Looking to save more on your taxes this year? Regardless of whether you’re a wealthy individual, retiree, or business owner, there are several end-of-year tax tips you can use to reduce your taxable income.
Be sure that you’re taking advantage of all available deductions, consider tax loss harvesting to offset capital gains, check your IRA distributions, and consider hiring a wealth manager to ensure you’re covering all of your bases.
In this article, we go in-depth on tax tips for individuals and business owners that can help you keep more of your hard-earned money. Keep in mind, you only have until December 31st to increase your tax breaks, so don’t wait to implement these strategies if you’re looking to minimize tax losses for the current financial year.
How can I reduce my taxable income at the end of the year?
As the end of the year approaches, it’s important to start thinking about your taxes — specifically strategies you can implement to lower your tax bill. While you may not be able to avoid paying taxes altogether, there are several methods you can use to minimize the amount of taxes you owe.
Here are some strategies you can use to reduce your taxable income this year:
1. Make charitable donations
One of the easiest ways to lower your taxes is to make charitable donations. Not only will you be contributing to a good cause, but you will also be able to deduct the amount of your donation from your taxable income. To do this, you’ll need to make sure to keep records of your donations so you can claim them come tax time.
There are various charitable investment vehicles you can use to make donations, such as donor-advised funds, charitable remainder trusts, and private foundations. Each of these vehicles has its own set of tax benefits you’ll need to consider before choosing one.
For example, donor-advised funds allow you to take an immediate tax deduction for your donation while still being able to control how the money is ultimately used by the charity. Alternatively, if you’re looking to get more out of your donation in the long run, you may want to consider a charitable remainder trust which will allow you to take a tax deduction now and receive income from the trust for life or for a period of time.
This is also a viable tax tip for business owners as businesses can deduct qualified donations of up to 25% of their taxable income.
2. Invest in tax-advantaged accounts
If you have money left over at the end of the year, consider investing it in a tax-advantaged account such as an IRA or 401(k). Not only will you get a deduction for your contribution, but your money will also grow tax-deferred (or tax-free in the case of a Roth IRA).
You can contribute up to $6,000 to an IRA for the 2022 tax year ($7,000 if you’re 50 or older), and up to $19,000 to a 401(k) ($25,000 if you’re 50 or older). If you max out both of these accounts, you could potentially reduce your taxable income by up to $31,000.
Other tax-advantaged accounts include Health Savings Accounts (HSAs) and 529 Plans. HSAs are a great way to save for healthcare expenses, and you can deduct your contributions from your taxable income. 529 Plans are another great way to save for education expenses and you can get a state tax deduction on your contributions depending on your state.
3. Defer income to the following year
If you’re self-employed or have a significant amount of freelance income, you can choose to defer some of your income to the following year. The thought behind this end-of-the-year tax tip is that if you are able to push off some of your billing until January or later, you won’t have to pay taxes on that income until the following tax year.
This strategy is most beneficial for those who believe they will be in a lower tax bracket the following year. However, it is important to note that you will still owe estimated taxes on any income you defer, so make sure you set aside enough money to cover your taxes when they come due.
4. Maximize your deductions
If you itemize your deductions, make sure you’re taking advantage of all of the deductions you’re entitled to. This includes deducting your mortgage interest, property taxes, and charitable donations. If you’re not sure what deductions you can take, talk to your accountant or financial advisor.
This is a great end-of-year tax tip for small businesses as well. If you own a small business, make sure you’re deducting all the eligible expenses such as business travel, office supplies, and employee salaries.
What can I write off to lower my taxes?
There are a number of deductions and tax credits you can take advantage of to lower your taxes. Some of the most common deductions include:
- Mortgage interest
- Property taxes
- Charitable donations
- Medical expenses
- State and local taxes
- Investment losses
- Business expenses
If you’re not sure what deductions you can take, talk to your accountant or financial advisor to make sure you’re taking advantage of all the tax breaks you’re entitled to.
5. Use tax loss harvesting
If you have investment gains, you may be able to offset some of those gains by selling investments for a loss. This is called tax loss harvesting and it can be a helpful way to reduce your taxes since you can use the losses to offset up to $3,000 of ordinary income.
This end-of-year tax tip is most beneficial for those who are in a higher tax bracket and have significant investment gains. However, it’s important to note that you should only sell investments that you’re comfortable selling, as you may miss out on future gains if the investment recovers.
Tax loss harvesting is not a strategy that is beneficial for everyone, so before you try to offset your portfolio on your own, be sure to talk with your financial advisor who has experience with Houston tax planning first to see if this strategy makes sense for your circumstances.
6. Move to a state with no income tax
If you’re serious about reducing your taxes, you may want to consider moving to a state with no income tax such as Florida, Texas, or Wyoming. Although you may still have to pay other taxes in these states, like property taxes, you’ll no longer have to pay income tax. However, you may still owe taxes on your investment income such as capital gains.
Capital gains are profits from the sale of an asset, such as a stock or bond. If you sell an asset for more than you paid for it, the difference is considered a capital gain.
So, is there a capital gains tax in Texas? Because capital gains are taxed at both the state and federal level, in some states (including Texas), the federal tax rate on capital gains will depend on your income tax bracket — but because there is no state income tax, you won’t need to pay any taxes to the state for gains. For example, if you’re in the 10% tax bracket, you’ll owe a 0% federal tax on capital gains. But if you’re in the 37% tax bracket, you’ll owe a 20% federal tax on capital gains.
7. Hire a wealth manager to help you reduce your taxes
If you’re not sure how to reduce your taxes on your own, consider hiring a wealth manager. A wealth manager can help you find ways to reduce your taxes, and they can also help you invest your money in a way that minimizes your taxes.
If you have the funds available, you may want to consider setting up a family office. A family office is a private company that provides financial, legal, and tax services to a single wealthy family. A family office can help you minimize your taxes by taking advantage of tax breaks and loopholes that you may not be aware of.
However, if a family office is outside of your budget, you can work with a boutique family office such as Avidian Wealth Solutions that offers a similar experience but without the steep overhead of running and managing your own single-family office.
Learn more: What happens to your tax liability with proper financial planning
Minimize your tax burden with help from an Avidian Wealth Solutions advisor
If you’re looking for end-of-year tax tips to reduce your taxable income, there are a few things you can do including harvesting losses, maximizing deductions, moving to a state with no income tax, and hiring a wealth manager.
Avidian Wealth Solutions is a high-net-worth wealth management firm based in Houston, Texas. We specialize in helping individuals, retirees, and businesses minimize their tax burden, grow their wealth, and achieve their financial goals. As a fiduciary firm, we are legally bound to always act in your best interests, putting your needs ahead of our own.
If you’re looking for end-of-year tax tips, contact us today. We can help you find ways to reduce your taxes and make the most of your money.
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