Tax Saving Strategies: A Helpful Checklist

Tax Strategies For Business Owners

Tax Saving Strategies: A Helpful Checklist

This Financial Guide provides tax saving strategies for deferring income and maximizing deductions and includes some strategies for specific categories of individuals, such as those with high income and those who are self-employed. Before getting into the specifics, however, we would like to stress the importance of proper documentation. Many taxpayers forgo valuable tax deductions because they haven’t kept receipts or other records. Not only are adequate records required by the IRS, but neglecting to track deductible expenses throughout the year can lead to overlooking them. You also need to maintain records regarding your income. If you receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income. The checklist items listed below are for general information only and should be tailored to your specific situation. If you think one of them fits your tax situation, we’d be happy to discuss it with you.

Defer Income Recognition

Most individuals are in a higher tax bracket in their working years than they are during retirement, so using tax-advantaged retirement accounts to defer income until retirement can reduce your current-year taxes plus may ultimately result in paying taxes on that income at a lower rate. Additionally, you may be able to invest the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.

Another way to use timing to reduce your current-year taxes is to accelerate deductions, for example, by paying a state estimated tax installment in December instead of at the following January due date. But be mindful of the $10,000 ($5,000 if you’re married filing separately) annual limit on the deduction for state and local taxes, which through 2025 applies to the combined amount of property taxes and income or sales tax.

Max Out Your 401(k) or Similar Employer Plan

Many employers offer plans where you can elect to defer a portion of your pay by contributing it to a tax-deferred retirement account. For many companies, these are 401(k) plans. For nonprofit employers, such as universities, a similar plan called a 403(b) is available. If your employer offers such a retirement plan, contribute as much as possible to defer income and accumulate retirement assets.

Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.

If You Have Your Own Business, Set Up and Contribute to a Retirement Plan

If you have your own business, consider setting up and contributing as much as possible to a retirement plan. These are allowed even for a sideline or moonlighting business. Several types of plans are available which minimize the paperwork involved in establishing and administering such a plan.

Related Guide: For details on retirement plans benefiting self-employed owners, see the Financial Guide: EMPLOYEE BENEFITS: How To Handle Them.

Contribute to an IRA

If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional or a Roth IRA. You may also be able to contribute to a spousal IRA even if the spouse has little or no earned income. All IRAs defer the taxation of IRA investment income and in some cases contributions may be deductible or be withdrawn tax-free.

Related Guide: For details on how Roth IRAs work and how they compare in other respects with traditional IRAs, please see the Financial Guide: ROTH IRAs: How They Work and How To Use Them.

To get the most from IRA contributions, fund the IRA as early as possible in the year. Also, pay the IRA trustee out of separate funds, not out of the amount in the IRA. Following these two rules will help ensure that you get the most tax-deferred earnings possible from your money.

Defer Bonuses or Other Earned Income

If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you’re self-employed, defer sending invoices or bills to clients or customers until after the new year begins. Here, too, you can defer some of the tax, subject to estimated tax requirements. This may even permanently save taxes if you are in a lower tax bracket in the following year. Be advised, however, that the amount subject to Social Security or self-employment tax increases each year.

Accelerate Capital Losses and Defer Capital Gains

If you have investments on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements). For most capital assets held more than 12 months (long-term capital gains) the maximum capital gains tax is 20 percent. However, make sure to consider the investment potential of the asset. It may be wise to hold the asset to maximize the economic gain or sell it to minimize the economic loss.

Watch Trading Activity in Your Portfolio

When your mutual fund manager sells stock at a gain, these gains pass through to you as realized taxable gains, even though you don’t withdraw them. So you may prefer a fund with low turnover, assuming satisfactory investment management. Turnover isn’t a tax consideration in tax-sheltered funds such as IRAs or 401(k)s. For growth stocks you invest in directly and hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.

