5 Tax Planning Strategies to Consider

Taxes might not be the most exciting topic to discuss, but it is an essential one. Whether you’re earning as a full-time employee or running your own business, taxes are unavoidable. This doesn’t, however, mean that you’re stuck paying a high amount.

With the right strategies, you can legally reduce what you owe and keep more of your money working for you. Smart tax planning can make far more of a difference than you might realize.

So, here are five strategies worth considering whether you’re an investor, a business owner, or just trying to be proactive about your finances.

1. Use Tax-Loss Harvesting

If you invest in stocks, ETFs, or other taxable securities, you may be sitting on some losing positions you’d rather forget. But instead of letting them gather dust in your portfolio, you can put them to work.

Tax-loss harvesting is the process of selling those investments at a loss to offset capital gains from other profitable investments. For example, if you made $5000 in capital gains but have $2000 in losses, you can use those losses to reduce your taxable gains to just $3000.

If you’re in the US, it can not only help you harvest losses to offset gains but also allow up to $3000 to offset regular income as well.

2. Explore Charitable Giving

Charitable donations can be a win-win strategy. You support a cause that you care about while reducing your taxable income. This can be done through direct donations, donor-advised funds, or even donating appreciated assets like stocks to avoid capital gains taxes.

If you’re over the age of 70, you can make Qualified Charitable Distributions (QCDs) from your IRA directly to a charity, satisfying required minimum distributions without increasing taxable income.

3. Review Tax Credits

Tax credits are a dollar-for-dollar reduction in the taxes you owe, and they are different from and arguably better than deductions. This is because they reduce the amount of tax you have to pay, while deductions simply reduce the amount of taxable income.

Some popular credits include the child tax credit, the American Opportunity credit for education, and the lifetime learning credit.

The key is to see if you qualify and claim them before the deadline. Some credits also have income phaseouts, so planning ahead is essential.

4. Consider the Timing of Income and Deductions

If you expect your income to be higher in the current year than the next, it might make sense to accelerate deductions and delay income. On the flip side, if you’re looking at a higher income year ahead, you could delay deductions and accelerate income to avoid a higher tax bracket later.

This strategy usually applies to small business owners and freelancers, but it can also benefit employees with bonuses and commissions.

5. Max Out Tax-Advantaged Accounts

One of the easiest ways to reduce your taxable income is by contributing to tax-advantaged accounts. These accounts include 401(k)s, IRAs, and in some cases, 529 plans for education savings.

Contributions to those accounts can lower your taxable income now or allow your investment to grow tax-free.