Year-round tax-planning and tax-saving strategies

Read time: 7 to 8 minutes

Paying less in income taxes can put more money in your pocket. By understanding basic tax forms and preparing for tax impacts, you can use simple financial planning strategies that may help you reduce your taxable income. And the best part? These strategies can be used throughout the year, not just at tax time.

Let's explore these four tax-savings strategies:

1. Stay in your target tax bracket

Adjusting your income to stay in your target tax bracket is one way to manage taxes. You can do this by accelerating or deferring your income. For example, you can use a Roth conversion to move your future income to the current year, while contributing to retirement accounts like traditional IRAs and 401(k) plans will move income to a later year. It's all about finding the right balance.

Ashley Greene, a Vanguard wealth planning specialist and co-author of the Fundamentals of tax planning: Beyond the basics whitepaper explained, “When you consider all the taxes you pay over time, paying more taxes today may net you the optimal results over the course of your lifetime.”

PRO TIP:

Year-end is a good time to make any adjustments needed to stay in your target tax bracket for the current year while also planning for the next year. You may also want to revisit your strategy any time you have an income change, such as when you receive a bonus or take distributions from an IRA.

2. Look for income exclusions

The IRS excludes certain income sources from federal income tax, which can help lower your overall income. For example, income from Roth IRAs and from municipal bonds is free from federal income tax. Balancing income distributions across taxable, tax-free, and tax-deferred accounts may also reduce your income.

PRO TIP:

When reviewing your investments or working with a financial or tax advisor, make sure you’re considering any income exclusions that might be available to you.

3. Manage capital gains

You realize a capital gain when you sell personal property (e.g., real estate, cars, stocks and bonds) at a profit. One way to manage capital gains is to limit taxable account transactions. Depending on your individual situation, there are different ways you can do this:

If you require income from your investments, you could use rebalancing proceeds or fund distributions throughout the year to meet your cashflow needs.
If you don’t require investment income, consider the tax impacts when you sell an investment or rebalance your portfolio. For example, you can manage capital gains by using the proceeds from rebalancing to fulfill your charitable contributions.

PRO TIP:

All investors need to pay attention to account settings like automatic reinvestment and default cost basis method, as they can have significant tax consequences. And since tax topics can be challenging for any investor, we recommend you consult with a tax advisor if needed.

4. Bunch your deductible expenses

You’re entitled to deduct certain annual expenditures from your taxable income. To take advantage of both the standard deduction and itemized deductions, you can shift multiple years' worth of deductible expenses into a single year. This strategy, known as bunching, is commonly used for charitable contributions and medical expenses. Depending on your state's laws, it may be applicable to other expenses as well.

“The combination of taking the standard deduction in some years, while taking itemized deductions in others, can increase total deductions over time,” Greene says.

PRO TIP:

To make the most of this strategy, you may want to keep a log to track your charitable donations, out-of-pocket medical costs, and any other expenses that might be deductible. And remember to file your receipts in a safe place! Doing all this throughout the year can make it easier when it comes time to file your taxes.

Getting advice: How financial advisors and tax advisors can help

When it comes to financial planning and lowering your taxes, deciding which strategies to use and implement can be complicated. That’s why many people turn to a financial or tax advisor for help. Financial advisors can help you grow your wealth through investment and financial planning, asset location, and money management. Tax advisors—such as Certified Public Accountants (CPAs)—typically provide taxation services along with advanced accounting and some financial planning.

Consulting with these professionals can help you boost your wealth and optimize your tax planning efforts.

Your retirement plan at Vanguard may offer advice and guidance options to help with retirement planning and tax-efficient investing.

See my advice options

Whenever you invest, there’s a chance you could lose the money.

Advice is provided by Vanguard Advisers, Inc. (VAI), a federally registered investment advisor. Eligibility restrictions may apply. VAI cannot guarantee a profit or prevent a loss.

Although the income from municipal bonds held by a fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.

The information contained herein does not constitute tax advice, and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code. Each person should consult an independent tax advisor about their individual situation.