Use the Gift Tax Annual Exclusion to Shift Income

You can give away $18,000 ($36,000 if joined by a spouse) per donee in 2024 without owing federal gift tax or using up any of your lifetime gift and estate tax exemption. You can make these annual exclusion gifts to as many donees as you like. While these transfers are not taxable, any income earned on these gifts after the transfer will be taxed at the donee’s tax rate, which in many cases is lower.

Special rules apply to children subject to the “kiddie tax.” Also, if you directly pay the medical or educational expenses of the donee, such gifts will not be subject to gift tax.

Invest in Treasury Securities

For high-income taxpayers who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax. Also, investing in Treasury bills that mature in the next tax year results in a deferral of the tax until the next year.

Consider Tax-Exempt Municipal Bonds

Interest on state or local municipal bonds is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the after-tax return from municipal bonds will often be greater than that from higher-interest commercial bonds. Gain on sale of municipal bonds is taxable and loss is deductible. Tax-exempt interest is sometimes an element in the computation of other tax items. Interest on loans to buy or carry tax-exempts is non-deductible.

Give Appreciated Assets to Charity

If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity than to sell the assets and give the charity the after-tax proceeds. Donating the assets instead of the cash prevents your having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale. Additionally, you can obtain a tax deduction for the fair market value of the donated assets, assuming you itemize deductions.

Many taxpayers also give depreciated assets to charity. The deduction is for fair market value; no loss deduction is allowed for depreciation in value of a personal asset. Depending on the item donated, there may be strict valuation rules and deduction limits.

Keep Track of Mileage Driven for Business, Medical or Charitable Purposes

If you drive your car for business, medical or charitable purposes, you may be entitled to a deduction for miles driven. For 2024, it’s 67 cents per mile for business, 21 cents for medical and moving purposes (members of the armed forces only for tax years 2018-2025), and 14 cents for service for charitable organizations. To substantiate the deduction, you need to keep detailed daily records of the mileage driven for these purposes.

From 2018 through 2025, employees who drive their own cars for business can’t deduct such expenses. This is due to the Tax Cuts and Jobs Act of 2017 (TCJA) suspension of miscellaneous itemized deductions subject to the 2% of adjusted gross income floor. This means that, generally, only businesses and the self-employed can claim a deduction for business miles driven.

Contribute to a Pre-tax Account to Fund Medical Expenses

Medical and dental expenses are generally deductible only if you itemize and only to the extent they exceed 7.5 percent of your adjusted gross income (AGI). For most individuals, particularly those with high incomes, this eliminates the possibility of a deduction. You can get a tax benefit similar to a deduction if your employer offers a Flexible Spending Account, sometimes called a cafeteria plan. You can redirect a portion of your compensation to the account to pay these types of expenses with pretax dollars. Another such arrangement is a Health Savings Account (HSA), though it’s available only if you have a high-deductible health plan (HDHP). Self-employed with an HDHP? You can set up an HSA for yourself and make tax deductible contributions to it.

Check Out Separate Filing Status

Certain married couples may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:

One spouse has large medical expenses, and
You and your spouse’s incomes are about equal.

Separate filing may benefit such couples because the adjusted gross income “floors” for taking the medical expense deduction will be computed separately. On the other hand, some tax benefits are denied to couples filing separately. In some states, filing separately can also save a significant amount of state income taxes.

If Self-Employed, Take Advantage of Special Deductions

You may be able to expense up to $1,220,000 in 2024 for qualified equipment purchases for use in your business immediately instead of writing it off over many years. Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums as business expenses. You may also be able to establish a SEP or SIMPLE IRA plan, or a Health Savings Account, as mentioned above.

If Self-Employed, Hire Your Child in the Business

If your child is under age 18, he or she is not subject to employment taxes from your unincorporated business (income taxes still apply). This will reduce your income for both income and employment tax purposes and shift income to the child at the same time; however, you cannot hire your child if he or she is under the age of 8 years old.

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Tax Strategies For Business Owners