Unlocking Tax Savings: Strategies for Minimizing Burden and Maximizing Benefits

As tax season rolls around, many Americans are sorting through their finances.

Recent data from the Tax Foundation reveals that the average American paid $14,279 in federal income taxes, with an average tax rate of 14.9%. Understanding these numbers sets the stage for exploring smart strategies to lower your tax bill and make the most of your money.

In this guide, we’ll explore different ways to help you save on taxes, making tax season easier and helping you keep more money in your pocket. At SWAT Advisors, we know tax planning can be complex. Alongside the tips in this guide, we offer additional services like retirement planning and business exit planning to meet your specific financial needs and boost your tax savings.

Discover Effective Tax-Saving Strategies

Exploring effective tax-saving strategies is essential for individuals and businesses aiming to enhance their financial health and reduce tax burdens. Let us examine tax loss harvesting tactics in more detail to learn about their workings and possible rewards.

Capital Gains Tax Management

Capital gains tax applies to profits from selling assets and varies by asset duration, income level, and asset type. To potentially reduce or eliminate these taxes, explore strategies on how to minimize capital gains tax.

• Hold Your Investments Longer: If you hold an asset for more than a year before selling, you typically pay a lower tax rate on the profit. This is because long-term capital gains taxes are generally lower than short-term gains taxes.
• Offset Gains with Losses: You can offset gains with losses from other sales. If losses exceed gains, up to $3,000 of the excess loss can reduce your income annually. Carry forward any remaining loss to future years for further deductions. For example, if you gain $5,000 via selling stocks but lose $20,000, the $20,000 loss offsets the gain, allowing a $3,000 deduction this year with $12,000 carried forward.
• Avoid the Wash-Sale Rule: Be cautious not to trigger the wash-sale rule. This rule disallows a tax deduction for a loss if you buy the same or a similar investment within 30 days before or after the sale. It’s important to wait at least 31 days if you plan to repurchase the same investment after taking a loss.
• Invest in Tax-Advantaged Accounts: Using accounts like 401(k)s or IRAs allows your investments to grow without incurring yearly capital gains taxes. Traditional accounts tax withdrawals as ordinary income, while Roth accounts allow tax-free withdrawals after retirement.
• Plan Sales Around Retirement: If you’re nearing retirement, consider delaying the sale of profitable investments until after you retire. This could lower your tax rate on capital gains if your retirement income is less than your working income, potentially eliminating the tax altogether.
• Monitor Your Holding Periods: To qualify for lower long-term capital gains taxes, ensure each asset is sold more than a year after it was purchased. Verify the exact purchase dates to avoid short-term rates.
• Choose Your Cost Basis Calculation Method: When selling parts of an investment, decide how you calculate the cost basis. Options include:
  • First-in, first-out (FIFO)
  • Last in, first out (LIFO)
  • Dollar value LIFO
  • Average cost (for mutual funds)
  • Specific share identification

Each method impacts the reported gain and, thus, your taxes differently. When considering how to offset capital gains with losses, it may be helpful to consult a tax advisor for complex situations. Make sure to keep detailed records to simplify these calculations.

Essential Tax Deductions for Small Businesses

As a small business owner, leverage various tax deductions for small business owners, including the claim of right deduction, to minimize your taxable income. So, if you are asking, how to reduce tax burden, then we’re here to answer you.

Here are some common expenses that are typically deductible:

1. Auto Expenses: Deduct the costs of using your car for business purposes. This includes tracking all your car-related expenses like gas, maintenance, and insurance, or opting for the simpler standard mileage rate, which is 67 cents per mile for 2024.
2. Startup Costs: When starting a business, you can deduct up to $5,000 in startup expenses such as market research, legal fees, and advertising for the first year. Any amount over $5,000 can be amortized and deducted over the next 15 years.
3. Professional Fees: Fees paid for legal, tax, or consulting services are deductible. If these services benefit your business over several years, the costs should be spread out over those years.
4. Insurance: Premiums for business insurance, such as liability, property, and employee health insurance, are deductible. This includes specific insurance like malpractice or workers’ compensation insurance.
5. Travel Expenses: Costs incurred while traveling for business, including airfare, hotel stays, meals, and car rentals, are deductible. Remember, personal expenses during a business trip are not deductible.
6. Interest: Interest paid on business loans or credit used exclusively for business purposes is deductible. Be aware that if your business profit exceeds $25 million, the deduction for interest expenses is limited to 30% of your earnings.
7. Equipment: Purchase costs for equipment can be deducted either through bonus depreciation or Section 179 expense. For 2023, you can deduct the full cost of equipment up to $1,160,000 under Section 179.
8. Charitable Contributions: If your business is a pass-through entity like an LLC or S corporation, you can deduct charitable contributions on your personal tax return. C corporations can deduct these directly from their business income.
9. Taxes: You can deduct various business-related taxes, including state and local sales taxes, property taxes, and excise taxes. Federal income taxes are not deductible for businesses.
10. Education Expenses: Expenses for education and training that maintain or improve skills needed for your current business are deductible. This does not include costs for training that qualify you for a new career or profession.
11. Advertising and Promotion: All ordinary advertising costs are deductible. This includes expenses for online ads, print media, promotional events, and giveaways.
12. Pass-Through Deduction: Owners of pass-through entities can deduct up to 20% of their net business income. This deduction applies even if you don’t itemize deductions but is subject to limitations based on your income and the nature of your business.
13. Employee Expenses: All costs related to employing staff, including salaries, benefits, and payroll taxes, are deductible. Benefits like health insurance provided to employees are also deductible.
14. Independent Contractors: Payments to non-employees for business services are deductible. This helps small businesses manage costs by hiring freelancers or consultants as needed.
15. Home Office: If you use part of your home exclusively for business, you can deduct a portion of home-related costs proportional to the size of your home office. This includes rent, mortgage interest, utilities, and repairs directly related to your office space

