Let's be real—tax season isn't exactly a time most of us look forward to. The mere thought of going through stacks of paperwork and trying to understand complex tax laws is enough to make anyone's head spin. But here's the good news: with the right strategies and expert guidance, you can easily tackle this challenging task and may even come out ahead.

In this article, we’ll share some tax tips to help you make the most of your financial opportunities and ease the stress of tax season.

1. Turn Losses into Gains with Tax-Loss Harvesting

Nobody likes losing money on investments, but using tax-loss harvesting, such losses can work to your advantage come tax time. This strategy involves selling investments that are currently in the red to offset profits from winning investments. 

Here’s an example: 

• Bob purchases stock A for $20,000 and sells it for $25,000, resulting in a $5,000 capital gain. 

• Bob also purchases stock B for $20,000 but sells it for $15,000, resulting in a capital loss of $5,000.

Bob can use his $5,000 capital loss to offset his $5,000 capital gain at tax time fully. Alternatively, if he holds onto stock A and only sells stock B, he can apply the $5,000 capital loss to offset part of his income or carry it forward to future tax years. However, only $3,000 of the loss can be used to offset earned income in a single year, with the remaining balance carried forward, up to $3,000 per year, until fully utilized.

Money gained from such stock sales can then be reinvested if they adhere to the  "wash sale" rule. This rule states that you can’t use money from a capital loss and immediately (within 30 days before/after the sale) reinvest it in the same or substantially identical security. 

Tax-loss harvesting can be a powerful strategy for managing your current and future tax bills. Still, it should be executed with a clear understanding of the rules, benefits, and long-term impact on your investment portfolio. Always consult a financial advisor to ensure this strategy aligns with your long-term financial goals.

2. Take Your Required Minimum Distributions (RMDs)

Once you turn 73, you need to start taking required minimum distributions (RMDs) from your retirement accounts, such as traditional IRAs, SEP IRAs, SIMPLE IRAs, and retirement plan accounts, such as 401(k) and profit-sharing plans. Failing to take these withdrawals can result in a hefty penalty —25% of the RMD amount that wasn’t withdrawn, although it can be reduced in some cases.

For those still working and participating in a workplace retirement plan, you can delay your RMDs until the year you retire unless you own more than 5% of the business sponsoring the plan. This rule allows for flexibility in managing your retirement income and tax burden.

Putting RMDs on your calendar yearly ensures you stay compliant and avoid penalties. If you're uncertain about the amount you need to withdraw, a financial advisor can help you calculate your RMDs and integrate them into your overall financial strategy, ensuring you meet the requirements without any surprises at tax time.

3. Give Back and Get a Tax Break

Charitable giving can be a rewarding way to reduce your tax bill. You can leverage donations to offset your taxes or income in several ways. 

• Directly offset your income when you itemize your taxes

• Use donor-advised funds to make a large donation, claim the tax deduction, and then distribute the funds over several years 

• Cover your RMD using a qualified charitable distribution (QCD) without increasing your taxable income

• Donate a mix of cash, assets, and securities to maximize your tax benefits in a single year

• When rebalancing your portfolio, donate stock that would otherwise come with a high capital gains tax bill

• Offset large influxes of cash from selling a business or receiving an inheritance with substantial donations that you can carry forward for up to 5 years

When looking for the right strategy to balance charitable giving and tax deductions, it's important to touch base with your financial advisor to avoid costly missteps. 

4. Adjust Your Withholdings to Avoid Surprises

It's a good idea to periodically check your tax withholdings to avoid unexpectedly owing more taxes. Using the IRS’s tax withholding estimator can help you adjust your W-4 with your employer to avoid underpayment penalties or decrease your withholding to eliminate receiving a large refund. The goal is to owe the IRS nothing at tax time and receive nothing (or very little) back, allowing you to utilize your money better throughout the year.

5. Max Out Those Retirement Contributions

Contributing to retirement accounts such as a traditional IRA or 401(k) helps you save for the future and provides immediate tax benefits. These contributions can reduce your taxable income, lowering your overall tax bill. They also allow taking advantage of free money through employer contributions.

You can also consider contributing to a Roth IRA, where your investments grow tax-free and withdrawals during retirement are also tax-free. However, note that contributions to a Roth IRA do not provide an immediate tax deduction since they are made with after-tax money.

6. Make the Most of Health Savings Accounts (HSAs)

Health savings accounts (HSAs) offer a triple tax advantage: contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are tax-free. For individuals with high income or significant healthcare costs, utilizing an HSA can result in substantial tax savings. Once you reach age 65, you can use the funds for any reason without penalty, but be aware that you’ll pay income tax on withdrawals that aren’t used for qualified medical expenses, similar to a 401(k) or IRA. 

A financial advisor can provide guidance on HSA contribution limits, investment choices, and proper disbursement tracking. 

7. Use the Annual Gift Tax Exclusion to Your Advantage

If you’re in a position to give, take advantage of the annual gift tax exclusion. For 2024, you can give up to $18,000 per person annually without incurring gift taxes. This is a great way to reduce your taxable estate and pass wealth to loved ones. 

You can continue to give in excess of $18,000, but you’ll want to track your gift not to exceed your lifetime limit. A financial advisor can work with you to determine how much to gift and when to limit your tax bill.

8. Keep Track of Your Medical Expenses

If medical expenses exceed 7.5% of your adjusted gross income, you can deduct the amount surpassing this limit. This includes payments for doctor visits, surgeries, prescription medications, and even premiums for long-term care insurance. Keeping detailed records of these expenses can help you claim these deductions and lower your taxable income.

9. Be Strategic with Your Income

Understanding your tax bracket can help you make strategic financial decisions. For example, if you’re approaching the top of your tax bracket, consider deferring income or maximizing deductions to avoid moving into a higher tax bracket. Correctly timing the sale of investments, bonuses, or large purchases can greatly affect your tax liability. Your financial advisor can help you expertly manage your income, investments, and assets for the best tax benefit.

The Aligned Perspective: Financial Advisor Tips to Simplify Your Tax Season

Understanding tax laws and optimizing your tax strategy can be complex. A knowledgeable financial advisor can provide tax planning strategies and tailored advice to fit your unique financial situation. They can help you take advantage of tax deductions and credits, plan for future tax liabilities, and ensure you comply with all tax laws. 

Taxes don’t have to be a dreaded annual ordeal. You can significantly reduce your tax bill with proactive tax planning and the right strategies. Ready to take control of your taxes? Start today and make your financial goals a reality.

Simple, strategic, and designed to give you clarity as you grow.