You track your budget every week. You set aside savings. You calculate your savings rate and pat yourself on the back when you hit your goals. Nice job. However, for a lot of us seeking financial independence, we overlook the biggest line item that’s taking money out of our hands. Yup, taxes. If you are looking for the advanced strategies of a tax genius, I suggest you check out the Mad Fientist. He’s the best at it. If you are looking to save a few bucks on your tax bill this year, I can probably help you with these simple tips to minimize your taxes before the end of the year.
Max out your 401k
This is one of the simplest steps you can take to minimize your taxes, but according to Vanguard data, only 10% of people are doing it each year. Contributing up to $18,000 (or $24,000 if you are over 50) to a 401k through your employer gives you two big benefits. One, those funds are deducted from your annual income for tax purposes. Second, you can let that money grow over time without paying taxes on the gains each year. This is a win-win and the most obvious step that you should take before the end of the year.
Max out your HSA
If you have a high-deductible health plan, you can enroll in an HSA. While many people contribute a small amount to these and sometimes get employers matching those funds, very few actually max it out each year. HSAs are great because you can use these funds like a debit card for any medical expenses, but you won’t be paying taxes on the income. Like a 401k, HSA contributions are not only non-taxed, but get deducted from your overall annual income as well. HSA contribution limits in 2017 are $3,400 (or $4,400 if you are over 55), or $6,750 ($7,750 if you are over 55).
Take advantage of deductions
Make sure that you talk to your tax professional or do the research yourself to uncover any and all deductions that you will be able to claim. There are always some sneaky ones in there that you may overlook like child care expenses, moving expenses or space that you use for a home office. This is one of the most obvious ways to minimize your taxes, but a lot of us don’t think about it until tax time, when it’s too late. Act now.
Get your dollar for dollar tax credits
Depending on your personal financial situation and the state that you live in, there are likely a number of very attractive tax credits that you can take advantage of. Here in Arizona, I personally benefit from the School Tax Credits and the Charitable Tax Credit. These credits total almost $2,000 for a married couple and are credited 100% against your state income tax, then can be claimed as a deduction against federal income tax. If you are owe both state and federal taxes, you actually come out ahead with credits like these.
Max out your IRA
One thing that I didn’t understand for a long time is that you don’t have to choose between a 401k and an IRA. It sounds silly to me now, but I always thought “I have a retirement account. I don’t need another one.” In addition to your employer-sponsored 401k, you can also deduct up to $5,500 (or $6,500 if you are over age 50) in contributions to a traditional IRA each year. Max that sucker out and keep reducing your taxable income.Defer some of your income to minimize your taxes
This may not be an option for everyone, but if you are in a position where you want to reduce your income this year at the cost of next year’s tax bill, you can try to defer portions of your income. If you are self-employed or a freelancer, you can wait to send invoices until the end of December, so that you get paid early next year. If you are employed, you can talk to your payroll department about potentially deferring bonuses or commissions until a few weeks later so they hit in the following year. Not all companies will do this, but if it can minimize your taxes, it’s worth a shot.
2017 Retirement Account Contribution Limits
| Single | Family | Catch-Up | |
| 401k and 403b | $18,000 | $36,000 | Additional $6,000 |
| Traditional/Roth IRA | $5,500 | $11,000 | Additional $1,000 |
| HSA | $3,400 | $6,750 | Additional $1,000 |
Recognize losses on investments
This is another one that makes sense in certain situations. If you have a few losing investments hanging out in your taxable accounts, go ahead and sell and realize the loss. If it is something like an ETF, you can repurchase a similar ETF or index fund at similar prices and still claim the loss. Be careful here, as there are laws that govern tax loss harvesting, but if you do it right, it can be a very beneficial strategy. Speaking of tax loss harvesting, I personally keep a bit of money in Wealthfront, which has harvested losses for me throughout the year that I can now take off of my year-end tax bill.