This article originally appeared on Thrivent.com and is sponsored here with permission by Nate Heeg, Thrivent Advisor based in Marshfield, WI
MARSHFIELD, WI (OnFocus) – Steer clear of costly tax pitfalls by knowing what to watch for. Discover how to unlock valuable deductions, claim key credits, and streamline your approach to tax season.
Key Takeaways
- Maximizing tax-advantaged accounts and leveraging charitable contributions can help you manage your taxable income.
- Don’t miss out on valuable tax credits like the Earned Income Tax Credit, Child Tax Credit, and Saver’s Credit to reduce your tax liability.
- Maintaining accurate documentation for at least seven years helps protect you in case of an audit.
- Avoid common tax errors by using tax software, getting help from a tax pro, and reviewing all your information before submitting.
Tax season can feel like navigating a maze. Without a good map, you can get lost, potentially resulting in overpaying taxes or, worse, owing penalties for mistakes.
While most people aim to pay what they owe—no more and no less—the tax system’s complexity often leads to missed opportunities to build tax efficiency into your financial strategy. From forgotten deductions to overlooked tax credits, even minor tax mistakes can add up and impact your financial health in ways you might not realize.
3 Tips for Optimizing Your Income Taxes
When preparing your income tax return, consider these tax strategies to minimize your tax liability: reducing taxable income, maximizing tax deductions and credits, and having the right documentation in place. Following these tax planning tips helps to ensure you won’t pay more than you need to come tax season.
1. Reduce Your Taxable Income
In the U.S., income is taxed in brackets. Taxpayers who have lower income levels are taxed at lower rates while higher-earning taxpayers are charged higher rates. Projecting which tax bracket you’ll be in helps you identify opportunities to reduce your taxable income, potentially lowering your overall effective tax rate.
Common Pitfalls & Tips for Managing Taxable Income:
Maximize Tax-Advantaged Savings Accounts
Tax-advantaged accounts usually reduce your taxable income. Typically, accounts fall into three categories: tax now, tax later, and tax never.
- Tax now: You pay taxes upfront on accounts like checking and savings accounts, certificates of deposit (CDs), mutual funds, and U.S. treasuries.
- Tax later: Employer-sponsored retirement plans like 401(k)s and 403(b)s, traditional IRAs, and annuities allow tax-deferred growth until withdrawal.
- Tax never: Roth IRAs, Roth 401(k)s, Health Savings Accounts (HSAs), and 529 plans allow tax-free growth and withdrawals for qualifying expenses.
Don’t Overlook Interest Income
The interest earned on savings accounts, CDs, and bonds is taxable if held in a taxable account. Even small amounts of unreported interest can lead to audits or penalties.
Manage Your Market Investments
- Capital Gains Taxes: Short-term capital gains are taxed at higher rates than long-term gains.
- Tax-Loss Harvesting: You may be able to offset capital gains with capital losses.
Make Charitable Contributions
- Donate Appreciated Assets: Giving stock to charity allows you to deduct the market value without paying capital gains tax.
- Make a Qualified Charitable Distribution (QCD): If you take a required minimum distribution (RMD) from your IRA, donating it directly to a qualifying charity can reduce taxable income.
2. Take Advantage of Tax Credits & Deductions
Tax credits and deductions are powerful tools for reducing your tax liability, but they work differently:
- Tax deductions lower your taxable income.
- Tax credits directly reduce the taxes you pay dollar for dollar.
Common Tax Credits & Deductions to Remember:
- Earned Income Tax Credit: Benefits low- to moderate-income workers.
- Child Tax Credit: Available to parents of dependents under age 17.
- Saver’s Credit: Encourages retirement savings.
- American Opportunity Tax Credit: Available for higher education expenses.
3. Be Diligent with Your Tax Documentation
Good record-keeping is the backbone of any tax-saving strategy.
Best Practices & Pitfalls to Avoid:
- Review Last Year’s Return: Helps identify credits, deductions, and income sources.
- Sign & Date Your Return: The IRS considers an unsigned return invalid.
- Provide All Necessary Documentation: Missing documents can delay processing and trigger IRS scrutiny.
- Meet Deadlines: Filing extensions give more time to file but not more time to pay.
- Keep Records Organized: The IRS recommends keeping tax records for at least seven years.
Special Tax Situations That May Mean Additional Responsibilities
Some situations bring extra responsibilities at tax time.
Filing Taxes for a Deceased Person
- File the final return using the deceased’s name and Social Security number.
- Pay any owed taxes before distributing assets.
- If the estate earns income after death, file Form 1041.
Estimated Tax Payments for Self-Employed Individuals
- Self-employed individuals must submit estimated taxes quarterly.
- Payments are due on April 15, June 15, September 15, and January 15.
Helpful Tips for a Smooth Tax Season
- Verify All Information Before Submitting: Double-check names, Social Security numbers, and banking details.
- Seek Professional Tax Assistance: A tax professional can help you optimize your tax strategy.
- Use Tax Software & E-Filing: This reduces errors and speeds up refund processing.
- Know You Can Correct Mistakes: Amended returns can fix errors and minimize penalties.
Protecting Your Finances from Tax Mistakes
Filing taxes isn’t just about compliance—it’s about paying what you owe and nothing more to preserve your financial stability. If you need help, a financial advisor can help you plan proactively with tax efficiency in mind. Thrivent financial advisors will work with you and your tax professional to guide you through informed decisions year-round that can reduce your taxable income, optimize your deductions and credits, and ensure you have the necessary documentation.
By combining thoughtful planning and professional support, you can confidently approach tax season—protecting your finances while maximizing the opportunities to save.
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Author: News Desk
This piece was posted by our news team! Contact us or submit stories at [email protected].
