One thing that we can all agree on is that no one enjoys paying more taxes than necessary. While taxes are a part of life, there are several smart financial moves that can help individuals and families legally reduce what they owe over time. The key is advance planning instead of waiting until tax season or retirement comes. Here are just 10 (of many) practical strategies that can help lessen your tax burden both now and later in life.
1. Contribute to Retirement Plans
One of the easiest ways to lower taxable income now is by contributing to employer retirement accounts such as a 401(k), 403(b), or traditional IRA. Contributions to many employer retirement plans are made pre-tax, which means you reduce your taxable income while saving for the future. The flip side is that you will pay income tax in retirement when you withdraw the money – at the future tax rate.
Another perk of an employer retirement account it that many employers offer matching contributions, which is essentially free money. Don’t miss out on this!
2. Consider a Roth IRA
While Roth IRA contributions are not tax deductible today, the long-term benefits can be tremendous. Money in a Roth IRA grows tax-free, and qualified withdrawals in retirement are also tax-free. Younger investors especially benefit because they may have decades of tax-free growth ahead of them.
3. Use a Health Savings Account (HSA)
If you have a high-deductible health insurance plan, an HSA can provide a triple tax advantage. Contributions may be tax deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. HSAs are one of the most tax-efficient savings tools available.
4. Take Advantage of 529 College Savings Plans
Parents and grandparents looking to help fund education should consider a 529 plan. Earnings grow tax-free, and withdrawals used for qualified educational expenses are tax-free as well. Many states also offer state income tax deductions or credits for contributions, such as the START Savings Program in Louisiana.
5. Harvest Investment Losses
Investors can sometimes reduce taxes by strategically selling investments that have declined in value. These losses can offset capital gains and, in some cases, reduce ordinary income. This strategy, known as tax-loss harvesting, should be coordinated carefully with your financial advisor or tax professional.
6. Make Charitable Contributions
Charitable giving can benefit both the community and your tax situation. Donations to qualified charities may be deductible if you itemize deductions. Donating appreciated stock instead of cash can be especially tax-efficient because it may allow you to avoid capital gains taxes while still receiving a charitable deduction.
7. Consider Roth Conversions Later in Life
For retirees or those approaching retirement, Roth conversions can be an effective long-term tax strategy. Converting portions of a traditional IRA into a Roth IRA allows you to pay taxes now in exchange for tax-free growth and withdrawals later. This strategy may also reduce future required minimum distributions and potentially lower taxes for heirs.
8. Use Qualified Charitable Distributions (QCDs)
Individuals age 70 ½ and older can donate directly from an IRA to a qualified charity through a Qualified Charitable Distribution. QCDs can satisfy required minimum distributions while excluding the donated amount from taxable income. This can be especially beneficial for retirees who don’t itemize deductions.
9. Review Property Tax Relief Programs
Many states such as Louisiana offer property tax freezes, exemptions, or reductions for seniors, veterans, or disabled individuals. These programs are often overlooked but can significantly reduce housing expenses in retirement. In Louisiana, senior citizens age 65 and older with an adjusted gross income of $102,700 or less can have the assessed value of their primary residence frozen. This can result in a huge savings over time. Contact your local Assessor’s Office for more details.
10. Work With a Qualified Professional
Tax laws change frequently, and every family’s financial situation is different. Working with a qualified CPA, tax professional, or fiduciary financial advisor can help uncover strategies specific to your circumstances. Good planning throughout the year is often far more effective than scrambling at tax time.
Reducing taxes is not about finding loopholes or taking unnecessary risks. It’s about making smart financial decisions that align with your goals and taking advantage of opportunities the tax code and law already provide. With proper planning, many individuals can keep more of what they earn in their pocket and build a stronger financial future.
Tracy L. Campbell is a partner and financial advisor at Meriwether Wealth and Planning, an independent Registered Investment Adviser (RIA) firm headquartered in downtown Minden, La. E-mail Tracy at tracy@meriwether.com. Disclaimer: This content is for general knowledge and education, not a substitute for professional advice.