Taxes reduce investment returns, impacting wealth-building efforts worldwide. A tax-efficient strategy can minimize this effect and enhance growth.
Taxes influence every investment, from retirement savings to income generation. Awareness of their impact is key to maximizing returns.
Here are 12 moves to lower tax bills for 2025. Sometimes, itemizing deductions instead of using the standard one can provide significant benefits.
1. Adjust the W-4
The W-4 tells your employer how much tax to take from your paycheck. If past tax bills were higher than expected, increase the withholding to reduce what you owe at tax time.
If you’ve been getting large refunds, lower your withholding. That way, you get more of your paycheck throughout the year.
You can adjust your W-4 whenever needed.
2. Maximize Your 401(k)
Contributing to a 401(k) reduces taxable income. The IRS doesn’t tax money you move directly from your paycheck into the 401(k).
You can contribute up to $23,000 annually. For those 50 and older, an additional $7,500 can be added.
401(k)s are typically employer-sponsored, but self-employed individuals can also set up their own. If your employer matches contributions, that’s extra money for you.
3. Consider an IRA
Two main types of IRAs: Roth and traditional. You may be able to deduct contributions to a traditional IRA. But the amount you can deduct depends on your work retirement plan and income.
Currently, the IRA contribution limits for 2024 are $7,000 per year ($8,000 if you’re 50 or older). You can fund your IRA until the tax filing deadline, giving you extra time to use this strategy.
The contribution limit applies to the combined total of both Roth and traditional IRAs. For example, contributing $3,000 to a traditional IRA and $4,000 to a Roth IRA would hit the 2024 limit.
4. Save for College
Contributing to a 529 plan can reduce your tax bill. While you can’t deduct federal contributions, you might get a deduction on your state taxes if you’re using your state’s 529 plan.
In 2024, if your total contributions, including other gifts to the same beneficiary, exceed $18,000, be aware of potential gift tax consequences.
5. Use an FSA
A Flexible Spending Account (FSA) allows you to set aside tax-free dollars for eligible expenses. If your employer offers one, use it to lower your tax bill.
For 2024, the limit is $3,200.
You must use the funds for qualified medical and dental expenses within the year. This can include bandages, prescriptions, and glasses or contacts for yourself and your dependents. Some employers allow carryover funds into the next year.
6. Maximize Your Dependent Care FSA
If your employer offers a dependent care FSA, you can use it to lower taxes.
In 2024, up to $5,000 of your pay can be diverted into the account tax-free.
This is a major benefit for parents of young children. Approved expenses include daycare, preschool, and after-school care, as well as some elder care costs.
7. Fund an HSA
If you have a high-deductible health plan, contribute to a Health Savings Account (HSA) to reduce your tax load.
Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
For 2024:
- Self-only coverage: The contribution limit is $4,150.
- Family coverage: Contribution limit is $8,300.
- If you’re 55 or older, you can contribute an additional $1,000.
You can open an HSA through your employer or at a bank or other financial institution.
8. Check for Earned Income Tax Credit (EITC)
If you earned less than $66,819 in 2024, you may qualify for the Earned Income Tax Credit (EITC).
Depending on your income, marital status, and number of children, this credit could be as high as $7,830 for taxes filed in 2025.
9. Donate to Charity
Charitable donations are tax-deductible, and it’s not just cash. Donated items like clothes, food, or household goods count if given to a qualified charity and you get a receipt.
For the 2024 tax year, you can deduct 20% to 60% of your adjusted gross income for charitable contributions if you itemize your deductions.
Tax software can help estimate the value of donated items. Keep a list to make sure you get credit for everything you donate.
10. Track Medical Expenses
Keep receipts for any medical or dental expenses.
For taxes filed in 2025, you can deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI).
For example, if your AGI is $40,000, you can deduct medical costs above $3,000. So, if you have $10,000 in medical bills, $7,000 could be deductible.
11. Sell Underperforming Stocks
You can offset taxable capital gains by selling stocks at a loss.
For 2024, you can use up to $3,000 in losses to reduce your taxable income ($1,500 for married couples filing separately).
However, the IRS will deny your deduction if you buy back the same stock within 30 days.
12. Time Your Expenses
Paying expenses before year-end can impact your tax deduction.
For example, making your mortgage payment in December could allow you to deduct an additional month of interest.
Similarly, moving a planned medical expense into the current year might make it deductible if it pushes you over the 7.5% threshold.
Other Ways to Minimize Investment Taxes
To minimize taxes on investment gains, focus on strategies that directly impact how your money is taxed. These seven methods are some of the most effective:
Practice Buy-and-Hold Investing
Taxes are only applied when investments are sold for cash, not while they are held. This means if investments are kept for the long term, no tax is due until you sell.
Holding investments indefinitely can also defer capital gains taxes for years or even indefinitely. This strategy often leads to higher overall returns since research shows passive investing typically outperforms active investing in the long run.
This makes buy-and-hold investing an efficient way to reduce taxes and boost returns.
Open an IRA
An IRA helps reduce current tax liability by allowing pre-tax contributions. With a traditional IRA, taxes on your earnings are deferred until you withdraw the funds after age 59 ½. This can provide decades of tax-deferred growth.
Alternatively, a Roth IRA offers a different benefit: contributions are made after tax, but withdrawals are tax-free in retirement. If you follow the rules, this can eliminate taxes on your earnings altogether.
Invest in Tax-Advantaged Accounts
Tax-advantaged accounts, like HSAs or 401(k)s, allow you to save on taxes. These accounts either defer taxes on contributions or offer tax-free growth, depending on the type.
By maximizing contributions to these accounts, taxes on your earnings are reduced or deferred, boosting long-term wealth.
Offset Gains with Losses (Tax-Loss Harvesting)
Selling investments at a loss can offset gains made elsewhere in your portfolio. This reduces your taxable income and lowers your tax bill.
It’s a strategy for minimizing taxes on investment gains while keeping a portfolio balanced.
Maximize Capital Gains Rates
Long-term capital gains (for assets over one year) are taxed at lower rates than short-term gains.
By holding investments longer, you can reduce the percentage of your taxed gains. This can make a significant difference in how much you owe in taxes.
Take Advantage of Dividends
Some dividends are taxed at a lower rate than regular income. To take advantage of these lower tax rates, focus on investments that generate qualified dividends.
Consider Location of Investments
Place investments that generate income in tax-advantaged accounts and keep growth-focused investments (less likely to produce taxable income) in taxable accounts. This allows your investments to grow without being taxed in the short term.
Conclusion
Minimizing taxes is essential for growing wealth, especially considering how taxes affect investments worldwide.
By adjusting your W-4, maximizing contributions to retirement accounts, and exploring tax-advantaged options, you can reduce your tax burden and keep more of your earnings.
Small adjustments today can lead to substantial benefits in the future, helping to secure a stronger financial foundation.