15 Tax Saving Strategies to Minimize Your Expenses

Similar to an FSA, an HSA also allows you to set aside pretax income to pay for health care expenses. However, while FSA funds are typically “use it or lose it,” you can carry over HSA contributions indefinitely. These accounts also have the potential to grow your money through investments with tax-free earnings, though distributions are only exempt for qualified medical expenses.³ Depending on how much you contribute to your HSA fund, you also have the potential to lower your tax rate. Keep in mind that HSAs are only available to taxpayers who have a High-Deductible Health Plan.

Another excellent tax planning strategy is to contribute the maximum amount toward your retirement plans. If your employer offers a 401k or 403b plan, you can add up to $22,500 for the 2023 tax year ($2,000 more than in 2022). If you are age 50 or older you can contribute an additional $7,500, bringing the total to $30,000. For traditional IRAs, contribution limits are set at $6,500, or $7,500 if you are age 50 or older, for 2023.⁴

For example, let’s say you’re at the top of the federal marginal tax bracket, you earn $695,000 per year, you’re married filing jointly, and you pay 37% in federal income tax. If you were to contribute the max amount to your 401k and IRA, you could reduce your taxable income to $665,000 per year, which would put you in the slightly lower tax bracket of 35%.

Outside of your primary job, you can also use self-employment to save on your tax return. Whether you have a side hustle doing freelance work or selling art, you can potentially claim a business deduction on all manners of expenses. You can write off almost anything you purchase for the business, from shipping fees and supplies to advertisements and websites. However, before you can receive any tax deduction benefits, you must prove that your business has been profitable for at least three out of the last five years.⁵

For those who already have a side business, are working from home or are self-employed, a home office deduction can provide a small tax benefit to help you cover some expenses. For instance, you can claim a portion of your monthly internet and utility bills on Form 8829 when you’re filing your tax return. It’s important to note, however, that you must use your home office regularly and exclusively for business purposes. So a spare room might qualify, but a shared space likely won’t.

The IRS has many tax credits that can help reduce your overall liability. If you’re in a lower tax bracket, the Earned Income Tax Credit can provide a tax break of up to $7,430 for you and three or more qualifying children in 2023.⁶ You can apply these credits to not only reduce the taxes you owe but potentially increase your refund. There is also the American Opportunity Tax Credit, which offers up to $2,500 annually for eligible students through the first four years of their higher education.⁷

Speaking of students, if you or your children plan on going to college or university, consider a 529 plan. Unfortunately, these plans don’t offer a federal tax break, but some states do allow you to deduct contributions. Distributions from 529 college savings plans are also tax-free as long as the withdrawal is used for a qualified educational expense. The SECURE 2.0 Act has also made these vehicles even more enticing by allowing you to convert some of the savings to a Roth account.

Depending on your financial situation, a charitable donation could be an excellent tax strategy to employ. Whether you’re deducting money from paychecks or donating goods and gifts directly, you can claim your good deeds through an itemized deduction. One common method is to donate assets or property that has appreciated over time. That way, you can receive a tax deduction for the fair market value without paying for capital gains from the sale. Take note, this only applies for assets that were held for more than one year. Additionally, there may also be adjusted gross income limitations that can apply.

For many high income earners, finding deductions you qualify for can seem like more work than it’s worth – but each one adds up. For instance, you can deduct the interest on any mortgage payments for houses you own. Keeping in mind that recent tax legislation reduced the amount of borrowings that can be deductible (limited to principal borrowings of up to $750,000).⁸ You can also look at tax strategies at the state and local levels. If you’re a small-business owner, there are more than 30 states that allow you to reduce your federal income tax through optional pass-through entity taxes. Check with your local and state tax authorities to see what other deductions you might be able to qualify for. Keep in mind this only applies to assets that were held for more than one year.

Moving on to your financial portfolio, bonds can be a great investment option for a taxable account if you’re looking to minimize your tax liability. When you buy a bond, you’re essentially giving the government a loan. In return, you get a set number of interest payments and, at the maturity date, you receive the full amount of your initial investment. The interest you accrue on municipal bonds is tax-free at the federal level and, depending on where you live, might be exempt from state and local taxes. Bonds may also have an attractive tax-equivalent yield, especially if you’re in a higher tax bracket. 

Whether you’re investing in bonds, stocks, mutual funds or even real estate, you should aim for long-term capital gains. Why? Assets held for less than a year are taxed at ordinary income rates. On the other hand, those held for longer than a year can benefit from a capital gains tax rate of 0%, 15% or 20%, depending on your income level. To qualify for 0% capital gains tax in 2023, your income must be less than or equal to $44,625 for single taxpayers.⁹

As you’re tweaking your investment strategy, be sure to reevaluate your portfolio’s asset allocation. It’s important to ensure you have a proper balance, but you should also look for ways to make your investments more tax-efficient. For example, funds with a higher tax rate should go into your 401k or IRA, whereas lower-rate exchange-traded or mutual funds are better kept in a taxable account. These funds typically incur long-term capital gains, which are currently taxed at preferential tax rates.

In addition to tax-efficient investing, you should also consider tax loss harvesting. This strategy is designed to sell off investments at a loss to offset the capital gains incurred in your portfolio.

Unlike distributions from traditional IRAs, Roth IRA distributions are exempt from taxes because you pay before you contribute. But many high-income earners aren’t able to make Roth IRA contributions if they earn above a certain threshold. However, you can perform a Roth conversion, wherein you move traditional IRA assets to a Roth account. While you will have to pay higher taxes on the conversion up front, you may be able to make future withdrawals without paying income tax. Be aware that you must hold on to these Roth conversions for at least 5 years. Also, keep in mind that there are no limitations for the dollar amount of conversions, but federal income tax would be incurred immediately upon conversion.

Alternative investments are assets that fall outside traditional stocks and bonds, and many of them can help you defer taxes. For example, cash-value life insurance allows you to grow money in the policy tax-free. You also won’t have to pay taxes on withdrawals, provided they don’t exceed the total amount you paid in premiums.

Deferred annuities are another example. With this tax strategy, you purchase an annuity contract from an insurer and they make payments starting at a set date in the future. During the accumulation phase, your annuity grows tax-deferred, but you will have to pay income tax on on the funds you receive during the income phase. That said, this strategy can still pay off if you expect to be in a lower tax bracket during retirement.

Absorbing and implementing all these tips can feel overwhelming, but don’t worry – a financial advisor can guide you through every step of the way. They’ll work with you and your tax advisor to understand your current financial situation and can create a forward-thinking tax planning strategy that can help minimize your liability while helping you achieve your goals.

At Edelman Financial Engines, we take a fully integrated wealth management approach to help you build, grow, protect and preserve your wealth through tax-efficient strategies. If you’re interested in getting started, contact a financial advisor today.