Essential Tax Deductions and Benefits for the Self-Employed

Maximizing tax deductions is crucial for self-employed individuals. This guide divides key deductions into the most critical ones and additional benefits, providing insight into claiming deductions to understand how to reduce tax burden effectively.

• Self-Employment Tax Deduction: You can deduct half of the self-employment tax (15.3%) you pay. This includes 12.4% for Social Security and 2.9% for Medicare. An additional 0.9% Medicare tax applies if your income exceeds certain thresholds.
• Home Office Deduction: If you use part of your home regularly and exclusively for business, you can deduct expenses related to this space. There are two calculation methods: the regular method (based on actual expenses) and the simplified option ($5 per square foot up to 300 square feet).
• Internet and Phone Bills Deduction: Deduct the business portion of your internet and phone bills. Ensure only to claim the costs directly related to your business activities.
• Health Insurance Premiums Deduction: Self-employed individuals can deduct premiums for health, dental, and qualified long-term care insurance for themselves and their dependents.
• Meals Deduction: Deduct 50% of meal expenses when traveling for business or entertaining clients. The cost must be considered reasonable and not extravagant.
• Travel Deduction: Business travel expenses that require overnight stays are deductible. This includes transportation, lodging, and meals. However, extravagant expenses are not deductible.
• Vehicle Use Deduction: Deduct costs when using your vehicle for business using either the standard mileage rate (67.5 cents per mile in 2023) or actual expenses based on the percentage of business use.
• Interest Deduction: Interest on business loans is deductible. If the loan was used for both personal and business expenses, only the business portion of the interest is deductible.
• Dues and Publications Deduction: Costs for business-related publications and membership dues for professional organizations are deductible. Expenses for general or recreational groups are not.
• Education Deduction: You can deduct education expenses if they are related to maintaining or improving skills required for your current business.
• Business Insurance Deduction: Premiums for business insurance, such as liability, fire, or vehicle insurance for business purposes, are deductible.
• Rent Deduction: Deduct rent for office space not located in your home, and any amounts paid for renting business equipment.
• Startup Costs Deduction: Deduct up to $5,000 in startup costs in the first year of business. This includes expenses for market research, travel, advertising, and professional fees.
• Advertising Deduction: Deduct expenses for advertising your business, including digital ads, billboards, and promotional materials.
• Retirement Plan Contributions Deduction: Contributions to SEP-IRAs, SIMPLE IRAs, and solo 401(k)s are deductible. This helps reduce your tax bill now while saving for retirement.
• Office Supplies Deduction: Deduct the cost of business supplies used within the tax year. This includes everyday items like paper, pens, and other office essentials.

Understanding Tax-Advantaged Accounts

Tax-advantaged accounts are special types of financial accounts that offer tax benefits, making them an effective tool for saving towards major life goals like retirement, education, or healthcare needs. These accounts can either reduce your taxable income through pre-tax contributions or allow your investments to grow tax-free, enhancing your ability to save.

Why Use Tax-Advantaged Accounts?

These accounts are designed to encourage saving by minimizing your tax burden. The main benefits include:

• Pretax Contributions: Reduce your taxable income for the year, lowering your overall tax bill.
• Tax-Deferred or Tax-Exempt Growth: Either delay paying taxes on earnings until you withdraw them or avoid paying taxes on gains altogether.

Types of Tax-Advantaged Accounts

Here are some common types of tax-advantaged accounts that can help you save money and grow your investments:

