Low-Hanging Fruit Tax Planning Strategies

Strategies to Reduce Your Tax Bill

Tax season is a stressful time of year. Until your return is complete, you can never be sure whether or not you owe the IRS money. Strategizing your tax strategy ahead of time will do a lot to alleviate this worry. Read on to learn more about maximizing your tax benefits through smart planning.

Tax Preparation vs. Tax Planning

Most people are familiar with tax preparation because filing your taxes is the law, but it’s only one half of the equation. The other half is called tax planning — a process that can save you a lot of money over time. To understand why you should engage in tax planning, let’s further delineate it from tax preparation.

Tax preparation includes gathering your tax documentation and filling out and completing the proper return paperwork required by the IRS. Accuracy is of the utmost importance, as errors can trigger costly and stressful audits. Consequently, many rely on an accountant or another tax professional to do their taxes, as these individuals are fluent in tax law and IRS regulations.

Your accountant or tax specialist will be able to answer most questions you have about the filing process itself, help you find deductions and credits you may have missed, and offer advice on savings tactics. However, they may not be able to help you devise an overall tax strategy to help you save more in the long term.

This is not because they don’t want to see you do well — it’s just that creating a comprehensive strategy requires much more time, research, and attention than filling out forms. Whereas tax preparation involves looking backward, tax planning involves looking ahead.

Tax planning is the process of creating a comprehensive financial strategy for minimizing your future tax burden through forward-thinking tax strategies and healthy financial habits. Your financial vision comes first when tax planning. You assess your entire financial landscape — including your debts, assets, and goals — to help shape your future trajectory. This process will require you to meet with your financial advisor many times throughout the year to establish your financial goals and the steps you must take to reach them.

Tax planning occurs more frequently than tax preparation every April; rather, it is an ongoing process that shifts as you change and grow. Tax planning encourages you to be proactive about your finances and what you want to achieve in your life.

A happy side effect of tax planning is that you will also be more prepared to file your taxes. You’ll have a better idea of what to expect in terms of your income and deductions, helping you to address any potential problems earlier.

Tax planning strategies include:

  • Contributing to retirement accounts

  • Converting to a Roth IRA

  • Maximizing charitable giving

  • Diversifying savings channels

  • Understanding tax-loss harvesting

  • Accelerating expenses

  • Knowing your risk tolerance and assessing your portfolio

This list is merely a sampling of the many elements involved in tax planning, and a financial advisor will be able to provide careful and specific advise best suited to your individual circumstances.

Now, let’s look closer at some tax-efficient ways in which you can plan for the future.

Tax-Efficient Financial Planning Ideas

Tax-efficient financial planning strategies aim to reduce your taxable income and help you save for future goals and expenses. There are savings accounts for a variety of different goals that do both. Here are a few goals and the savings plans best suited to each.

Goal: Plan for Retirement

The government wants people to be able to afford retirement — as a result, retirement accounts provide you with various tax advantages.

Workplace retirement plans, such as 401(k)s, take contributions out of your paycheck before calculating taxes, reducing your taxable income. This money is then invested in your choice of the plan’s investment options so that your money can grow.

Plus, many employers will match your contributions up to a specific percent of your salary (usually 6%), called an employer matching bonus. Like your contributions, matching bonuses avoid taxes.

For example, let’s say your salary is $120,000 per year, and your employer matches 401(k) contributions up to 6% of your salary. That means your employer will put up to $8,400 per year in pretax funds into your 401(k) without any additional work from you.

For 2023, the IRS allows you to contribute up to $22,500 per year to workplace plans ($30,000 per year if you’re 50 or older). Hitting that maximum each year puts you in a fantastic financial position for retirement.

401(K) Plan True-Ups

A true-up is a provision in some plans that requires the employer to make an additional end-of-year contribution to an employee's account if the employee hasn't received the full match they were entitled to under the terms of the plan. For example, let's say an employee's 401(k) plan has a 50% match up to 6% of salary. If the employee contributes $10,000 to their 401(k) for the year, they should receive a matching contribution of $5,000.

However, if the employee reaches the annual contribution limit of $22,500 before they have contributed 6% of their salary, they will not receive the full $5,000 match. With a true-up provision, the employer would make an additional $1,500 contribution to the employee's account at the end of the year to ensure that they receive the full match they were entitled to.

Not all 401(k) plans have a true-up provision, and even if they do, not every employee will receive one. The provision is typically only available to employees who contribute a significant portion of their salary to their 401(k) plan. True-ups can be a valuable way to ensure that employees receive the full match they are entitled to. However, they can also add complexity to the administration of a 401(k) plan, so employers should carefully consider whether or not to offer them.

Now, workplace plans tend to offer limited investment choices. Whether your plan’s options suit your tastes and you’re maxing out your 401(k), or you’re dissatisfied and only hitting the employer match limit for the free money, you’ll want to look outside of your employer for more retirement tax savings.

Individual Retirement Accounts (IRAs) are tax-advantaged retirement plans that you can open outside of your employer at any broker. Unlike workplace retirement plans, IRAs let you choose nearly any type of investment. There are two types of IRAs: traditional IRAs and Roth IRAs.

