While tax laws change frequently, taxpayers can generally count on certain tax-saving strategies and principles that have endured over the years. Here are a few, and your financial planner can identify many more.
Determine your marginal tax bracket. That's the rate at which your last dollar of taxable income is taxed.
Calculate your effective tax rate. This is determined by dividing your total income into your total tax bill. It shows you the impact of taxes on every dollar you earn.
Save in tax-favored accounts. The number and complexity of these accounts have multiplied over the past 20 years but the principle remains the same: saving in tax-favored accounts is a powerful tool for funding a long-term financial objective, such as retirement or college.
Don't tap retirement savings before age 59 ½.
Look where you borrow. Deductions for many interest payments have been eliminated over the years, but interest on loans secured by the equity in your home, within limitations, remain tax deductible. Many taxpayers also can deduct interest on college loans and investments.
Time income and expenses. Depending on your tax situation, you can reduce your tax bite by bunching together deductible expenses or by accelerating or delaying receipt of taxable income.
Shift income. You may be able to save taxes by shifting assets to family members who are in lower tax brackets. However, consideration should be given to the potential adverse impact on shifting these assets to another family member.
Use charitable gifting strategies. The right charitable gifting technique or vehicle can save you more tax dollars, which means more money for the benefit of the charity.