It’s Not Too Late to Make These Smart Tax Moves

The last thing you probably want to think about when it’s not tax season is taxes.

However, this is the perfect time to make the most of the tax year by maximizing deductions and decreasing your taxable income. 

You can take these six easy steps before the end of the year to make filing in the spring a little less stressful. 

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1. Maximize Your 401(k) Contributions

Contributing to your 401(k) is one of the most effective ways to reduce your taxable income while saving for retirement. 

If your employer’s retirement plan allows you to change your 401(k) contribution level at any time, make sure you max out your contributions for the year. Sure, it will reduce your next few paychecks, but it will also decrease how much income you must report when you file. 

Say you are making $80,000 annually and contribute 5% of your salary — $4,000 annually. If you increase your contributions to 10% or $8,000, you will boost your savings and report your income as $72,000 rather than $76,000. 

And if you weren’t taking full advantage of your employer’s 401(k) match, you will earn bonus money too.

RELATED: How To Save for Retirement Without a 401(k)

2. Increase Your HSA Contributions

If your health insurance option comes with a health savings account (HSA), make sure to take full advantage. 

Contributing to an HSA helps reduce your taxable income and allows you to use these funds for qualified medical expenses without incurring taxes.

Unlike flexible spending accounts (FSAs), any unused funds in your HSA roll over from year to year, providing a long-term savings opportunity.

Plus, these funds aren’t just good to spend at the doctor’s office. You can start spending your HSA dollars on Amazon on things you need right now such as skincare items, female hygiene products, and even that red light therapy mask you’ve been dying to try. 

You were going to buy health and beauty products anyway, so why not spend pre-tax dollars to make your money go further? 

READ MORE: How to Use Your HSA to Unlock Preventative Care Savings

3. Consider a 529 Plan

A 529 plan is a tax-advantaged savings account to help families save for future education expenses. The expenses aren’t just for college either — they can be used for trade schools, certificates, and even K-12 education costs. 

The primary attraction of a 529 plan is the tax benefits it offers — while contributions are made with after-tax dollars, the earnings grow tax-free, and withdrawals are not taxed when used for qualified education expenses.

You might also be able to use the funds to repay student loans. 

Depending on the state where you file taxes, you might also be eligible for state tax deductions or credits for contributions made to a 529 plan.

4. Donate to Charity

Giving funds to charities you believe in feels great and these contributions can qualify for tax deductions, potentially lowering your taxable income when you file. 

While you shouldn’t give to get, there are opportunities to donate and get a free gift in return, which can make your holiday shopping budget go further. 

Receiving a gift won’t necessarily hurt your contribution when you file though — it depends on what the charity claims is the fair market value of the item. 

For example, the World Wildlife Fund (WWF) offers free stuffed animals or apparel with donations that would be great to give to children and adults alike while supporting a good cause. 

5. Explore Additional Tax Credits

You might still have time to purchase items that qualify for additional tax credits. 

For example, you can pay for educational costs while pursuing a new degree or certification with the Lifetime Learning Credit (LLC). The LLC offsets education expenses by reducing your taxable income by $2,000 per year. 

It is available to individuals who are paying for tuition and related expenses for themselves, their spouse, or dependents. 

One of the LLC’s greatest benefits is its flexibility, as it applies to a wide range of educational levels, including undergraduate, graduate, and professional degree courses.

Or, you can make energy-efficient improvements to your home to qualify for energy-efficient credits. 

Some purchases that will count for a tax credit include exterior doors and windows that meet Energy Star requirements, as well as new air conditioning units and water heaters. 

READ MORE: How Do Taxes Work?

6. Make Use of Tax-loss Harvesting 

Tax-loss harvesting is a traditional method used to lower your tax obligations. 

This approach involves selling an investment when it is underperforming, thereby incurring a financial loss. 

You can then apply this loss to counterbalance gains that have already been realized, or against potential gains that you might realize in the future.

If you're unsure how to navigate tax-loss harvesting, consult with a financial advisor who can provide expert guidance tailored to your situation. Some robo-advisors also offer assistance with tax-loss harvesting, leveraging automated features to efficiently manage your portfolio. 

FAQs

How do charitable donations affect my taxes?

Charitable donations can lower your taxable income if you itemize deductions on your tax return. Be aware of the fair market value of any gifts from charities, as this might affect the deduction amount.

Can I adjust my 401(k) contributions in the middle of the year?

Yes, many employers allow you to adjust your 401(k) contributions at any time. 

This means you can bump up your contributions at the end of the year and then move them back to where you are comfortable once the new year begins. Your company’s HR department will help you figure out the process. 

Can 529 plan funds be used for K-12 education costs?

Recent tax law changes allow you to use up to $10,000 per year per beneficiary from a 529 plan for tuition at public, private, or religious elementary and secondary schools. 

Check with your state to see if there are any restrictions or tax implications. 

TL; DR: You’ll Thank Yourself When Tax Season Is Here

The blunt truth is that spending extra money on your retirement or Energy Star-compliant doors before the year ends is not fun. It is much more fun to book a trip or see a concert. 

However, these smart tax moves will keep more of your hard-earned money in your pocket when it’s time to file. 

For more tips on preparing your budget (and yourself!) for the year ahead, check out these episodes of the Erika Taught Me podcast:

• Atomic Habits You’ll Actually Stick To
• Upgrade Your Life With These Life Hacks
• How to Become Better With Money

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