September 30 marks the end of the tax year. Unused tax allowances will be forfeited when the tax allowances are renewed. There’s a chance to stretch your money further and pay less taxes after one tax year and the beginning of another.
This article will provide some easy techniques to lower tax liability through strategic tax planning. By exploring legal and practical avenues for optimising your financial situation, you can make informed decisions that maximize available tax benefits and minimize your overall tax burden.
1. Review your gift and estate plans
If you value generosity, now might be an excellent time to consider increasing your donations. Suppose you are a regular charitable giver, and you itemise your deductions on your income tax returns. In that case, Navani advises you to consider contributing multiple years’ worth of gifts to a donor-advised fund (DAF) for a single year. “You may take an immediate deduction and spread out your DAF payments over several years in this way.” Of course, while making any of these decisions, taxes should not be the only consideration.
2. Harvest investment losses
You can lower your tax liability by reporting losses on capital investments. “Loss harvesting” is seen as a crucial year-end tactic. This is the point at which you sell your assets to “realize” a loss (selling at a loss). You can lower your total tax obligation by using these losses to offset capital gains taxes on a dollar-for-dollar basis.
- You can deduct regular income up to $3,000 in excess losses if your losses exceed your gains.
- Any losses not covered by the annual $3,000 cap can be carried forward year after year.
- Remember that the IRS prohibits using losses from “wash sales,” which occur when you buy an identical investment within 30 days before or after the loss.
3. Start a Business
A side business not only increases revenue but also provides numerous tax benefits. When many expenses are employed for regular company purposes, they can be subtracted from income, lowering your overall tax liability. For the taxpayer to be eligible for these deductions, business must be conducted to turn a profit. To ascertain this, the IRS considers several variables. It is assumed that taxpayers who turn a profit within three or five years are operating a profit-making firm.
4. Save for college
You can reduce your tax liability by saving a portion of your child’s tuition. Contributions to 529 plans, which are savings accounts run by states or educational institutions, are a well-liked choice. If you contribute to your state’s 529 plans, you may be allowed to deduct contributions from your federal income taxes on your state return. Additionally, remember that if your donations and any additional gifts made to a specific beneficiary exceed $17,000 in 2023, there can be gift tax implications. The cap is set at $18,000 for 2024.
5. Consider asset location
Dividends and cash distributions are generally taxable in the year they are received. To keep taxes low on dividends, consider holding assets in tax-advantaged accounts like IRAs and regular taxable brokerage accounts, and keep dividend stocks within IRA limits.
Meanwhile, stocks that have the potential to generate capital gains may be kept in a standard taxable account. However, tax deferral, one of the main advantages of an IRA, is still available in a tax account until you sell your investment, which may be decades from now. However, you should carefully assess whether putting all your dividend payers into an IRA makes the best financial sense.