Reduce Your Tax Bill Now: Smart Planning for 2026 Savings

Starting your 2024 tax planning now can help you take advantage of tax-saving opportunities all year long. With 2022 taxes settled, it's easy to focus on summer activities rather than next year's tax situation. However, if you faced unexpected tax payments this year, it's wise to strategize. Before you lose contact with your tax preparer, taking steps now can ease next year's tax burden.

Many individuals realize too late how heavy their tax load is. Once March or April 2024 arrives, there's little even the best accountant can do to lessen your tax bill. Beginning your 2024 tax planning today allows you to pace yourself and explore various tax-saving strategies.

There's no need to tackle everything at once. Keep these ideas in mind to address throughout the year.

Increase Your Retirement Contributions

One effective way to reduce your taxable income is by contributing more to your retirement savings. Money placed in tax-deferred accounts like 401(k)s or 403(b)s decreases your taxable income. For example, if you earn $80,000 and contribute 15% of your income, that's $12,000, reducing your taxable income to $68,000. The more pre-tax contributions you make, the better chance you have of landing in a lower tax bracket.

I often advise clients to aim for saving at least 15% of their income. I understand it can be challenging, but any amount you can save now will contribute to your future. Even adding an extra $100 or $150 each pay period can accumulate significantly over the years.

Utilize Flexible Spending Accounts

By contributing to a flexible spending account (FSA), you can allocate pre-tax dollars for healthcare expenses. In 2023, the FSA limit is set to $3,050. However, ensure you spend the amount you contribute since it generally operates on a use-it-or-lose-it basis, with limited rollover options. You can find a complete list of eligible FSA expenses.

Additionally, a dependent care FSA allows you to use pre-tax funds for childcare costs. You can set aside up to $5,000 (if you're single or married filing jointly) through your employer for dependents under 13. This covers daycare, preschool, or summer camps (excluding overnight camps). Be sure to keep copies of invoices and tax information from the camp, stored digitally for reimbursement purposes. Remember, the dependent care FSA is a combined benefit, so if both you and your spouse have this option, the limit remains $5,000.

Consider Tax Loss Harvesting

If you face investment losses in 2023, you might save on taxes by employing a tax loss harvesting strategy. Selling investments at a loss can offset gains elsewhere in your portfolio. Any remaining losses can be carried forward indefinitely to offset future gains. You can also deduct up to $3,000 of your losses against ordinary income.

What to do with the proceeds? You can repurchase the same securities after waiting 30 days to comply with the wash sale rule. However, I recommend buying similar investments instead of the exact ones to maintain your asset allocation without being out of the market.

Make Your Home More Energy Efficient

While many tax-saving strategies have existed for a while, recent changes from the Inflation Reduction Act introduce new benefits for energy-efficient purchases.

Under the new law, you can receive a 30% credit (up to $1,200) for home improvements aimed at enhancing energy efficiency. If your upgrades involve heat pumps, heat pump water heaters, or biomass stoves, your credit may reach $3,200. This is in addition to existing tax credits of up to 30% for solar, wind, and geothermal home installations.

Tax credits provide more value than deductions since they reduce your tax bill dollar for dollar, allowing for potential savings of up to $3,200. However, you must first incur the expenses before claiming the credits on your tax return next year. Check for any state tax benefits related to energy upgrades as well.

Purchase an Electric Vehicle

If you're considering an electric vehicle, now is a great time to buy. Tax credits for EVs can be somewhat complex, and eligibility may vary, but generally, you can receive a tax credit up to $7,500 off the purchase price.

The exact credit amount depends on the origin of the vehicle's components and where it was assembled. Generally, only cars with a manufacturer's suggested retail price below $55,000 and SUVs/pickups under $80,000 qualify for the tax credit. A comprehensive list of qualifying vehicles is available.

Income restrictions also apply. If you're single with a modified adjusted gross income over $150,000, you can't claim the credit. The same applies to married couples filing jointly with a MAGI above $300,000. Heads of households must have a MAGI below $225,000 to benefit. Additionally, some previously owned clean vehicles may qualify for a tax credit up to 30% of the sale price (capped at $4,000).

While these credits are currently available, always be cautious as laws can change with new administrations. If you plan to make home improvements or buy an electric vehicle, consider acting sooner rather than later.