What to do with your money this year to save on your taxes next year

If you only think about your taxes in the weeks leading up to the April deadline each year, options for lowering your tax bill tend to be limited. But with a little more planning, you open yourself up to dozens of smart tax savings moves that can help you cut your bill to Uncle Sam in 2024. 

Contribute to your retirement accounts

Building up your nest egg can shrink your tax bill each year; saving in retirement accounts, such as 401(k)s and 403(b)s, allow you to reduce your taxable income in proportion to how much you contribute — and in 2023 you can set aside up to $22,500. Those age 50 and older can put in an additional $7,500. 

“That means a couple could shelter as much as $60,000 of their income a year, which is just huge,” said Rachel Elson, a wealth manager at Perigon Wealth Management in San Francisco.

If you don’t have access to these employer-sponsored retirement accounts, consider contributing up to $6,500 (or $7,500 for those 50 and older) in a traditional IRA.

You may see your tax benefit reduced or entirely diminished if you earn above a certain amount of income and you or your spouse has a retirement plan at work. You can see this IRS worksheet on reduced IRA deductions.  

Make less than $36,000 as single filer or $73,000 as a married joint filer and you can claim an additional tax benefit for retirement saving: the Saver’s Credit, worth 50%, 20% or 10% of the contributions you made to your retirement plan up to $2,000 ($4,000 if filing jointly).

This means the credit could potentially knock as much as $1,000 off your total tax bill if you’re a single filer, or $2,000 if you’re filing jointly.

Take advantage of an HSA or FSA

If you have a high-deductible health insurance plan, open a Health Savings Account (HSA). 

It’s triple tax advantaged in that your contributions reduce your taxable income, you don’t owe capital gains on any investment earnings and withdrawals spent on qualified medical costs also avoid taxation. 

This account allows you to shrink your 2023 taxable income by up to $3,850 if you have self-only coverage, and up to $7,750 if you have family coverage. An extra $1,000 can be stashed in the account each year if you’re age 55 or older. 

“Even if you have a healthcare crisis, the tax advantage you get from maxing [out] an HSA — combined with what are often lower premiums and perhaps employer HSA contributions — can often outweigh the higher out-of-pocket costs that come with high-deductible plans,” said Elson. “That’s particularly true if you are a high earner facing hefty state and federal taxes.”

If an HSA isn’t an option for you, check if you have access to a medical FSA. 

Any portion of your salary that you direct here, up to the 2023 funding limit of $3,050, is exempt from federal income tax and employment tax. 

But you’ll need to be mindful that any unspent funds by year end are typically forfeited. Generally referred to as a “use it or lose it plan,” the FSAs that do allow some funds to carry over to the next year still limit the amount, which is set to $610 for 2023.

Offset higher education costs

Paying college tuition for yourself, spouse or child this year? 

Under the American Opportunity Credit, you could reduce your total tax bill by as much as $2,500 for each qualifying student. 

And if your tax bill hits zero before you’ve used the full amount of your credit, 40% of it could be refunded to you. 

In order to take advantage of the American Opportunity Credit, you and the student must meet certain requirements. The person claiming the education tax credit must be under an income limit and can only claim it for the same student for four years, max. The student must not have already completed the first four years of postsecondary education and must be enrolled, at least part-time, in a program leading to a degree or other recognized education credential.

The IRS won’t let you double-dip and use the same student’s education expenses to also claim the Lifetime Learning Credit. However, the IRS advises opting for the American Opportunity credit if you have the choice. 

That’s because the Lifetime Learning Credit will only reduce the taxes you owe by $2,000 at most and is nonrefundable, meaning if your tax bill drops to zero before you use the full credit, the excess is lost. 

If you’re still paying school off, you could cut up to $2,500 of the interest you paid on your student loans from your taxable income, provided your modified gross income (MAGI) isn’t more than $85,000 as a single filer or $175,000 as a married filer. This move can also help lessen the sting should the pandemic’s federal student loan repayment freeze ending this year.

See if you qualify for the Earned Income Tax Credit

It is always worth checking to see if you can claim the Earned Income Tax Credit in a low-income year, since it’s one of the most generous breaks Uncle Sam provides. 

To nab it, your investment income must be less than $11,000 for the year and your total income must be below a certain threshold, which varies depending on your filing status and number of dependents. But you won’t qualify at all if your income exceeds $56,838 for single filers or $63,698 for joint filers. 

The more dependents you claim, the fatter the tax credit becomes. Whereas those with no dependents get a max credit of $600, those with three or more can receive as much as $7,430. 

The best part? The credit is refundable, meaning if you owe no tax, you’ll receive this sum as a refund payment.

Get the most out of self-employment

“Being self-employed serves up many unique tax breaks you may be eligible for, but a lot of people hesitate to take these deductions,” said CPA and TurboTax tax expert Lisa Greene-Lewis.

If you’re legitimately using that space or car for work, she adds, then go ahead and claim a deduction for a home office or mileage.