Traditional IRA contributions are tax-deductible, meaning that you can subtract the amount you contribute from your gross income when you file your taxes. This can lower your taxable income and reduce your tax bill. For example, if you contribute $6,500 to your traditional IRA in 2023, you can deduct that amount from your 2023 gross income. This could save you hundreds or even thousands of dollars in taxes.

On the other hand, Roth IRAs are tax-advantaged upon withdrawal. Unlike workplace retirement plans and traditional IRAs, you must use after-tax dollars to contribute to your Roth IRA. However, when the time comes to withdraw from your Roth IRA, you’ll have paid the taxes ahead of time and will not need to pay taxes again.

Picking the best IRA for you requires you to plan your income and potential tax burden in retirement. If you expect to be in a lower tax bracket in retirement, a traditional IRA might be your best option. You’ll lower your current tax bill now and pay less in taxes during retirement. However, if you think you’ll be in the same tax bracket or higher in retirement, a Roth IRA could make more sense — you can settle your taxes now when you earn less, then avoid taxes when you earn more

Goal: Prioritize Your Health

Medical expenses can throw a wrench in an otherwise airtight financial plan. Health Savings Accounts (HSAs) can help. HSAs are savings accounts designed to help you save for medical expenses. You can enroll in an HSA through a High Deductible Health Plan (HDHP), a type of health insurance plan that charges low premiums but a high deductible.

HSAs have what is called a “triple tax advantage,” meaning contributions are pretax, your money grows tax-free, and withdrawals don’t incur taxes — as long as you use them to pay for qualifying medical expenses.

Qualifying medical expenses include things such as cold and flu medicine, first aid supplies, copays for doctor visits for you and your family, hospital bills, eyeglasses, and more. With an HSA, the funds in the account roll over from year to year, so you’re able to constantly grow a dedicated fund for unexpected medical expenses.

HSAs can also be used to prepare for rising health care costs in retirement. Medicare may not entirely cover your care in some cases, but a well-funded HSA can fill that gap.

Goal: Focus on Education

If private school is in your children’s future, or if you’d like to help cover the cost of their college education, consider a 529 plan. 529 plans are dedicated savings accounts for education expenses, helping you and your child avoid student loan debt.

Although you can’t fund 529 plans with pre-tax money, your contributions grow free from federal and state taxes. Your earnings won’t be taxed if you spend them on qualifying education expenses, such as tuition, fees, and textbooks.

With that said, many states let you deduct your contributions for state tax purposes if you invest in their state-sponsored plan.

Additionally, family members and friends can contribute to the plan without incurring gift taxes — regardless of who opened the account — as long as their contribution meets certain thresholds.

Investing for tax benefits doesn’t have to stop once you’re reaching your goals with these accounts. By putting your money into a taxable investment account, you can take advantage of lower tax rates when you sell your investments later down the road.

Capital Gain/Loss Planning

Timing the sale of your capital assets is vital. If you sufficiently fund a taxable investment account over your career, you can derive much of your income from long-term capital gains later in life and decrease your tax bill.

Capital losses are the other side of the equation. You incur a capital loss when you sell for less than your cost basis. The IRS lets you write off up to $3,000 per tax year ($1,500 if married but filing separately) in capital losses against your capital gains, reducing the net capital gains reported on your return. If you have more than $3,000 in capital losses for a year, you can carry that over to subsequent years until you’ve “used up” the loss.

Plan Bonuses Wisely

Work bonuses are income — called “supplemental income” — which means the IRS would like a piece. Fortunately, the IRS also provides you with two ways to withhold bonuses from your taxes.

The Percentage Method vs. The Aggregate Method

The Percentage Method is used when your employer pays your bonus separately from your wage. Under this method, your bonus is taxed at a flat 22% tax rate. If you earned a $500 bonus, the IRS gets $110 of that. Employers favor this method due to its simplicity.

The Aggregate Method is more complex, used when your employer tacks your bonus onto your last paycheck. Under this method, you add your bonus to your regular wage and determine your tax rate using the IRS withholding tables. Then, you subtract your normal withholdings from that amount. Your bonus withholdings are the difference between the bonus amount and the normal withholding amount.

Unless you’re below the 22% tax bracket (meaning you earn $39,475 or less if single), then the Aggregate Method will cost you more in taxes. If you’re in the 37% bracket, you’d rather pay 22% on your bonus using the Percentage Method than 37% using the Aggregate Method.

If your bonus will put you in a higher tax bracket this year, and you expect to earn less next year — perhaps you’re in your last year before retirement — you can ask your employer to defer your bonus until next year.

High Dollar Bonuses (Bonuses Greater Than $1 Million)

Executives of large companies often earn bonuses exceeding $1 million. The IRS automatically taxes any portion of a bonus exceeding $1 million at 37%.

For example, if you earned a $1.5 million bonus, the first $1 million can be taxed at 22% under the Percentage Method. The excess $500,000 would be taxed at 37% automatically, meaning $185,000 in withholdings.

