Legitimate Ways to Save Tax

5 Legitimate Ways to Save Tax with Amida Wealth

As the New Year unfolds, Amida Wealth extends a special gift to its clients—a guide to legitimate ways to save on taxes. In the spirit of giving, this blog post outlines strategic financial moves that benefit clients and align with Amida’s commitment to financial education and empowerment. Let’s begin!

#1. Investment Review and Rebalancing

At Amida Wealth, we understand the significance of regularly reviewing and rebalancing investment portfolios for optimizing returns and as a strategic move to save money on taxes. This ongoing effort involves a thoughtful examination of the performance of various assets, with a focus on selling underperforming investments and introducing tax-loss harvesting as a key tax-saving approach.

The Importance of Investment Review: Reviewing investment portfolios is fundamental to maintaining a well-balanced and diversified financial strategy. It allows us to assess the performance of individual assets, ensuring they align with clients’ financial goals and risk tolerance. Regular reviews at Amida Wealth empower us to identify underperforming investments and take proactive steps to enhance overall portfolio health.

Selling Underperforming Investments: One strategic way to save money on taxes is advising clients to sell underperforming investments. By realizing losses on these assets, investors can offset capital gains taxes generated by the sale of better-performing assets. This not only helps manage tax liabilities but also positions the portfolio for potential future gains.

Introduction of Tax-Loss Harvesting: Tax-loss harvesting is a sophisticated strategy that involves intentionally selling investments at a loss to offset capital gains elsewhere in the portfolio. This strategic approach serves a dual purpose—minimizing tax liabilities and rebalancing the overall investment portfolio. At Amida Wealth, we integrate the daily practice of tax-loss harvesting as part of our commitment to optimizing clients’ financial outcomes.

How It Saves Money on Taxes:

Capital Gains Offset: Selling underperforming investments at a loss provides a valuable tool to offset capital gains realized from profitable investments, effectively reducing the taxable portion of the portfolio’s overall gains.
Tax Efficiency: Tax-loss harvesting enhances the tax efficiency of the investment portfolio, helping to mitigate the impact of capital gains taxes on clients’ wealth accumulation.
Strategic Rebalancing: Beyond tax benefits, this strategy facilitates the rebalancing of the portfolio, ensuring it remains aligned with clients’ financial goals, risk tolerance, and market conditions.

Above all, our commitment at Amida Wealth extends beyond optimizing investment returns—it encompasses strategic financial planning to save money on taxes. We empower our clients to navigate the complex landscape of investment taxation while working towards their long-term financial objectives.

#2. The Gift Tax Exclusion

The gift tax exclusion is a provision in the U.S. tax code that allows individuals to give a certain amount of money or property to others without incurring gift tax. The purpose of the gift tax exclusion is to enable individuals to make modest-sized gifts to family members, friends, or others without triggering a tax liability. Here are the key details about the gift tax exclusion and how it can help you save on taxes:

Annual Exclusion Amount: The annual gift tax exclusion allows you to give a certain amount per recipient each year without incurring gift tax. As of 2022, the annual exclusion amount is $18,000 per donor, per recipient. This means that you can give up to $18,000 to as many individuals as you want in a calendar year without facing gift tax consequences.
No Tax Liability for Recipients: Recipients of gifts covered by the annual exclusion do not need to report the gifts as income, and they do not owe any taxes on the gifted amount. The tax liability, if any, is on the donor.
Spousal Gifts: If you are married, you and your spouse can combine your annual exclusions. This means that as a couple, you can give up to $36,000 per recipient without incurring gift tax. This provision is known as gift splitting.
Lifetime Gift Tax Exemption: While the annual exclusion allows for tax-free gifts within certain limits each year, there is also a lifetime gift tax exemption. As of my last update, the lifetime exemption was $13.61 million per individual (or $27.22 million for a married couple). This means that gifts exceeding the annual exclusion may not result in immediate tax consequences for the donor but will start to use up their lifetime exemption.

Above all, be sure to consult with a qualified tax advisor for the most up-to-date information and personalized advice based on your specific financial situation and goals.

