Savvy taxpayers are exploring ways to optimize their tax strategies and reduce taxable income. From bunching itemized deductions to making charitable contributions and maximizing retirement account contributions, there are several strategies you can use to lower your tax burden. Whether deferring income, harvesting losses, or converting to a Roth IRA, tax planning can lead to significant savings. Here are some tax-saving opportunities to consider this tax season.
Bunching Itemized Deductions
The standard deduction is $30,000 for married couples, $15,000 for single filers, and $22,500 for heads of households. Bunching itemized deductions, such as medical expenses exceeding 7.5 percent of AGI, charitable donations, or property taxes, into one year can help surpass the standard deduction and reduce taxable income. Alternating between itemizing and claiming the standard deduction in different years maximizes tax savings.
Making Charitable Contributions
Charitable giving is a powerful tax strategy. Donating appreciated assets avoids capital gains tax and may reduce taxable income. For individuals 70½ or older, qualified charitable distributions (QCDs) from retirement accounts can fulfill required minimum distributions (RMDs) and exclude up to $108,000 (adjusted for inflation) from taxable income. Additionally, individuals can make a one-time QCD of up to $54,000 through a charitable remainder trust or gift annuity. These strategies maximize both tax savings and philanthropic impact.
Leveraging Maximum Contribution Limits
Maximizing contributions to retirement and healthcare accounts helps reduce taxable income and grow future funds. The current contribution limits are $23,500 for a 401(k) ($31,000 if age 50 or older), $7,000 for a traditional IRA ($8,000 if 50 or older), and $4,300 for individual coverage or $8,550 for family coverage in a Health Savings Account (HSA), with an additional $1,000 catch-up contribution for those aged 55 or older.
Harvesting Losses
Despite record stock market highs this past year, you may have investments valued below their cost basis. Selling these "losers" can offset capital gains, and losses exceeding gains can reduce up to $3,000 of ordinary income, with excess losses carried forward. Beware of the "wash rule," which disallows loss deductions if you repurchase a substantially similar investment within 30 days of the sale.
Converting an IRA to a Roth IRA
Roth IRA conversions can be a strategic choice, particularly if you expect higher tax rates in 2026. While you will owe income tax on the conversion, the funds will grow tax-free, and qualified distributions will be tax-free after five years. Roth IRAs also have no RMDs. Additionally, Roth accounts allow tax and penalty-free withdrawals for specific expenses, such as first-time home purchases up to $10,000, qualified birth or adoption expenses up to $5,000 per child, and higher education costs.
Timing Your Income and Expenses
To optimize your tax strategy, consider deferring income to 2026 and accelerating deductible expenses into 2025, provided you will not be in a higher tax bracket next year. This can lower taxable income and enhance tax benefits such as IRA contributions and student loan deductions. If approaching a higher tax bracket, consider accelerating income into 2025 by realizing deferred compensation, triggering capital gains, performing a Roth conversion, or exercising stock options.
Here to Help with Tax Strategies
If you have any questions, we are here to help. We build value-added relationships with each client to understand their business structure and provide solid solutions. Our approach offers direct access to the firm's decision-makers. Our innovative cross-functional services help businesses address the challenges ahead.
Comments