While many people think of their salary as their income, it can also include any money, property or even services you receive. In general, your taxable income is any amount included on your tax return unless it is specifically exempt by law. This is the portion of your total annual income that is subject to federal, state and local taxes, and you must report the full amount.
15 Tax Saving Strategies to Minimize Your Expenses
Here’s how you can reduce your taxable income this season.
For high-income earners, managing taxes at the federal, state and local levels each year can be a daunting task. And the higher your tax bracket, the more complicated and costly it becomes. Of course, we’re all prepared to pay our fair share, but nobody wants to find out they owe more money than they thought.
While taxes are inevitable, there are plenty of strategies you can employ to help avoid that unexpected bill each year. So, what’s the key to minimizing your liability and maximizing your tax savings? We’ll show you 15 different tax planning strategies you can use to reduce what you owe at tax filing time.
Frequently asked questions
In a traditional IRA, you can contribute pretax dollars to the account and the money will grow tax-deferred. That means any withdrawals you make after the age of 59½ will be taxed as normal income.
A Roth IRA is the inverse of this. With these accounts, your contributions are taxed and your money grows tax-free; however, after the age of 59½, any withdrawals you make will be tax-exempt and penalty-free.
In contrast to a tax deduction, which reduces your taxable income, a tax credit is the amount of money you can subtract directly from the total taxes you owe. This makes them particularly attractive, especially to high income earners. Different credits will have different values and criteria for qualifying, but they generally fall into three categories: refundable, partially refundable and nonrefundable. Refundable credits are generally the best because they are paid out in full (even if the amount is more than you owe in taxes).
A charitable donation can be any gift of cash, assets or property made to a qualified charitable organization. By definition, you cannot receive anything of value in return for your donation. However, donations contributed with cash or checks allow you to deduct up to 60% of your annual adjusted gross income.
When you’re filing your tax return, you can either choose a standard deduction or an itemized deduction. Most people choose the first option because it’s faster, but reporting itemized deductions can help you save more depending on your financial situation. In an itemized deduction, you can claim things such as charitable donations, mortgage interest, property taxes, state or local income taxes, certain medical expenses and more.
Capital gains taxes are a levy imposed on the profits you make when you sell an investment in a given tax year. Short-term capital gains for assets held less than a year are taxed as ordinary income. However, long-term capital gains are taxed at varying rates depending on your income. This incentivizes investors to hold onto their assets for longer to grow their wealth over time.
A stock is an equity or share you buy of a given company that can be sold on a stock exchange. Stocks generally offer the potential for growth, but they also come with additional risk and volatility.
Bonds are debt securities you purchase from an organization like a government entity. Generally, once you buy the bond, the organization pays interest on the investment for a set period of time until the maturity date. Then, you receive the full amount of the initial investment. Bonds with longer durations will be more sensitive to changes in interest rates, while corporate bonds will be riskier than those issued by the U.S. Treasury.
Tax planning is integral to helping maximize and manage your wealth. Tax considerations shouldn't be reactive; you need a tax-savvy partner who can help you understand the tax implications of the financial decisions you make so you can keep more of the money you work hard to earn.
Tax planning should happen every year and every time you make a major financial or life decision. Don't just consider what you want to plan for in the next year, but also many years into the future. Awareness of annual tax filing deadlines and requirements imposed by the IRS is only one small component of the tax planning equation. Our tax laws are also more complex than ever. Forward-looking tax planning should account for both our evolving tax laws and changes to your financial situation.
By working with your financial planner and your tax professional, you can better understand how the choices you make today may impact your future wealth. With your goals and overall life intentions in mind, we'll work with you to understand your complete financial picture. Then we can better assess potential tax benefits and identify opportunities for tax optimization.
Potentially, just like when markets are pulling back and there may be opportunities to harvest losses – the other end of the spectrum also exists where capital gains may be offset in the same year by losses in other investments.Potentially, just like when markets are pulling back and there may be opportunities to harvest losses – the other end of the spectrum also exists where capital gains may be offset in the same year by losses in other investments.
We offer education and guidance on tax planning with a forward-looking view of tax considerations for your investments, including tax-efficient strategies that can help you preserve and elevate your wealth. Tax planning sits alongside your overall financial planning and helps to maximize the efficiency of your investments as well as the financial decisions you make over your lifetime.
Your financial planner can bring in our experts from the tax planning team to collaborate on your tax planning as a part of our integrated wealth management approach. We work as an orchestrated team to help ensure you are matched with resources for your needs.
We don’t offer tax preparation or compliance at this time. We provide forward-looking tax planning to help you stay informed about the potential tax impacts of your decisions so you can work to preserve and elevate your wealth. We can work collaboratively with your tax preparer to help ensure there is a comprehensive review of your overall long-term planning.
1 IRS (2023, January 10). Publication 15-B (2023), Employer's Tax Guide to Fringe Benefits. Retrieved April 11, 2023, from https://www.irs.gov/publications/p15b#en_US_2023_publink1000193743
2 National Institutes of Health (2023). Flexible Spending Accounts Program – New 2023 Limits For The HCFSA And LEX HCFSA. Retrieved April 11, 2023, from https://hr.nih.gov/about/news/benefits-newsletter/2022/12/flexible-spending-accounts-program-new-2023-limits-hcfsa-and#:~:text=The%20IRS%20has%20increased%20the,a%20HCFSA%20or%20LEX%20HCFSA
3 IRS (2023, February 1). Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans. Retrieved April 11, 2023, from https://www.irs.gov/publications/p969#en_US_2022_publink1000204023
4 IRS (2022, October 21). 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500. Retrieved April 11, 2023, from https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
5 IRS (2007, April 18). Business or Hobby? Answer Has Implications for Deductions. Retrieved April 11, 2023, from https://www.irs.gov/pub/irs-news/fs-07-18.pdf
6 IRS (2023, March 8). Earned Income and Earned Income Tax Credit (EITC) Tables. Retrieved April 11, 2023, from https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income-and-earned-income-tax-credit-eitc-tables
7 IRS (2023, February 16). American Opportunity Tax Credit. Retrieved April 11, 2023, from https://www.irs.gov/credits-deductions/individuals/aotc#:~:text=The%20American%20opportunity%20tax%20credit,of%20%242%2C500%20per%20eligible%20student
8 IRS (2022, December 14). Publication 936 (2022), Home Mortgage Interest Deduction. Retrieved July 20, 2023, from https://www.irs.gov/publications/p936
9 IRS (2023, April 4). Topic No. 409, Capital Gains and Losses. Retrieved April 12, 2023, from https://www.irs.gov/taxtopics/tc409
Neither Edelman Financial Engines nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to include your qualified tax and/or legal professionals in these discussions and decisions to help determine the best options for your particular circumstances.