#3. Charitable Donations

Charitable donations can provide valuable tax deductions for individuals who itemize their deductions when filing their tax returns. By documenting contributions carefully, you can maximize the potential tax savings associated with charitable giving. Here’s how this process works:

Tax Deductibility of Charitable Contributions: Charitable donations made to qualifying organizations are generally tax-deductible. These deductions are applied to your taxable income, reducing the amount of income subject to taxation.
Itemizing Deductions: To benefit from charitable deductions, you need to itemize your deductions when filing your tax return.
Record-Keeping: Documenting your charitable contributions is essential for claiming deductions. Keep thorough records, including receipts, acknowledgment letters from charitable organizations, and bank statements showing the donated amounts.
Types of Deductible Contributions: In addition to cash donations, certain non-cash contributions, such as clothing, household items, or securities, may also be eligible for deductions. Assign fair market values to these items and document their donation.

By following these steps and documenting your charitable contributions meticulously, you not only enjoy the satisfaction of supporting charitable causes but also optimize your tax situation.

#4. Energy-Efficient Home Improvements

Making energy-efficient home improvements can lead to potential tax savings through various tax credits offered by the government. These credits are designed to incentivize homeowners to invest in environmentally friendly upgrades that contribute to energy conservation. Here’s how energy-efficient home improvements can save on taxes:

Federal Tax Credits: The U.S. government offers federal tax credits for certain energy-efficient home improvements. These credits can directly reduce the amount of income tax you owe. Examples of eligible improvements include installing energy-efficient windows and doors, upgrading insulation, or investing in energy-efficient heating and cooling systems.
Solar Energy Credits: Installing solar panels or solar water heaters may qualify you for the Residential Renewable Energy Tax Credit. This credit allows homeowners to claim a percentage of the cost of qualified solar property installation, subject to certain limits.
Energy-Efficient Appliance Credits: Upgrading to energy-efficient appliances, such as water heaters, air conditioning units, or furnaces, can also make you eligible for tax credits. These credits aim to encourage the use of appliances that consume less energy and contribute to overall energy efficiency.
State and Local Incentives: In addition to federal credits, many states and local jurisdictions offer their own incentives for energy-efficient home improvements. These can include additional tax credits, rebates, or other financial incentives that further reduce the overall cost of making energy-efficient upgrades.

Homeowners considering energy-efficient improvements should consult with their tax advisor to ensure they are aware of the latest tax credits and incentives applicable to their specific circumstances.

#5. Business Expenses

Strategic expense planning can be a valuable wealth enabler for self-employed clients and small business owners. Effective tracking and deducting of eligible business expenses throughout the year can help save money on taxes. Here’s how:

Reduced Taxable Income: Business expenses are subtracted from the total revenue of a business, reducing the taxable income. By tracking and deducting eligible expenses, self-employed individuals and small business owners can lower the amount of income subject to taxation.

Lower Tax Liability: As the taxable income decreases due to deductible business expenses, the overall tax liability is reduced.

During the year, businesses may incur various expenses that could be deductible, such as:

Gifts: Business-related gifts to clients or employees may be deductible up to certain limits.
Entertainment: Expenses related to business-related entertainment, like parties or events, may be partially deductible.
Travel: If business travel occurs, related expenses such as accommodation and meals may be deductible.
Decorations: If decorations are used for business purposes, their cost may be considered a deductible business expense.
Home Office Expenses: For those who operate a business from a home office, a portion of home-related expenses, such as utilities and rent or mortgage interest, may be deductible. This includes holiday decorations or other expenses related to maintaining a home office during the festive season.

Above all, tracking, itemizing, and deducting eligible business expenses throughout the year can help you lower taxable income and serve as a proactive approach to managing the overall tax liability.

Amida Wealth Family Conversations

At your next family or friends gathering, share this blog! Ask the ones you love about life moments. Ask about their marriages, having children, and career changes. What do they wish they did differently when it comes to their financial lives? Become curious and inquire… perhaps, their answers will guide you to a more secure future. Remember, this journey to wealth never has to be walked alone. Encourage those you love to join you!

Final Thoughts

While these strategies offer valuable insights, it’s crucial to remember to consult with a tax professional for personalized advice. At Amida Wealth, we believe in empowering our clients with financial solutions and the knowledge to make informed decisions. Let’s celebrate financial well-being and smart tax planning together.