5 Underused Strategies to Improve Your Tax Position

Introduction

Taxes are a necessary part of life, but that doesn't mean you have to pay more than you owe. There are a number of strategies you can use to reduce your tax liability, and many of them are underused. In this article, we'll discuss five of these strategies. Note that several of these strategies involve moving money around in tax-advantaged accounts. If you don't already have these accounts set up, you may need to speak with a financial planner before trying these strategies.

1. Contribute to a Health Savings Account (HSA)

HSAs are tax-advantaged savings accounts that can be used to pay for qualified medical expenses. Contributions to HSAs are tax-deductible, and the money in your HSA grows tax-free. You can also withdraw money from your HSA tax-free to pay for qualified medical expenses.

One of the best ways to use an HSA to reduce your tax liability is to contribute the maximum amount allowed each year. In 2023, the maximum contribution limit for HSAs is $3,850 for individuals and $7,750 for families. If you have a high-deductible health plan (HDHP), you may be eligible to contribute to an HSA.

2. Take Advantage of Retirement Accounts

Retirement accounts, such as 401(k)s and IRAs, offer a number of tax advantages. Contributions to retirement accounts are tax-deductible, and the money in your retirement accounts grows tax-free. You can also withdraw money from your retirement accounts tax-free in retirement.

One of the best ways to use retirement accounts to reduce your tax liability is to contribute the maximum amount allowed each year. In 2023, the maximum contribution limit for 401(k)s is $22,500 ($30,000 for those age 50 and older). The maximum contribution limit for IRAs is $6,500 ($7,500 for those age 50 and older). If you have access to a 401(k) plan, you should contribute as much as you can afford.

3. Use Tax Credits and Deductions

Tax credits and deductions are two ways to reduce your tax liability. Tax credits are subtracted directly from your tax bill, while deductions reduce your taxable income.

There are a number of tax credits and deductions available to taxpayers, including the following:

• Earned income tax credit (EITC)
• Child tax credit
• Child and dependent care credit
• Mortgage interest deduction
• Student loan interest deduction

To claim tax credits and deductions, you must itemize your deductions on your tax return. If you don't itemize your deductions, you can still claim the standard deduction. The standard deduction is a fixed amount that varies depending on your filing status. In 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly.

4. Harvest Tax Losses

Tax loss harvesting is a strategy that involves selling investments that have lost value. You can then use the losses to offset gains on other investments. This can reduce your capital gains tax liability.

To harvest tax losses, you need to identify investments that have lost value. You can then sell these investments and use the losses to offset gains on other investments. You can only use capital losses to offset capital gains. You cannot use capital losses to offset ordinary income.

5. Roth Conversions

A Roth conversion is a strategy that involves converting money from a traditional IRA to a Roth IRA. Traditional IRAs are tax-deferred, which means that you don't pay taxes on the money in your IRA until you withdraw it. Roth IRAs are tax-free, which means that you don't pay taxes on the money in your IRA when you withdraw it.

One of the benefits of a Roth conversion is that it can reduce your tax liability in retirement. When you convert money from a traditional IRA to a Roth IRA, you pay taxes on the money that you convert. However, you won't pay taxes on the money in your Roth IRA when you withdraw it in retirement.

Roth conversions can be a complex strategy, so it's important to speak with a financial planner before you decide if a Roth conversion is right for you.

Conclusion

These are just a few of the many strategies you can use to reduce your tax liability. By implementing these strategies, you can save money on your taxes and improve your overall financial situation.