📝 Tax Tips & Strategies

As December approaches, there are several tax-saving strategies you can implement:

• Maximize your 401(k) contributions up to the $23,500 limit (2025)

• Consider Roth IRA conversions if you're in a lower tax bracket this year

• Harvest investment losses to offset capital gains

• Make charitable donations before December 31st

• Consider bunching itemized deductions into one year

• Review your HSA contributions and maximize if possible

• Pay deductible expenses like property taxes early if beneficial

Many people confuse marginal and effective tax rates. Here's the difference:

• Marginal Tax Rate: The rate you pay on your last dollar of income

• Effective Tax Rate: Your total tax divided by total income

Example: If you're single earning $80,000:

• Your marginal rate might be 22%

• But your effective rate is much lower (around 12-15%)

This happens because of the progressive tax system - you pay lower rates on the first portions of your income.

Pre-tax contributions are one of the most powerful tax-saving tools available:

401(k) Benefits:

• Reduces current taxable income dollar-for-dollar

• Tax-deferred growth until retirement

• Many employers offer matching contributions

HSA Triple Tax Advantage:

• Tax-deductible contributions

• Tax-free growth

• Tax-free withdrawals for medical expenses

Example: Contributing $20,000 to 401(k) in the 24% bracket saves $4,800 in taxes immediately.

State income taxes vary dramatically across the US:

No State Income Tax:

• Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming

• New Hampshire (only taxes dividends/interest)

High State Tax States:

• California (up to 13.3%)

• New York (up to 10.9%)

• Hawaii (up to 11%)

Consider Before Moving:

• Overall cost of living differences

• Property tax rates

• Sales tax rates

• Quality of life factors

For high earners, state tax savings can be substantial, but evaluate the complete picture.

Choosing between Traditional and Roth depends on your current vs. future tax situation:

Choose Traditional 401(k)/IRA when:

• You're in a high tax bracket now

• You expect lower taxes in retirement

• You want immediate tax deduction

Choose Roth 401(k)/IRA when:

• You're in a low tax bracket now

• You expect higher taxes in retirement

• You want tax-free retirement income

Many experts recommend a mix of both for tax diversification in retirement.

2025 Roth IRA contribution limits: $7,000 ($8,000 if 50+)

Tax Credits vs. Deductions - know the difference:

Tax Deductions:

• Reduce your taxable income

• Value depends on your tax bracket

• $1,000 deduction saves $220 if you're in 22% bracket

Tax Credits:

• Reduce your tax owed dollar-for-dollar

• $1,000 credit saves $1,000 in taxes

Major Tax Credits:

• Child Tax Credit: Up to $2,000 per child

• Earned Income Tax Credit (EITC)

• American Opportunity Education Credit

• Retirement Savings Contribution Credit

Credits are generally more valuable than deductions!

If you have self-employment income, consider these strategies:

Business Deductions:

• Home office expenses

• Business equipment and supplies

• Professional development and training

• Business meals (50% deductible)

• Vehicle expenses (actual cost or mileage method)

Retirement Planning:

• Solo 401(k): Contribute up to $69,000 (2025)

• SEP-IRA: Up to 25% of income

Quarterly Estimated Taxes:

• Required if you owe $1,000+ in taxes

• Due dates: Jan 15, Apr 15, Jun 15, Sep 15

Keep detailed records and consider business entity election for tax optimization.