Tax Saving Strategies: A Helpful Checklist

Start with documentation

Before any strategy on this list does you any good, it needs paperwork behind it. Many taxpayers give up valuable deductions simply because they didn't keep receipts or other records. The IRS requires adequate records for deductions, and without them you're also more likely to simply forget an expense was deductible in the first place. The same goes for income: if you receive a large tax-free amount, a gift or inheritance, document it clearly so the IRS doesn't later treat it as unreported income.

The strategies below are general information meant to be tailored to your specific situation. If one looks like it fits, it's worth a real conversation before you act on it.

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Timing strategies: deferring income, accelerating deductions

Most people are in a higher bracket during their working years than in retirement, so deferring income into tax-advantaged retirement accounts can lower this year's tax and may mean paying tax on that income later at a lower rate. It also lets you invest money you would otherwise have paid in tax, growing your retirement fund faster. Deferral can help even short term if you expect a lower bracket next year, or if holding an asset a little longer qualifies it for lower long-term capital gains rates.

Accelerating deductions works the same lever in reverse, for example paying a state estimated tax installment in December instead of waiting for the January due date. Just watch the $10,000 annual cap ($5,000 if married filing separately) on the combined deduction for state and local property, income, and sales taxes.

If you're due a year-end bonus, deferring receipt until January can push the tax on it into next year. Self-employed individuals can do something similar by holding invoices until after the new year starts. Either can save tax permanently if you land in a lower bracket the following year, though the income subject to Social Security or self-employment tax tends to rise each year, so run the numbers rather than assuming.

On the investment side, selling a position with an accumulated loss before year-end can offset gains, since capital losses are deductible up to your capital gains plus $3,000. Conversely, waiting until after year-end to sell an appreciated position defers the tax on the gain another year. Long-term capital gains (assets held over 12 months) top out at 20 percent for most taxpayers, but the underlying investment case should still drive the decision, not just the tax angle.

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Retirement account strategies

If your employer offers a 401(k) or a nonprofit equivalent like a 403(b), contribute as much as you comfortably can. It defers income today and builds retirement assets. If your employer matches contributions, structure your own contribution to capture the full match; leaving that on the table is leaving free money on the table.

If you have your own business, even a sideline or moonlighting business, setting up and contributing to a retirement plan is worth serious consideration. Several plan types keep the paperwork manageable.

If you have wage or self-employment income, contributing to a traditional or Roth IRA builds a tax-sheltered investment, and a spousal IRA may be available even if your spouse has little or no earned income of their own. To get the most from an IRA, fund it as early in the year as possible, and pay any trustee fees from separate funds rather than out of the IRA balance itself, since both habits maximize tax-deferred growth.

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Investment and gifting strategies

Watch the trading activity inside your mutual funds. When a fund manager sells at a gain, that gain passes through to you as taxable income even if you never withdraw it, so a lower-turnover fund can mean a lighter tax bill, assuming the management is otherwise solid. This doesn't matter inside tax-sheltered accounts like IRAs or 401(k)s. For stocks you hold directly long term, you owe no tax on the appreciation until you sell, and none at all on unrealized appreciation at death.

The annual gift tax exclusion lets you give away a set amount per recipient each year (check the current-year figure) without touching your lifetime gift and estate tax exemption, and you can give to as many people as you like. The gift itself isn't taxable, though income the recipient later earns on it generally is, often at their own, lower rate. Paying someone's medical or educational expenses directly, rather than gifting them the cash, sidesteps gift tax on those amounts entirely.

High earners in high-tax states sometimes benefit from Treasury securities, since the interest is exempt from state and local income tax, and buying bills that mature the following year defers the tax on that interest. Municipal bond interest is generally exempt from federal tax and from tax in the issuing state, which can make the after-tax return better than a higher-rate taxable bond for someone in a high bracket, though gain on selling a municipal bond is still taxable.

If you're planning a charitable gift, donating appreciated long-term assets directly, rather than selling them and giving the after-tax cash, avoids the capital gains tax on the sale while still generally getting you a deduction for the full fair market value if you itemize.

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Everyday deductions worth tracking

Mileage driven for business, medical, or charitable purposes can be deductible at set per-mile rates that change each year, but only with a detailed daily record of the miles and their purpose. Since 2018, employees generally can't deduct unreimbursed mileage for their own business driving; this deduction is mostly available to businesses and the self-employed now.

Medical and dental expenses are deductible only if you itemize and only above 7.5 percent of adjusted gross income, a threshold that rules out most people. A Flexible Spending Account or Health Savings Account gets you a similar benefit through pretax dollars instead, and if you're self-employed with a high-deductible health plan, you can open and fund an HSA yourself.

Some married couples with large medical expenses and roughly equal incomes benefit from filing separately rather than jointly, since the medical deduction floor is computed on each spouse's income separately under that filing status. It's worth running both scenarios, since separate filing also forfeits some other tax benefits.

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If you're self-employed

Self-employed taxpayers can generally expense a substantial amount of qualified equipment in the year of purchase rather than depreciating it over several years (the annual limit changes yearly, so check the current figure), and can deduct 100 percent of their own health insurance premiums as a business expense. A SEP, SIMPLE IRA, or Health Savings Account may also be available on top of that.

If you employ your own child under age 18 in an unincorporated business, their wages generally aren't subject to employment taxes, though income tax still applies. That reduces your own income for both income and employment tax purposes while shifting income to your child, though children under age 8 generally can't be employed in the business.

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