The Internal Revenue Service (IRS) of the United States announced on January 10 (Friday) that the 2025 tax season will officially begin on January 27 and end on April 15. While the IRS has complex and diverse tax laws, it also provides various legitimate tax-saving avenues. Tax expert Philip Wu has compiled 10 tax-saving methods for taxpayers, aiming to help reduce the tax burden.
Philip Wu, a graduate of DePaul University with a degree in accounting, is fluent in English, Mandarin, Cantonese, and Hokkien. He holds multiple professional qualifications, including Enrolled Agent (EA), Annual Filing Season Program certificate (AFSP), Certified ETF Specialist, National Social Security Advisor (NSSA), and Certified Tax Resolution Specialist (CTRS). Currently, he serves as the Chief Tax Accountant and tax expert at the Chicago World One Accounting Firm.
Wu specifically recommends that low to middle-income individuals make full use of Individual Retirement Accounts (IRAs), which not only effectively reduce taxes but also prepare financially for retirement. IRAs in the U.S. mainly come in two types: Roth IRA and Traditional IRA. Contributions to a Traditional IRA may be tax-deductible, and the earnings in the account can be deferred until withdrawal; whereas Roth IRA uses after-tax contributions, and withdrawals during retirement, including earnings, are completely tax-free. Additionally, taxpayers can invest in treasury bonds, certificates of deposit, and bond funds indirectly through IRAs, or directly invest in individual securities for higher investment returns.
IRA accounts can be opened by individuals at banks, and as long as they are established before April 15 of this year, they can enjoy tax benefits.
529 College Savings Plans are flexible “diversified investment portfolio” savings accounts that typically include investments in treasury or municipal securities. Earnings generated within the account can be tax-free at both state and federal levels but must be used for government-approved educational purposes. By participating in 529 college savings plans offered by states or educational institutions and opening 529 accounts for children, taxpayers not only save for their children’s education but also enjoy tax benefits provided by state governments.
Lower taxable income means fewer taxes to be paid. Participating in an employer’s 401(k) retirement plan and allocating more wages into the account is a common method to reduce taxable income because the income transferred to a 401(k) account is not subject to taxation by the IRS, allowing for tax savings and retirement savings simultaneously.
Flexible Spending Accounts (FSAs) authorized by the IRS and provided by employers to employees are a benefit that allows taxpayers to reduce taxes on medical and childcare-related expenses. FSAs are divided into three types, each with different functions and rules, including Health Care FSA (HCFSA), Dependent Care FSA (DCFSA), and Limited Purpose FSA (LPFSA).
For instance, taxpayers needing to care for children under 13 can consider participating in an employer-provided Dependent Care FSA plan, with a tax-exempt limit of $5,000. Funds in the account can be used to pay for children’s childcare expenses, such as preschool or after-school care, daycare, pre-kindergarten programs, and day camps. Additionally, eldercare expenses can also be included, leading to more savings for families.
Drawbacks of such accounts include funds that remain unused cannot be carried over for future use, funds in the account do not generate interest or earnings, and the ownership belongs to the employer, posing the risk of funds loss upon leaving the employer.
Moreover, this account typically conflicts with Health Savings Accounts (HSAs) and cannot be opened simultaneously in most cases. Taxpayers should carefully assess their situation or seek professional advice to choose the most suitable financial plan.
Health Savings Accounts (HSAs) are tax-advantaged tools for paying medical expenses. By contributing to an HSA, taxpayers can reduce taxes, and both contributions and withdrawals are tax-free when used for eligible medical expenses. The key requirement of an HSA is that the account holder must be enrolled in a High Deductible Health Plan (HDHP) to be able to fund the account.
HSAs do not need to be provided by employers, as individuals can open accounts themselves. However, some employers offering generous benefits may provide additional subsidies for employee HSAs. It should be noted that in the year of depositing funds into an HSA, if the account holder has Medicare, Tricare, military medical benefits, or is considered a dependent for tax purposes by someone else, they cannot continue contributing to an HSA.
In addition to fully utilizing the above tax-saving methods, high-income individuals can consider the following methods to further reduce the tax burden and maximize after-tax returns.
Tax expert Philip Wu points out that different types of investment interest income are subject to different tax regulations. For example, interest income from savings accounts, certificates of deposit, and corporate bonds is subject to federal ordinary income tax rates and often state and local taxes as well. However, opting for investments in municipal bonds, treasury bonds, or savings bonds can help lighten the tax burden.
Municipal Bonds: Offers federal tax-free income and may be exempt from state taxes, making it an ideal choice for high-income individuals.
Treasury Bonds: Provide security and stable returns, including treasury notes, bonds, bills, long-term bonds, and Treasury Inflation-Protected Securities (TIPS). They are subject to federal taxes but exempt from state and local taxes, potentially yielding higher after-tax returns for residents in high-tax states.
Savings Bonds: (such as Series I and Series EE) Series I bonds provide inflation protection, while Series EE guarantees doubling its value after 20 years. They allow for tax deferral until redemption or maturity, and the interest may be tax-free if used for qualified expenses like tuition, exempting from federal taxes.
Certificate of Deposit (CD): Offers fixed returns and low risk, suitable for conservative investors.
Reducing taxable income through gifting can also achieve wealth transfer goals. As of 2024 regulations, gifts up to $17,000 per person annually do not require reporting. By gifting treasury bonds or CDs to family members with lower tax rates, overall tax burdens can be lowered.
However, for minors, if non-labor income exceeds $2,500, they will be taxed at their parents’ rates (2024 standard). Through careful financial planning, not only can this tax item be avoided but also the tax and financial benefits of wealth transfer can be enjoyed.
Donations to eligible charitable organizations, whether in cash or items, are tax-deductible. Donating clothes, food, old sports equipment, or household items can all be subject to tax deductions. However, taxpayers must retain detailed receipts provided by the charitable organization, which must specify the cash amount donated and description of non-cash property.
Furthermore, providing volunteer services to qualified charitable organizations can also be counted as tax-deductible items, such as expenses directly paid for volunteering or mileage calculated from the round trip between home and the charitable organization. These expenditures must be well-documented for verification.
Interest income from savings bonds (such as Series I and Series EE), if used for qualified expenses like tuition, is exempt from state and local taxes and possibly federal taxes. Taxpayers only need to fill out IRS Form 8815 to apply for this tax-exempt treatment.
Philip Wu emphasizes that besides using tax-saving methods, developing an appropriate investment strategy is equally crucial. He particularly recommends a ladder investment strategy, which not only ensures stable income in IRA accounts but also reduces interest rate risks while fully utilizing tax advantages.
The core of the ladder investment strategy lies in diversifying securities investments by maturity dates. For example, investing $100,000 in a Roth IRA, with $20,000 each buying certificates of deposit ranging from 1 to 5-year terms. When one certificate of deposit matures, the principal and interest can be reinvested in a new 5-year term deposit. This method can provide steady cash flow, tax-free growth, and greater flexibility to adapt to market changes.
This article is for informational purposes only and not financial or tax advice. For financial and tax advice, please consult a professional. Those in need can consult tax expert Philip Wu from the Chicago World One Accounting Firm. Website: https://primeraactg.com/ ◇