5 Tips for Tax Planning Basics

5 Tips for Tax Planning Basics

By Mark Keeling, MBA, CFP®, BFA™, ChFC®, CLU®, APMA™

Financial Advisor and Managing Partner of Inspire Confidence Group

Tax planning can seem overwhelming, but with a few strategic steps, you can reduce your tax burden and keep more of your hard-earned money.

5 Tips to help reduce your tax burden:

• Maximize retirement contributions – Fund your 401(k) or IRA to reduce taxable income and save for the future.
• Leverage deductions and credits – Claim eligible deductions and tax credits to lower your overall tax bill.
• Use tax-loss harvesting – Offset capital gains by selling underperforming investments strategically.
• Understand RMDs and QCDs – Withdraw required minimum distributions (RMDs) on time and consider charitable giving for tax benefits.
• Optimize income and expense timing – Adjust when you earn income or pay expenses to reduce taxable income in high-tax years.

One of the best ways to lower taxable income is by contributing to retirement accounts like a 401(k) or an IRA. If you contribute to a traditional 401(k), the money goes in before taxes, reducing the income you report to the IRS. If you opt for a Roth IRA, you don’t get an immediate tax break, but your withdrawals in retirement will be tax-free1.Maximizing these contributions each year can help you save on taxes while building long-term wealth.

Another key strategy is to take advantage of tax deductions and credits. Deductions, like mortgage interest, student loan interest, and medical expenses, lower your taxable income, while credits, such as the Child Tax Credit or Earned Income Tax Credit, reduce the actual amount of tax you owe. Keeping track of eligible deductions and credits can make a big difference in how much you pay or get refunded. It’s a good idea to review your expenses and discuss with a tax professional to ensure you’re not leaving money on the table.

If you have investments, tax-loss harvesting is a useful way to offset gains and minimize your tax bill. This strategy involves selling investments that have lost value to counterbalance capital gains from profitable investments. By strategically managing your portfolio, you can reduce taxable income without changing your overall investment strategy.

If you're nearing retirement, it's important to understand Required Minimum Distributions (RMDs). Once you turn 73, you must start withdrawing money from tax-deferred retirement accounts. If you don't, the penalties can be steep. If you’re charitably inclined, you might consider a Qualified Charitable Distribution (QCD), which allows you to donate directly toa charity without paying taxes on the withdrawal.

Lastly, timing your income and expenses wisely can help you manage your tax liability. If you're a business owner or freelancer, you might delay receiving income until the following year to lower your current tax bracket. On the other hand, accelerating deductible expenses, like medical costs or charitable donations, into the current year can provide a tax benefit sooner. By planning ahead and making strategic decisions throughout the year you can avoid surprises at tax time and keep more money in your pocket.