Takeaways
- The IRS’s federal tax filing deadline for the tax year 2024 is April 15, 2025.
- The 401(k)-plan max contribution is $23,000 for 2024 and $23,500 for 2025.
- Tax-loss harvesting can help offset a potentially large capital gains tax bill.
- Writing off startup costs for a business can improve your taxes and boost income.
- The best online tax software programs automatically analyze your finances for the best tax deductions and credits.
Tax season can be stressful. Figuring out what tax filing status to use, waiting patiently for your Form W-2, and trying to choose the best online tax filing software platforms only add to the well-documented sensation of tax anxiety.
The good news is that there are several strategies you can implement during the year to reduce your blood pressure and lower your tax liability (even at the eleventh hour). By taking advantage of these last-minute tax-saving tips, you can maximize your tax refund or minimize a large tax bill owed to the IRS.
To ensure a smooth tax filing experience, it's always best to stay organized throughout the year, keep all your personal documents, and understand the key state and federal tax filing deadlines.
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9 Last-Minute Ways to Lower Your Taxes
Here are nine tax reduction strategies you can implement before the end of the tax year and some before tax filing deadlines:
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1. Increase Your W-4 Withholdings
Adjusting your Form W-4 withholding form can help you avoid a surprise tax bill at the end of the year. By increasing your withholdings, you'll have more taxes withheld from your paycheck, reducing your tax liability when you file your return. However, be cautious to withhold only a little, as this could result in a larger refund that you won't have access to throughout the year.
To adjust your W-4, you can either complete a new form and submit it to your employer or use the IRS's online Withholding Calculator. This tool can help you determine the appropriate amount of withholding based on your income, tax deductions, and tax credits.
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2. Max Your Retirement Contributions
Contributing to your retirement accounts like 401(k) plans and Traditional IRAs can significantly reduce your taxable income. These contributions are made with pre-tax dollars, lowering your taxable income and, consequently, your tax liability.
If you haven't maxed out your 401(k) contributions for the year, consider increasing them before the deadline. You can also consult with a tax or financial planning professional to determine the optimal contribution strategy for your specific financial situation.
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3. Take an Investment Loss
If you have invested in stocks, bonds, real estate, or cryptocurrency, you might have experienced an investment loss during the year. For taxes, you are allowed to offset capital gains with capital losses. This strategy is known as tax-loss harvesting.
Tax-loss harvesting can help reduce your overall tax liability. To take advantage of this strategy, you can sell underperforming investments to realize a capital loss. This can reduce a large capital gains tax bill. Once you sell your investment at a loss, you can reinvest the funds in similar or more conservative investments, like a certificate of deposit.
Before intentionally selling any investment for a loss, brushing up on the specific rules and limitations associated with capital loss deductions is essential. For example, the wash-sale rule prohibits selling a security and repurchasing a "substantially identical security" 30 days before or after the sale.[1]
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4. Start a Business
Starting a business can offer several tax benefits. You can reduce your tax burden by understanding the various deductions and credits available to small business owners. Some standard deductions for businesses include:
- Business expenses: Costs related to running your business, such as rent, utilities, and supplies.
- Home office deduction: If you use a portion of your home for business purposes, you can deduct expenses related to that space.
- Vehicle expenses: If you use your vehicle for business purposes, you can deduct expenses such as gas, insurance, and maintenance.
However, consulting with a tax professional is crucial to ensure compliance with all tax laws and regulations. Starting a business involves significant time, effort, and financial resources.
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5. Contribute to Your HSA
A Health Savings Account (HSA) can provide significant tax benefits. Contributions to an HSA are typically tax-deductible, and withdrawals for qualified medical expenses are tax-free.
If you still need to max out your annual HSA contribution, consider making additional contributions before the deadline.
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6. Invest in Municipal Bonds
Municipal bonds are debt securities issued by state and local governments. The interest income from municipal bonds is often exempt from federal income tax and may also be exempt from state and local taxes.
Investing in municipal bonds can be a tax-efficient way to generate income, especially for high-income individuals.
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7. Maximize Long-Term Capital Gains
Long-term capital gains are taxed at a lower rate than ordinary income. By strategically timing your capital gains, you can minimize your tax liability.
Consider deferring the sale of assets that have appreciated in value until the next tax year, if possible. However, it's important to balance tax considerations with investment goals. Selling assets solely to avoid taxes may not be the best financial decision.
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8. Make Charitable Donations
Charitable donations can provide significant tax benefits. Be sure to document all charitable contributions and consult with a tax professional to determine the maximum deductible amount.
Consider donating appreciated assets like stocks or real estate to maximize your tax savings.
9. Check Eligibility for Tax Credits
Tax credits can directly reduce your tax liability because they are a dollar-for-dollar reduction in your tax liability. There are many tax credits to consider, and if you file your taxes online, your tax program will automatically prompt you to consider some credits.
Be sure to check your eligibility for various tax credits, such as the Child Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit.
Smart Summary
Everyone wants to reduce their tax liability. However, tax laws and regulations are complex and subject to change. It’s a smart money move to consult with a tax professional to ensure that you are taking advantage of all available tax deductions and credits to maximize your refund or minimize your tax bill. By understanding the tips and tricks, you can implement strategies to optimize your tax planning, saving you money.
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(1) Internal Revenue Service. Wash Sales. Last Accessed January 12, 2025.