Home office deductions

To deduct a portion of your home expenses, including rent, insurance, mortgage interest, property taxes and utilities, you must use a part of your domicile regularly and exclusively for your business. 

You can then calculate the tax break one of two ways. The simpler option equates to $5 per square foot of space used exclusively for your business, up to 300 square feet, meaning the maximum you can knock off your taxable income this way is $1,500. The alternative method requires you to determine the share of allowable expenses that apply to just your work space. 

Either way you take the deduction, you’ll use Form 8829.

Transportation deductions

Use your car to drive to meetings or make deliveries? Deduct that business mileage. 

You can either multiply the IRS’s 2023 standard mileage rate of 65.5 cents per mile by the number of miles you drove during the year for your business and claim that sum. Or you can opt for the actual expense method which allows you to deduct costs like gas, oil, repairs, tires, insurance and registration fees equal to the proportion of business miles driven.

Retirement plan deductions

The self-employed can also reduce their taxable income by opening a SEP IRA or a solo 401(k). 

With a SEP, your business can contribute up to 25% of your income capped at $66,000, while a solo 401(k) allows you to put in funds equal to the standard 401(k) limits as well as receive employer contributions. 

Ann Reilley, the chief executive of Alpha Financial Advisors in Charlotte, recommended the solo 401(k) as your first choice since, “even if the business doesn’t make any money one year you can still make an employee contribution.” 

Be sure to deduct half of your self-employment tax from your income since the IRS views the employer portion of this Social Security and Medicare charge as a business expense. Meaning instead of paying 15.3% in tax, you’ll pay 7.65%, or the share most employees do. 

Miscellaneous self-employment deductions

Dozens of other costs can be deducted too, such as: credit card interest used to pay for business expenses; work-related education programs; the portion of your cell phone service you use for business; and business travel expenses like airline tickets, taxi fares, and hotel lodging.

Make charitable donations

The special donation rules that went into effect in 2021 have expired, meaning that in order to have charitable contributions offset some of your taxable income this year, you must once again itemize your deductions on Schedule A and not take the 2023 standard deduction, which automatically shields $13,850 of income for single filers and $27,700 for joint filers. 

The IRS allows you to deduct cash donations to qualified public charities totaling no more than 60% of your income. 

Don’t limit yourself to just cash, though. Giving appreciated stocks, bonds, mutual funds or other securities directly to your chosen charity can be a great way to increase your tax deduction and spare yourself the capital gains tax. 

Good targets for this gifting are any inherited stocks that don’t align with your investment portfolio, said Elson.

Try tax loss harvesting

Earn a little too much this year? Or want to offload a few stocks that rose sharply lately? Selling the investment duds in your portfolio at a loss can help you offload losing securities and save money on your taxes. 

Known as tax loss harvesting, this strategy reduces the amount of tax you’d pay for selling profitable investments. 

And if your losses outweigh your gains, you could also potentially offset up to $3,000 worth of your ordinary income on your taxes this year. Any losses above that $3,000 limit aren’t lost, but can be carried forward into future tax years.

Use state and local tax (SALT) breaks

Taxes paid to your state and local government could reduce your federal tax liability by as much as $10,000 — the current cap applied by 2017’s Tax Cuts and Jobs Act — if you itemize when filing.

The SALT deduction allows you to offset either a combination of state property and income taxes or state property and sales taxes. The latter applies if your state doesn’t have a personal income tax, like Florida and Texas, explained Greene-Lewis. 

The SALT deduction is traditionally extremely beneficial to higher-income earners in California, New York, New Jersey, Illinois, Texas and Pennsylvania.

Get rewarded for paying child and dependent care expenses

Working parents, there’s a tax break for you. 

If you paid someone to look after your kids, you can likely claim some of those costs on your taxes via the Child and Dependent Care Credit. To qualify, your child must be under age 13, or the dependent must be unable to physically or mentally look after themselves.

To figure out the size of your credit, you’ll need to multiply your work-related care expenses by a percentage between 20 and 35, depending on your income level. However there is a limit to the amount of care costs you can use when doing this calculation: $3,000 for a single dependent and $6,000 for two or more. 

Alternatively, caregivers can also reduce their taxable income by diverting up to $5,000 from their salary into a dependent care flexible spending account to pay costs for a care giver, daycare, nanny or afterschool program.

Go greener

Thanks to the Inflation Reduction Act passed last year, you can claim some generous tax credits starting in 2023 for making more environmentally friendly purchases. Home improvements made to increase energy efficiency could net you a tax credit worth up to $1,200.

Additionally, if you buy a new plug-in electric vehicle or fuel cell electric car, you could claim a tax credit worth up to $7,500, provided you and the car met certain requirements. 

Used electric vehicle shoppers can claim a separate credit worth up to 30% of the sales price or $4,000, whichever is greater, if you spend less than $25,000 on the purchase. 

“These electric vehicle credits can be huge savings as they reduce the taxes you owe dollar for dollar,” said Greene-Lewis.