Nothing is as certain as death and taxes. While no one has control over the former, there are ways to impact the latter. Effective tax planning can significantly reduce your tax liability, both now and in the future. Read on for several areas where careful tax planning strategies can lead to substantial savings.

Retirement Account Contributions

Contributions to a tax-deferred retirement account, like a traditional 401(k), lower the amount of tax you owe now. Instead, you’ll owe taxes on these accounts when you withdraw funds during retirement. Ideally, you’ll be paying taxes at a lower rate when you retire. But there is a chance you’ll be at a higher tax bracket, too, so this strategy is a bit of a gamble. Even if you do end up in a higher tax bracket when you retire and start taking distributions from these accounts, you could still come out ahead thanks to gains from compound interest.

If you opt for an after-tax account, like a Roth 401(k), as a retirement savings vehicle, you’ll pay taxes on the money now, but your withdrawals will be completely free of federal income tax. This is assuming you’re at least 59 ½ years old when you begin making withdrawals and you’ve had the account open for at least 5 years. Tax planning should include a careful analysis of both options.

Educational Savings Accounts: Smart Tax Planning for Education

If you have dependents, tax-deferred savings plans like 529 plans or Coverdell Education Savings Accounts (ESA) are a way to save money for their college education while lowering your taxes over the long term. Contributions to 529 and ESA plans are made with after-tax dollars, but withdrawals (including earnings from interest) are not subject to federal income tax—and in some cases, you won’t pay state income taxes on them, either. This is a critical component of family-focused tax planning.

Keep in mind that 529 and ESA funds must be used for qualified secondary education expenses, as outlined by your plan administrator. Otherwise you’ll be hit with extra taxes and penalties. You can, however, roll over funds from a 529 account into a Roth IRA account for the same beneficiary. This is helpful if you have funds leftover in the account when your student finishes college. Understanding the details of a 529 savings plan tax deduction is crucial.

Capital Gains and Losses: Planning Taxes for Investments

Minimizing taxes isn’t the most important part of your investment strategy, but it should be part of your tax planning strategy. After all, it can have a big impact on your gains. Here are some terms you need to know:

• Capital gains: Money earned by selling an investment for more than you paid for it.
• Capital loss: Money lost by selling an investment for less than you paid for it.
• Long-term capital gain or loss: Money earned or lost after owning an investment for more than a year. Long-term gains are taxed at a lower rate than ordinary income. The long-term rate is based on your adjusted gross income, or AGI, and could be anywhere from 0-20%. You could face additional surcharges based on your AGI.
• Short-term capital gain or loss: Money earned or lost after owning an investment for less than a year. Short-term gains are taxed as ordinary income.
• Offset losses or gains: Long-term capital losses can offset long-term capital gains, and short-term losses can offset short-term gains, dollar-for-dollar. Unused losses can also be carried forward from one tax year to the next. These losses have no time limit, so you can carry over losses until they are exhausted.

With this information in mind, it may make sense to hold on to some investments long enough that they can be taxed as long-term capital gains. Or, if you’re going to sell at a loss, doing so before the end of the tax year can offset other gains.

Avoid the Wash Sale Rule

Be careful when claiming investments as a loss. The IRS prohibits taxpayers from taking a loss on investments and then replacing them with the same or similar investment within the same 30-day period before or after a sale. This rule includes the day you sell your investment, so it actually ends up being 61 full days that you cannot buy an investment that is the same or similar, according to the IRS. If your transaction is deemed a wash sale, you won’t be able to claim any of the losses.

Health Care Costs and Tax Planning

Set aside money for health care with pretax income using a flexible spending account (FSA), if your employer offers one. You cannot use the money to pay for premiums, but you can use it for copays, deductibles, prescription drugs, and even over-the-counter medications that qualify. You can contribute up to $3,300 in 2025 by payroll deduction into an FSA account, and potentially save hundreds of dollars in health care expenses. If you are wondering "do you put pre tax income for aca plans," consult with a tax professional.

FSAs come with one risk, though—if you don’t use the money during the calendar year, you may forfeit it. Employers can offer a two-and-a-half month grace period into the next year, so you can still spend the funds during that time. Or they may offer a rollover of unused funds.

Charitable Donations and Tax Strategies

You can deduct gifts to qualified charitable, religious, or educational organizations in different ways. These gifts can be cash donations, stocks and securities, personal property and inventory, real estate, and more. If you want to make gifts to family members, like children and grandchildren, consult a professional about the best ways to make those gifts to minimize the tax impacts to you and them.

Managing Your Federal Tax Payment Plan

If you find yourself unable to pay your taxes on time, exploring a federal tax payment plan with the IRS is a crucial step in responsible tax planning. This can help you avoid more severe penalties and interest accruals.

The Benefits of Tax Planning Software

Using tax planning software can greatly simplify the process of managing your taxes and identifying potential deductions and credits. These tools can help you stay organized and ensure you're taking advantage of all available tax benefits. Are 529 plan contributions tax deductible? Tax planning software can help answer this and other tax-related questions.

FAQs on Tax Planning & Prep

• Are 529 plan contributions tax deductible? While contributions to a 529 plan are not deductible on your federal income tax return, they may be deductible on your state income tax return. This depends on your specific state's laws.
• Do you put pre-tax income for ACA plans? Pre-tax income can be used to pay for health insurance premiums through your employer's plan, including those offered through the Affordable Care Act (ACA) marketplace. This lowers your taxable income.
• What is the best tax planning software? The "best" software depends on your specific needs. Many options are available, so research and compare features to find the right fit for you.

Effective tax planning is a year-round process. By staying informed and proactive, you can minimize your tax burden and maximize your financial well-being.