Non-Cash Bonuses

Employers like to gift items to staff — such as an expensive bottle of wine or a watch — instead of cash as bonuses. Sometimes, the IRS considers these items to be “de minimis fringe benefits,” meaning they’re too insignificant to tax. The IRS has various rules that these items and the situations in which they’re gifted must meet to avoid taxes, though.

Non-cash bonuses are most common during the holiday season. Fortunately, the IRS considers holiday gifts to be de minimis fringe benefits, so you probably won’t owe extra if the company gifts you some holiday spirits at the holiday party.

Remember Your Values

Although it can be tempting to max out your contributions to all of your tax-efficient accounts, contributing without a purpose rarely makes sense. Instead, you should determine your financial goals and prioritize accounts accordingly. For example, if you’re concerned that you won’t have enough money for retirement, max out your workplace plan and IRA before saving for your child’s education in a 529 plan.

Those are just a few strategies. A financial planner can help you pick the best accounts and allocate the right amount of money to each so that you can meet your financial goals and cut your future tax bill

If you received a tax refund this year, you could use it to get a head start on some of your goals today. Read the next section to learn more.

How to Use Your Tax Refund

With the average tax refund being just under $3,000, many people are tempted to spend it right away. Instead, you should use yours to improve your finances and work towards your goals. Here are eight ways you can do so.

Improve Your Home

Use your tax refund to make home repairs or improvements that you’ve been putting off. Not only will your home be a more inviting place to live, but it may also increase in value. The extra equity you gain through a home improvement can come in handy. You can borrow against it if need be, and if you do eventually sell the home, you could increase your profit — money you can use to buy a better home or save for the future.

Pay Down Your Debt

Building wealth isn’t easy when you owe large sums of money. Use your tax refund to chip away at your debts. On top of letting you keep more of your paycheck, reducing most of your debts will improve your credit score.

Interest is the silent killer here, so start with your highest-interest debts first — these would be any credit cards or personal loans. If you have any leftover refund after tackling those, move on to any car loans you may have. Most cars are depreciating assets, so you don’t want to owe more than the car is worth.

Mortgages and student loans can come last. Both types of loans tend to have low interest rates, and you can almost think of them of as investments — a mortgage buys you a property that can appreciate, while your student loans gain you an education that you can leverage for income. Plus, having some forms of manageable debt contributes to a higher credit score. Lenders want to see that you use some credit, but not too much.

If you don’t have many debts, then you’ll want to put money away for a rainy day.

Create an Emergency Fund

Car accidents, unexpected medical bills, and other tragic events can wreak havoc on your finances if you’re not prepared. Consider using your tax refund to create an emergency fund that you can rely on should the unexpected occur.

Aim to save three to six months of expenses in your emergency fund. Your refund likely won’t cover that entire amount, but it can accelerate the process.

As for where to put your emergency fund, open a high-yield savings account or money market account. Your fund will earn a decent interest rate in either of these accounts when you don’t need it — and you hopefully won’t need it often, helping you to earn more. You can use these earnings to either bolster your fund or invest elsewhere.

Should you ever need your money, however, it’s easy to make withdrawals from high-yield savings and money market accounts.

Do you already have an emergency fund? You’re prepared to continue building wealth as usal, even if tragedy strikes.

Fund Your Tax-Advantaged Accounts

Get a head start on your contributions to your tax-advantaged accounts with your tax refund.

Perhaps you have an IRA. You could max it out early and take advantage of market gains throughout the year. Or, maybe you’ve been waiting to open a 529 plan. Your refund could kickstart your child’s education savings.

Maybe you\’re certain you’ll earn enough income this year to max your accounts, though. If so, you can invest your money in a taxable investment account.

Invest in a Taxable Brokerage Account

Taxable investment accounts are an option for investing cash left over after reaching your other goals. As mentioned earlier, you could save a lot on taxes in retirement through long-term capital gains on your investments.

Start Saving for Large Purchases

Planning on buying a house in the future? Need a new car soon? Put your refund towards a down payment on a large purchase. High-yield savings accounts are an excellent choice because of their safety, liquidity, and interest rates.

Alternatively, if you have a higher risk appetite and you’re flexible about your purchase date, you could use a taxable investment account to see better gains. Always be aware of the risks of investing, though.

Donate to Charity

Donate your check from the IRS to a cause you support. You’ll be doing social good, but you may also be able to write off your donation on next year’s taxes if you keep the receipts.

Invest in Yourself

Use your refund to invest in yourself. Perhaps you take a class that teaches you skills you can use to increase your salary or land a better job. Or maybe you take a course on how to do repairs around the house, saving you money on hired handymen in the future.

By using your tax refund for any of these purposes, you’ll put yourself ahead of the pack and ensure progress towards your goals.


Tax refunds are better than tax payments, but they’re not ideal. Overpaying to avoid underpayment penalties — fees the IRS charges if you fail to pay sufficient tax throughout the year — may seem like the safe option, but you’re giving the government an interest-free loan. Think of it as an investment that earns you no returns.

Tax planning is how you direct that money towards investments that provide higher returns. By working with a financial planner, you can create a long-term plan that puts you on track to meet your goals while giving less to Uncle Sam. Once your financial accounts are well-funded and growing, you’ll hardly care that the government no longer sends you money every spring.