8 Effective Tax-Planning Strategies for Individuals

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Tax planning is much more than just filling out your 1040 form on time each year. When you’re earning a regular income, you’ll want to keep as much of it as you can while still doing your duty of paying taxes.

Fortunately, lots of methods allow you to minimize taxes above board and help you plan for things like your kids’ college education, retirement and even healthcare savings.

This guide offers some effective tax-planning strategies for individuals.

Get the Income Lay of the Land

The first step in tax planning is to determine all your income sources. If you’re employed by a single employer, you should get a nice W-2 form at the end of each year showing how much you earned and how much in taxes they took out for you.

However, if you have any kind of side hustle or ongoing freelance work and accept payments through apps like Venmo or Paypal, you might not get any paperwork from them and must remember to report the income you make yourself. Otherwise, freelance contractors are typically issued a 1099 of some kind.

However, make sure any income documentation you receive matches your earnings — mistakes happen, and you don’t want to pay extra taxes on someone else’s error.

Deductions, Deductions, Deductions

Once you know your income and the type, start looking toward deductions — essentially ways to reduce your taxable income.

Self-employed and freelance workers can itemize deductions and write off eligible business expenses, everything from mileage spent driving to or from work-related locations to subscriptions you require to do your work. Working with an accountant or financial advisor helps you find deductions you might not even know you could write off.

If you’re not self-employed, you’re limited on the kinds of deductions you can take.

Look For Tax Credits

Depending on your circumstances, you may be eligible for tax credits in a wide variety of areas.

From the child tax credit to the American opportunity tax credit for higher education, check with an accountant yearly for tax credits that reduce what you owe.

Utilize Retirement Accounts

One of the best ways to defer taxes is through making deposits into tax-advantaged retirement accounts like 401(k) plans, IRAs and even health savings accounts (HSAs). Typically 401(k) plans are employer-sponsored and deducted from your paycheck, reducing your taxable income. However, self-employed people can also utilize them.

With IRAs, while deposits don’t lower your taxable income, you aren’t taxed on any of the gains these accounts make, as they’re typically invested in things like stocks and bonds that can grow significantly over time. 

All of these accounts have different rules for how much you can contribute yearly and penalties for early withdrawal, so be sure to understand the rules before investing.

Consider a Health Savings Account

A health savings account, or HSA, is another tax-free savings account, so long as you use it correctly. It’s specifically to help people pay for qualified medical care.

You won’t pay taxes on any income you put into one and you can withdraw funds tax-free as long as it’s specifically for qualifying healthcare expenses. 

Benefit From Charitable Giving

If there’s a cause or nonprofit organization dear to your heart, consider donating whatever cash you can to it with the knowledge that you can write off the contribution from your taxes.

Your donation needs to be to an eligible 501(c)(3) nonprofit organization and you’ll need the employer identification number (EIN) for your accountant, but it’s a nice way to do double duty: Support a cause in need and get a tax benefit.

Consider Your Stage in Life 

While you can do anything on this list at almost any stage of life, you will want to prioritize based on where you’re at.

A Gen Zer just starting in the workforce should focus more on tax credits and deducting things like student loan interest; while a millennial or younger Gen X worker may want to focus on retirement savings.       

Plan For the Unexpected

Life rarely goes as planned. Unexpected situations occur, from changes in health to divorce and job changes. Even positive scenarios, like buying a house and getting married, change your tax situation. If something big happens, get financial advice so that you can make the best choice for you.

Remember that the IRS expects you to know the tax rules and rarely cuts much slack if you mess something up. If you’re uncertain about your tax situation, always seek professional support.

Whatever you do, don’t leave your tax situation up to chance.

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