedule a call, and let’s get started.
Meet the Contributor
Zack Swad, financial planner located in Santa Rosa, CA
Zack Swad is a fee-only financial planner located in Santa Rosa, CA serving clients locally and across the country (virtually).
He specializes in financial planning and retirement planning for people age 50+. As a fee-only, fiduciary, and independent financial advisor, Zack Swad is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice. He has been in the finance industry for over 11 years. He previously worked for a Fortune 500 Financial Services company, managing a practice of $800 million for 300 clients. Zack then went on to build his own firm, Swad Wealth Management, LLC so he could make a deeper impact in his client’s lives. In his free time, Zack enjoys spending time with his wife Elise, playing board games, piano, and singing.
Zack Swad’s Contact Information:
Email – zack@swadwealth.com
Want to talk to Zack? Schedule a Call
Disclosures:
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Swad Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Swad Wealth Management, LLC or performance returns of any Swad Wealth Management, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this article constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Swad Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
