7 ways to reduce your tax liability

4 mins readLast updated February 1, 2024by Pim Piers

From contributing more to your retirement plan to donating to charity, here’s your guide to minimizing your taxes.

Understanding your taxes

Between federal, state, and local taxes, it's easy to lose a sizable amount of your money to the IRS.

With so many people already feeling the pinch, losing so much of your income can leave you wanting to pay just a little less to make things easier.

Fortunately, the US tax system comes with some built-in rebates and exemptions that are designed to help people minimize their tax contributions.

Normally, these exemptions apply when you have used your money in a certain way, made certain donations, or need help meeting key personal financial commitments or payments.

Plan your taxes right, and you can reduce the amount of tax you pay. Or even land yourself a healthy rebate by the end of the year.

Seven ways to reduce your tax liability

So, with the above in mind, here are our top tips on how to help reduce your tax liability.

1. Contribute more to your retirement plans 

The amount of income tax you pay is based on your gross income, and the simplest way to reduce your gross income is to optimize your pension contributions.  

Whether you manage your own Traditional Roth IRA or have an employer-sponsored 401(k) plan, you can contribute more from your monthly income to your savings schemes without paying additional tax on it.

Your growing savings will amass and compound over time, and you will only pay tax when you take out your savings.

This differs for Roth plans, where tax is paid upfront. Click here to learn more about the differences between 401(k) and IRA accounts.

2. Plan ahead

The US tax code comes with two main deductions:

  • A standard tax deduction - this depends on your filing status

  • Itemized deductions - these can require more planning but can also save you more money.  

The standard deduction can make a helpful difference to individuals and families looking to minimize their monthly tax contributions.

However, planning ahead and keeping records and receipts of how you use your money means itemized deductions can better for reducing your liability.  

Some itemized deductions you could make include: 

  • Health Savings Account (HSA) deduction 

  • State and local tax deduction 

  • Medical expense deduction 

  • Student loan interest deduction 

  • Mortgage interest deduction 

  • Educator expense deduction

3. Donate to charity

Charitable donations can also reduce your tax liability.

Charitable organizations are tax-exempt, and any donations you make to these organizations are free of tax.

You can deduct up to 60% of your gross adjusted income by making donations to tax-free organizations, but be aware that some organizations might be restricted to lower levels of tax-free income.

4. Invest in municipal bonds

When you buy a government bond, you’ll receive the amount of money you invested plus some interest on top once the bond has reached its maturity day — the date at which the bond has repaid in full.  

When you buy a municipal bond, you’re effectively lending money to the government so that it can finance its day-to-day activities.

Many of these bonds are tax-exempt.

Municipal bonds are considered very safe as there is a high chance that you will get at least some money back.

5. Be aware of capital gains tax

Capital gains tax is a tax on assets that you have sold for a profit.

From stocks and shares to real estate, if you’ve sold something at a profit, it’s likely capital gains tax will kick in and take a chunk of the leftover profit.   

While capital gains tax can be an unwelcome hit to your finances, there are ways to make it work for you.

One way to reduce your capital gains tax is to hold on to your assets for longer. The longer you hold an asset without selling it, the more preferential your capital gains tax rates become.

For example, if you sell an asset within 12 months of owning it, you’re likely to face a minimum capital gains tax rate of around 37%. Sell it after 12 months, and you will be taxed at 20% — potentially even lower.  

6. Claim tax credits 

Just as there are certain tax exemptions that can help you land a healthy tax rebate, tax credits are paid directly to you to help you with meeting certain tax liabilities and outstanding costs.

Some examples of tax credits include: 

  • Adoption credit 

  • Education credit 

  • Child and dependent care credit 

  • Mortgage interest credit

  • Energy credit

7. Speak to a financial advisor  

The US tax system isn’t always easy to understand. With various deductions at your fingertips, credits you could claim and simple ways you can minimize your tax liability, it isn’t always easy to know how best to manage your money.  

But speaking to a financial advisor can help.

Whether you need tailored advice that helps you meet your financial goals or simply need help protecting your money from an additional tax hit, a financial advisor can help.

Match with a financial advisor perfectly suited to meet your needs today.

*This article is for information purposes only. For financial advice, talk to a regulated financial advisor.

Pim is the Chief Operating Officer at Unbiased.com.

Pim Piers

Pim is the COO at Unbiased.com. He has a wealth of experience in exit and fundraising across different sectors in the SaaS space. Pim is also an advisor to a number of technology businesses in London and Amsterdam.