1. 401(k)s and Other Employer-Based Retirement Plans: These are retirement savings plans sponsored by employers. Common types include 401(k), and 403(b) typically used by non-profit organizations, and 457 plans used by government employees.
   • How they work: You contribute a portion of your salary to these plans before taxes are deducted (traditional plans), which reduces your taxable income and, therefore, your tax bill each year.
   • Benefits: Many employers offer to match a portion of your contributions, essentially providing free money to boost your retirement savings. While traditional plans defer taxes until you withdraw funds in retirement, Roth 401(k) options allow for tax-free withdrawals, as contributions are made with after-tax money.
2. Individual Retirement Accounts (IRAs): IRAs are personal retirement savings accounts that are available to anyone with taxable income.
   • Types:
     • Traditional IRAs let you make tax-deductible contributions, with taxes deferred until you take distributions in retirement.
     • Roth IRAs involve contributions with after-tax dollars, but withdrawals of both contributions and earnings are tax-free in retirement, provided certain conditions are met.
   • Benefits: IRAs offer a flexible way to save for retirement with significant tax advantages, including a wide range of investment options not typically available in employer-sponsored plans.
3. 529 Educational Plans: These are tax-advantaged savings plans administered by states to encourage saving for future education costs.
   • How they work: Contributions grow tax-free and withdrawals are also tax-free when used for qualified educational expenses, including tuition, room and board, and other related costs.
   • Benefits: Although contributions are not federally tax-deductible, many states offer tax incentives such as deductions or credits on state income tax. Originally designed for college expenses, many plans now also cover expenses for K-12 and postgraduate studies.
4. Coverdell Education Savings Accounts (ESAs): Coverdell ESAs are tax-advantaged accounts that help families save for education expenses.
   • How they work: Like 529 plans, the money grows tax-free and withdrawals used for qualified education expenses are also tax-free. Unlike 529 plans, contributions to Coverdell ESAs are not tax-deductible and there are lower contribution limits and income restrictions on who can contribute.
   • Benefits: They offer more flexibility than 529 plans in terms of investment choices and can be used for a wider range of educational expenses, including tuition for private K-12 schools.
5. Health Savings Accounts (HSAs): HSAs are savings accounts available to individuals enrolled in high-deductible health plans (HDHPs).
   • How they work: Contributions are made with pretax dollars, reducing your taxable income. The funds can be invested and grow tax-free. Withdrawals for qualified medical expenses are tax-free, making HSAs a triple tax-advantaged account.
   • Benefits: HSAs are an excellent way to save for future healthcare costs while reducing current taxable income. Unlike flexible spending accounts (FSAs), HSAs do not have a “use it or lose it” policy, allowing funds to roll over year after year.

Each of these accounts has its own specific rules and benefits, making them valuable tools for financial planning. Whether saving for retirement, education, or healthcare, these tax-advantaged accounts can help maximize your savings and minimize your taxes.

Charitable Giving and Tax Benefits: How to Maximize Your Contributions

Charitable giving does more than just help worthwhile causes; it can also provide valuable tax benefits that enhance the impact of your donations. Explore the information below to discover what are the tax benefits of giving and how to maximize the effectiveness of your charitable contributions while following IRS rules.

Choosing the Right Organization to Donate To

• Qualifying Organizations: Only donations made to organizations with 501(c)(3) status qualify for a tax deduction. These include religious groups, educational institutions, public parks, and organizations like the Red Cross.
• Verification: Before donating, confirm the charity’s 501(c)(3) status through the IRS Exempt Organizations Select Check tool to ensure your donation will be tax-deductible.
• Non-Deductible Gifts: Donations to individuals, such as gifts to family or friends, do not qualify for tax deductions and may be subject to gift tax if above certain thresholds.

Documenting Your Donations

• Keep Records: For any monetary donations, retain a bank or credit card statement, a receipt from the charity, or a canceled check. For payroll deductions, keep your W-2 or pay stubs that itemize the donation.
• Special Documentation:
  • Donations Over $250: Obtain a written acknowledgment from the charity detailing the amount given and any goods or services received in return.
  • Noncash Donations Over $500: Complete IRS Form 8283, and if your total noncash donations exceed $5,000, attach an appraisal to the form.

Deductions for Volunteering

• What You Can Deduct: While you can’t deduct the value of your time, you can deduct out-of-pocket expenses related to volunteering that are not reimbursed by the charity. This includes costs like gas or supplies used directly for charitable work.
• Mileage Deductions: You can deduct mileage driven for charitable activities either by documenting actual expenses or using the standard mileage rate set by the IRS.

Timing Your Donations

• Deadline: Donations must be made by December 31st of the tax year for which you want to claim the deduction. The IRS determines the donation date based on:
  • Checks: The date the check is mailed.
  • Credit Cards: The date the charge is processed.
  • Stocks and Options: The date they are transferred or exercised by the charity.

Claiming Your Tax Deduction

• Itemizing Deductions: To claim any tax deductions for donations, you must itemize your deductions using Schedule A on your tax return. This involves more detailed accounting and may require more complex tax preparation.
• Standard vs. Itemized Deductions: Compare your standard deduction with your total itemized deductions. If the standard deduction is higher, it might be more beneficial financially to opt for it instead of itemizing.

SWAT Advisors also offers succession planning and family tax office services to optimize your broader financial strategies. These additional services are available to help manage and optimize your broader financial strategies.

Stay Compliant with Tax Regulations and Laws

To ensure you’re following tax rules, keep careful records of what you earn and spend. Filing your taxes accurately and on time is crucial to steer clear of any penalties. This blog is all about finding ways to pay fewer taxes and gain more benefits. But don’t forget, it’s crucial to update your tax plan as tax laws and your life change. If you need assistance with this or anything else, remember we’re here to help.

In addition to assisting with strategies to minimize your tax burdens, we also offer services like CFO Services, Tax Planning in California (and beyond), Advanced Tax Planning, and Life Insurance Planning.