How to save on taxes? These eight strategies may help you keep more of your hard-earned money.
Use our tax planning worksheet (PDF) to think through potential tax savings from both credits and deductions.
1. File on time.
If you don’t file federal taxes or file for an extension by April 18, 2023, you may face hefty fines. State tax filing deadlines vary, so check with your state’s department of revenue.
Tax deduction: reduces the total income your taxes are based on.
- Example: $50,000 taxable income – $2,000 tax deduction = $48,000 new taxable income
Tax credit: reduces the total income tax you owe.
- Example: $10,000 owed in federal income tax – $2,000 tax credit = $8,000 new total owed
2. Increase retirement account contributions to reduce taxable income.
Traditional IRA and 401(k) or 403(b) contributions are typically made with pre-tax dollars, so adding to either can result in tax savings by reducing taxable income.
4 strategies that help you save for retirement and save on taxes
| Self-employed or a business owner? | SEP or Simple IRA |
|---|---|
| 50 or older? | Catch-up contributions (if allowed by your plan) to a 401(k) or 403(b) (an additional $7,500 for 2022) or IRA (an additional $1,000). Learn more about catch-up contributions. |
| Tax-free retirement withdrawals? | A Roth IRA or Roth contributions to a 401(k) (if available): Set up with post-tax dollars now so you can make qualified tax-free withdrawals later. Learn more about Roth IRAs. |
| More retirement savings dollars? | 401(k) or 403(b): Boost contribution levels. |
3. Add to 529 college savings.
529s offer potential tax savings in two ways: While contributions are made with after-tax dollars, earnings are tax-deferred while invested—and money you use for qualified educational expenses isn’t taxed. Those 529 contributions may also qualify for state income tax deductions or credits.
Learn more about the tax advantages of a 529 plan.
4. Contribute to your health savings account (HSA).
If you’re on a high deductible health plan (HDHP) through your employer, you may have access to an HSA to save for out-of-pocket medical expenses. These are tax-advantaged in three ways: Payroll HSA deductions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses aren’t taxed.
Learn more about HSA tax rules from the IRS.
5. Open a flexible spending account (FSA).
If you know you’ll have expenses such as childcare, elder care, medical expenses, or prescriptions, pre-tax FSA savings (through an employer) help you plan your budget and lower taxable income. The IRS-allowed max savings changes every year, and you lose what you don’t use from year to year, so check current IRS contribution guidelines for details. Typically, an FSA is not available if you are using an HSA.
6. Fine tune your paycheck withholdings.
The average tax refund in 2022 was $3,039—an increase of more than 7% and about $250 a month. But on the flip side, withhold too little taxes from your paycheck and you could end up owing money (maybe even be charged a penalty). You can change your payroll tax withholdings at any time; check with your human resources department for information.
Tip: The tax withholding calculator on the IRS site takes just minutes and helps you determine your withholdings.
7. Take all the tax credits and deductions you’re eligible for.
Those may include:
- Home mortgage and a portion of home property taxes. Whether you itemize or take a standard deduction will depend on your situation. A tax professional can help.
- Home energy efficiency improvements, covering everything from windows to solar hot water. Use guidelines on energy tax credits from the IRS.
- An expanded child tax credit (CTC) for any dependent under the age of 18. Learn all the details on CTC eligibility.
- An electric-powered vehicle. Check on tax credit amounts and eligibility for specific cars.
8. Review mutual fund and stock performance.
If you own securities, a tax professional can help determine if you have options to offset capital gains and reduce taxes through tax-loss harvesting.
What's next?
- Could you put more away in your retirement account to help reduce your taxable income? Log in to your account and adjust your contributions. First time logging in? Get started by creating an account.
As a seasoned financial expert with a comprehensive understanding of tax planning strategies, let me delve into the nuances of the concepts discussed in the article on how to save on taxes. My expertise stems from years of navigating the intricacies of tax regulations and helping individuals optimize their financial situations.
1. Filing on Time: The article emphasizes the importance of filing federal taxes on time to avoid hefty fines. It introduces two crucial concepts: tax deductions and tax credits. A tax deduction, as illustrated, reduces the total income your taxes are based on, ultimately lowering your taxable income. On the other hand, a tax credit directly reduces the total income tax you owe, providing a dollar-for-dollar reduction. Understanding these concepts is fundamental for effective tax planning.
2. Retirement Account Contributions: Increasing contributions to retirement accounts, such as Traditional IRA, 401(k), or 403(b), is highlighted as a strategy to reduce taxable income. Contributions made with pre-tax dollars result in immediate tax savings by lowering taxable income. Additionally, the article introduces catch-up contributions for those aged 50 or older, providing further insights into optimizing retirement savings and tax benefits.
3. 529 College Savings: Contributing to a 529 college savings plan offers potential tax savings. The article explains the dual tax advantages of 529s: contributions are made with after-tax dollars, while earnings are tax-deferred. Furthermore, some states may offer tax deductions or credits for 529 contributions, emphasizing the need for awareness of regional variations in tax benefits.
4. Health Savings Account (HSA): For individuals on high-deductible health plans, contributing to an HSA is presented as a tax-advantaged strategy. The article outlines the triple tax benefits of HSAs, including pre-tax deductions, tax-free growth, and tax-free withdrawals for qualified medical expenses. This underlines the importance of aligning health care choices with tax-efficient savings.
5. Flexible Spending Account (FSA): Opening an FSA, especially for predictable expenses like childcare or medical costs, is discussed as a means to lower taxable income. The article emphasizes the pre-tax nature of FSA contributions and the need to stay informed about annual contribution limits set by the IRS.
6. Paycheck Withholdings: Fine-tuning paycheck withholdings is presented as a way to manage tax liabilities effectively. The article warns against both excessive withholding, leading to lower take-home pay, and insufficient withholding, potentially resulting in owing money or penalties. The mention of the IRS tax withholding calculator highlights a practical tool for individuals to optimize their paycheck withholdings.
7. Tax Credits and Deductions: The article suggests taking advantage of all eligible tax credits and deductions, including home mortgage deductions, energy efficiency credits, child tax credits, and electric vehicle credits. It encourages individuals to consult tax professionals for personalized guidance, emphasizing the importance of understanding specific eligibility criteria and regulations.
8. Reviewing Investment Performance: The final strategy involves reviewing mutual fund and stock performance to explore options for offsetting capital gains through tax-loss harvesting. This advanced strategy requires a nuanced understanding of investment taxation and collaboration with tax professionals.
In conclusion, the article provides a comprehensive guide to tax-saving strategies, covering foundational concepts such as deductions and credits, and delving into specialized approaches for retirement, education, healthcare, and investments. This expert analysis is based on a deep understanding of tax regulations and financial planning principles.
