Paying taxes is a necessary part of living in a civilized society, but it’s essential to avoid paying more than your fair share. However, many people have this misconception of thinking tax professionals or themselves can find ways help them save on taxes when filing their tax returns. The sad truth is when it’s time to file your tax returns, it’s already too late for you to do anything to reduce your tax dues for the prior year. In order to optimize your tax burden, you need to plan ahead, way ahead, like, one year, five years, even ten years ahead. So, to optimize your tax burden for year 2025 you need to start planning NOW. Here are some tips on how to avoid paying above your fair share in taxes in 2025:
- Take Advantage of Tax Deductions and Credits
Tax deductions and credits are valuable tools for reducing your taxable income and lowering your tax liabilities. Some common tax deductions include mortgage interest, charitable donations, and medical expenses. Tax credits, on the other hand, offer a dollar-for-dollar reduction in your tax bill and can be more valuable than deductions. Examples of tax credits include the earned income tax credit, child tax credit, and education tax credit.
To take advantage of these tax benefits, make sure to keep detailed records of your expenses and consult with a tax professional to determine which deductions and credits apply to your situation.
- Contribute to Retirement Accounts
This strategy is a no brainer. The easiest and the most obvious tax saving strategy is to maximize your pre-tax contributions to retirement accounts such as 401(k)s, IRAs, and SEP-IRAs.
For example, if, in 2025 you are under 50 years old, your 401(k)-plan contribution limit has increased by $500 to $23,500. If you are over 50, you can make an additional $7500 catch-up contribution to your 401(k) plan. If you turn 60 this year, you can make even bigger catch-up contribution for your retirement. Starting in 2025, people between 60 and 63 can contribute additional $11,250 to their 401(k)-retirement plan, resulting in even bigger tax savings.
Maximizing your contributions to these accounts can lower your taxable income and reduce your tax liabilities, allowing you to keep more of your money.
- Consider Tax-Loss Harvesting
Tax-loss harvesting is a strategy that involves selling investments that have declined in value to offset gains in other investments. By selling losing investments, you can reduce your tax liabilities on capital gains and potentially save money on taxes.
However, it’s essential to be aware of the wash-sale rule, which prohibits you from buying back the same investment within 30 days of selling it to claim a tax loss. This strategy may not suit everyone, and may result in unintended financial consequences or loss. Make sure to consult with a financial advisor to determine the best tax-loss harvesting strategies for your unique situation and goals.
- Plan Your Charitable Donations
Charitable donations can be a powerful tool to reduce your tax liabilities and support causes you care about. However, it’s essential to plan your charitable donations strategically to maximize their tax benefits.
For example, donating appreciated assets such as stocks or mutual funds can provide a double tax benefit. You can deduct the fair market value of the asset on your taxes and avoid paying capital gains taxes on the appreciation of the asset. Make sure to consult with a tax professional and the charity of your choice to determine the best charitable giving strategies for your unique situation and goals.
By taking advantage of tax deductions, credits, and strategies, you can avoid paying above your fair share in taxes and keep more of your hard-earned money. It’s crucial to consult with a tax professional and financial advisor to determine the best tax strategies for your unique situation and goals. With careful planning and attention to detail, you can minimize your tax liabilities and achieve your financial goals.