Tips for Reducing Your Tax Burden

Tax season can present you with a welcome refund or a disappointing tax bill, depending on the state of your finances and how you manage your money throughout the year. While everyone has a tax burden of some sort, you can offset a significant amount of this sum with wise investments, diligent deductions, and smart financial planning. Learn how to reduce your tax burden so you can make it through tax season comfortably.

What Is a Tax Burden?

Your tax burden is the amount of tax that you pay during a particular period. It’s typically represented as a percentage of your income. While individual tax burdens are the same throughout the country where your federal taxes are concerned, each state leverages a different ratio

Some states, including Florida, Alaska, South Dakota, Wyoming, Nevada, Texas, and Washington, have no individual income tax, whereas New York has the highest state income tax at 4.72%. New York also has the highest total tax burden in the country at 12.47%, while Alaska’s is the lowest at just 5.06%.

Regardless of the exact tax burden that you’re facing, you’re sure to welcome any strategy that will lower the amount you ultimately owe. There are several strategies that you can pursue to minimize your taxes and keep more funds in your pocket.

Start Your Retirement Savings

Contributing to a retirement account is one of the best ways to reduce your tax burden, as it simultaneously helps you prepare for the future. Contributions to individual retirement accounts (IRAs) and 401(k)s that come from your taxable income are tax deductible. If your company sponsors and matches contributions to a 401(k), this is by far the best option. At a minimum, you should contribute the total amount that your employer will match. If possible, contribute the maximum total allowed. For 2024, the maximum allowable 401(k) contribution is $23,000, or $30,500 for taxpayers over the age of 50.

You can also contribute to a Roth IRA to lower your future tax burden. Contributions to a Roth IRA are taxed upfront, but the distributions come out tax free in the future.

Use a Health Savings Account

Money that you put into a health savings account (HSA) is never taxed if you use it to pay for medical expenses. These contributions grow tax-deferred and are tax-free withdrawals. Best of all, you can contribute to your HSA until the tax deadline and still apply the deduction to the previous year, which is a smart way to continue lowering your tax burden even after December 31. HSAs are usually available to those with high-deductible health care plans.

In 2024, you can contribute up to $4,150 if you have self-only high-deductible health coverage and up to $8,300 if you have coverage for your whole family. 

Fund Your Children’s Educations

A 529 savings plan can be used to pay for qualified education expenses for college tuition as well as K-12 public, private, or religious school tuition. Each year, you can use up to $10,000 in funds from this account to pay for educational expenses. Earnings and distributions from the account are not taxed. Though contributions are not federally tax deductible, you may be able to take a state tax deduction if you’re using your state’s 529 plan.

Maximize Business Deductions

Depending on your career, you may be able to take several work-related deductions. If you work from home, you can take a home office deduction for any part of the house that you use exclusively for business. You can also deduct a percentage of your utilities depending on what percentage of your home’s total square footage is used for business purposes. 

Gig workers can take creative tax deductions for any expenses associated with their work. You can deduct expenses used to advertise your business, develop and manage your website, ship goods, or travel for work. You can also deduct the cost of subscriptions or memberships related to your business. If you participate in any professional groups or receive industry publications that are relevant to your work, keep track of these costs so you can deduct them on your taxes.

Practice Tax-Loss Harvesting

If you’ve suffered from losses though investing, you can still save yourself from some of the financial loss through a strategy known as tax-loss harvesting. Tax-loss harvesting involves selling your investments at a loss to offset taxable capital gains on other investments where you made a profit. You can offset up to $3,000 per individual or $1,500 for a married couple filing separately by replacing losing assets with other comparable options.

Tax-loss harvesting is a very helpful practice, but it’s complex. It’s best to consult a tax expert to make sure that you handle this process correctly. A professional financial planner can help you organize your investments in advance to best utilize this tactic.

Donate to Charity

Charitable contributions are often tax deductible, which means you can lower your tax burden simply by supporting charitable causes that are important to you. To take a deduction on charitable deductions, you must itemize your deductions. Your charitable contributions must exceed the standard deduction for this strategy to make sense. 

You can also use charitable deductions to minimize specific taxes. If you donate an appreciated stock, you can avoid the capital gains tax on that investment. If you’re 73 years of age or older, you need to start taking the required minimum deductions from your retirement accounts. You can bypass the tax on these deductions if you send them directly to a charity.

Manage Your Financial Planning Year-Round

The best way to reduce your tax burden is to think about your taxes long before tax season rolls around. Planning proactively for your tax expenses will help you make wise choices throughout the year regarding your investments, retirement funds, health care spending, and educational savings. A skilled financial planner can help you organize your personal finances to optimize your situation and minimize your taxes. Contact Pasquesi Sheppard LLC in Illinois to learn more about the financial planning tools available to you.

coffee mug near open folder with tax withholding paper by Kelly Sikkema is licensed with Unsplash License