As tax season approaches, many Americans scramble to take advantage of every possible deduction and credit, hoping to reduce their final bill. Whether you’re a seasoned investor or a working professional, the U.S. tax code offers a range of perfectly legal ways to soften your tax bite. From retirement contributions to specialized savings accounts, here are some lesser-known strategies and perennial favorites to consider this year.
1. Commuter Benefits: Savings on the Road
Don’t overlook the costs of getting to and from work. By utilizing commuter benefits—up to $300 a month (for a maximum of $3,600 a year)—you can pay for mass transit fares, parking lots, and even parking meters with pre-tax dollars. This not only helps you reduce taxable income but also eases the burden of ever-rising commuting costs.
2. Retirement Plans: The Power of Tax-Deferred Growth
Contributions to retirement accounts such as a 401(k) or a 403(b) if you work for a nonprofit can substantially reduce your taxable income. Money put into these accounts grows tax-deferred, meaning you won’t pay taxes until you make withdrawals—often at a point when you’re in a lower tax bracket.
3. Health Savings Accounts (HSAs): A Triple Tax Advantage
If you have a high-deductible health plan, consider an HSA. Contributions go in tax-free, earnings grow tax-free, and withdrawals for qualified medical expenses remain tax-free. It’s a powerful combination that can alleviate the sting of rising healthcare costs while lowering your annual tax bill.
4. Flexible Spending Accounts (FSAs): Use It or Lose It
FSAs let you set aside pre-tax dollars to pay for eligible healthcare costs not covered by insurance. The catch: Funds generally must be used within the calendar year. Still, if planned correctly, an FSA can offset common medical expenses, leaving you with more take-home pay.
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5. Dependent Care FSA: A Break for Caregivers
For families shouldering childcare or dependent adult-care expenses, a Dependent Care FSA provides tax-preferred dollars to meet those costs. Setting aside money pre-tax can lighten the load of daycare bills, after-school programs, or the ongoing costs of caring for an elderly parent.
6. Capital Losses: Offsetting Your Gains
Investors sometimes find themselves with losses. While no one enjoys seeing an asset decline in value, capital losses can offset capital gains, thereby lowering your overall tax liability. These losses can even offset up to $3,000 of ordinary income annually, with any excess carried forward to future tax years.
7. Long-Term Capital Gains: Hold for a Year, Pay Less
When it comes to taxable investment gains, timing is everything. Holding on to an asset for at least one year before selling often qualifies the gain for a lower, long-term capital gains tax rate—potentially around half the ordinary income tax rate. This patient strategy can pay dividends come April 15.
8. Review Your 1099-B: Watch Those Cost Basis Blanks
Your brokerage sends a 1099-B at year’s end, detailing gains and losses on your investments. If the “cost basis” column is blank or incorrect, take action. Confirming the amount you originally paid for a stock can prevent you from overreporting gains—and overpaying taxes.
9. Margin Interest: A Lesser-Known Deduction
If you’ve borrowed to invest, the interest on your margin loan may be deductible. While the rules are nuanced, many investors overlook this potential savings. Consider speaking with a tax professional to ensure you’re capturing every dollar you’re entitled to.
10. Gambling Losses: It’s Not All a Roll of the Dice
If Lady Luck didn’t smile on you at the casino, your losses can reduce your taxable winnings. Form W2-G, issued when you win above certain thresholds, alerts the IRS that you’ve had a lucky streak. Keep careful records of your losses; they can help offset any reported gambling gains.
11. Traditional IRAs: More Room for Pre-Tax Savings
A Traditional IRA is another dependable vehicle for tax-deferred savings. For those who qualify, contributions reduce taxable income in the current year. Over time, this can add up to meaningful tax savings while building a nest egg for retirement.
12. 529 Plans: Tax-Free Growth for Education
Although contributions aren’t typically pre-tax, a 529 plan allows investments to grow tax-free, and distributions used for qualified education expenses are also tax-free. Some states even allow you to deduct contributions, adding a further incentive to save for a child’s future education.
13. Fixing Your W-4: Avoiding Penalties
If you’ve been hit with an underpayment penalty, it might be time to adjust your W-4 withholding. Ensuring the right amount of tax is withheld from your paycheck throughout the year can help you avoid unpleasant surprises—and penalties—when you file your return.
14. The Minimal Rental Use Rule: Airbnb’s Hidden Perk
If you rent out your home or vacation property for 14 days or fewer in a year, the income you earn is typically tax-free. Known as the “minimal rental use rule,” it can turn short-term hosting gigs—think Airbnb—into a tidy, tax-free profit center.
Before You File
Each of these strategies comes with its own rules, limits, and caveats. Consult with a qualified tax professional for personalized advice.
Taking the time now to understand your options and keep diligent records can pay off handsomely in April and beyond.