Tax season doesn’t have to be the only time you think about taxes. Proactive tax planning throughout the year with the help of your wealth advisor and tax professional can ensure that you’re managing your investments and retirement withdrawals in the most tax-efficient way. Here are several strategies you can consider well ahead of tax time to help optimize your financial situation.

Understanding Tax Deductions: Above-the-Line vs. Below-the-Line

One of the first steps in tax planning is understanding the different types of deductions available to you. “Above-the-line” deductions, also known as “adjustments to income,” directly reduce your total income, lowering your adjusted gross income (AGI) and ultimately, your taxable income. These deductions appear above the line on tax forms, where AGI is calculated.

On the other hand, “below-the-line” deductions, also called itemized deductions, are subtracted from your AGI to determine your taxable income. However, these deductions can only be claimed if you choose to itemize and if the total amount exceeds the standard deduction. For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. The standard deduction is slightly higher for those over 65.

Key Above-the-Line Deductions to Consider

Health Savings Accounts (HSAs)
HSAs are a great example of an above-the-line deduction. These accounts, which must be paired with a high-deductible health insurance plan, offer triple tax benefits. Contributions are deducted from your taxable income, while interest, dividends, and capital gains grow tax-free, and withdrawals used for qualified medical expenses are also tax-exempt. If you don’t need to use your HSA funds right away, they can compound tax-free for years to come. For 2023, you can contribute up to $3,850 for self-only coverage and up to $7,750 for family coverage. Those over 55 can contribute an additional $1,000 as a catch-up contribution. After age 65, HSA funds can be used for any purpose, not just medical expenses.

Traditional IRAs
Contributions to traditional IRAs are another form of above-the-line deduction, which can help reduce your taxable income. The maximum contribution for 2023 is $6,500, or $7,500 if you’re 50 or older. However, the deduction you can claim depends on your income and whether you or your spouse are covered by a workplace retirement plan. For example, single filers with income above $83,000 or married couples earning over $136,000 may face limitations on their deductions.

401(k) Contributions
Another highly effective tax-saving strategy is contributing to a 401(k) or other qualified retirement plans, such as a 403(b) or 457 plan. Contributions to these plans reduce your taxable wages, with a contribution limit of $22,500 for 2023. For those 50 and older, catch-up contributions allow an additional $7,500, bringing the total limit to $30,000. Maximizing your contributions, even beyond any employer match, is a great way to save for retirement while reducing your current taxable income.

Charitable Giving Strategies for Tax Savings

Donating Appreciated Assets
While cash donations are the most common form of charitable giving, donating appreciated assets—such as stocks, real estate, or artwork—can provide even greater tax savings. You’ll receive a deduction for the full market value of the asset, and if the asset has been held for over a year, it won’t be subject to capital gains taxes.

Donor-Advised Funds (DAFs)
If you want to give strategically, setting up a Donor-Advised Fund can be a great option. By donating assets to a DAF, you get an immediate tax deduction for the year of the donation, and you can choose to disburse funds to qualified charities over time. This strategy is particularly useful in years when you want to maximize your charitable contributions for tax purposes.

Qualified Charitable Distributions (QCDs)
For those aged 70½ or older, QCDs allow you to transfer up to $100,000 from your IRA directly to a charity, without the amount counting toward your taxable income. This can save significant amounts in taxes each year, and the distribution will also count toward your required minimum distribution (RMD).

Additional Tax-Saving Opportunities

Mortgage Interest Deductions
If you own a home, mortgage interest deductions can help reduce your taxable income. Married couples can deduct interest on mortgages up to $750,000. Making an extra payment on your mortgage before the end of the year, if your lender allows it, can also help maximize this deduction.

Investment Interest Expenses
If you’ve borrowed money to invest, you may be able to write off the interest you paid on those loans. This includes margin interest or other fees related to investment borrowing. However, these deductions are capped at the amount of investment income you’ve earned in the year.

Deferring or Accelerating Income

Managing the timing of your income can also have a significant impact on your tax situation. For instance, if you expect a decrease in income next year, you might choose to defer any compensation or bonuses until then to avoid a large tax burden this year. Alternatively, if you anticipate higher earnings next year, it may be beneficial to accelerate income into the current year to avoid paying taxes at a higher rate.

Final Thoughts

Proactively planning for taxes year-round can help you take full advantage of available deductions and strategies to reduce your tax liability. Whether it’s making contributions to retirement accounts, donating appreciated assets, or strategically timing your income, these tactics can ensure that you’re managing your finances in the most tax-efficient way possible. Be sure to consult with a wealth advisor and tax professional to tailor your tax strategy to your specific situation.