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7 ways to help reduce your taxable income

June 24, 2024
Last revised: July 2, 2024

Discover practical and effective strategies to help reduce your taxable income. From retirement savings to smart investment decisions, opportunities to keep more of your earnings are at hand.

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Key takeaways

  1. Contributions to retirement accounts such as traditional 401(k)s and IRAs may lower your taxable income while prioritizing your financial future.
  2. Take advantage of pre-tax contributions to flexible spending accounts and health savings accounts to cover qualified medical expenses and trim taxable income.
  3. Tax credits could offer substantial savings because they're a dollar-for-dollar reduction in the amount of taxes you owe.
  4. Bunching several years' worth of charitable donations into one year can help you surpass the standard deduction and reduce your taxable income.

If there's one thing you can count on, it's paying taxes. But even though taxes are inevitable, they don't have to feel overwhelming. There's a lot you can do to help manage your tax burden and become more tax efficient.

Let's explore seven ways to reduce taxable income so you can keep more of your hard-earned money.

1. Reduce your taxable income by saving for retirement

Saving for retirement creates a more secure financial future, and it may offer tax advantages today. Maximizing contributions to traditional retirement accounts can lower your taxable income, allowing you to save more while paying less in taxes. Several account options are available:

Traditional 401(k)s

A traditional 401(k) is one of the most common employer-sponsored retirement savings plans. Contributions to a traditional 401(k) are made pre-tax, meaning they're deducted from your gross income before calculating income taxes.

For 2024, you can contribute up to $23,000 to a 401(k)—$30,500 if you're 50 or older. Contributing the maximum amount significantly reduces your taxable income while simultaneously building a nest egg for your future.

Traditional 403(b)s

A 403(b) plan is similar to a 401(k) but available to employees of public schools and certain tax-exempt organizations. The contribution limits are the same as those for a 401(k).

Contributions to a 403(b) also are made pre-tax, lowering your taxable income while you save for retirement.

Traditional individual retirement account (IRA)

A traditional IRA provides a way to save for retirement regardless of whether you’re covered by a workplace retirement plan. For 2024, you can contribute up to $7,000 to an IRA—$8,000 if you’re 50 or older.

Contributions to a traditional IRA may be fully or partially deductible, depending on your income and whether you are covered by a retirement plan at work.1 This deduction directly reduces your taxable income.

2. Cut taxable income with FSAs and HSAs

Flexible spending accounts (FSAs) and health savings accounts (HSAs) can help you manage your health care expenses and tax liabilities. When you deposit money into these accounts, it's typically with untaxed dollars. This might be arranged through a payroll deduction, thus reducing your taxable income for that year.

FSA

An FSA is an employee benefit that allows you to set aside money pre-tax and use it to pay for eligible qualified medical expenses such as prescriptions, co-pays and other health-related costs.

For 2024, you can contribute up to $3,200 to a health FSA if your employer offers one. However, plan carefully how much you contribute. FSAs have use-it-or-lose-it rules, meaning you forfeit any unused amount at the end of the year. Some plans allow a grace period for using the money after year-end or allow participants to roll forward a portion of their account balance.

HSA

HSAs are similar to FSAs in that they allow you to set aside pre-tax dollars for future qualified health care expenses. However, they offer more tax advantages than FSAs.

To be eligible for an HSA, you must be enrolled in a high-deductible health plan (HDHP).

For 2024, you can contribute up to $4,150 if you have self-only coverage, or $8,300 for family coverage. Those contributions are tax-deductible (or pre-tax if offered through your employer), the earnings in the account grow tax-free, and withdrawals are tax-free as long as you use them for qualified medical expenses.

Unlike FSAs, HSAs have the added benefit of not being a use-it-or-lose-it account; the funds roll over year after year.

3. Leverage tax credits

Tax deductions and tax credits both reduce your tax bill, but tax credits offer more substantial savings than deductions because they're a dollar-for-dollar reduction in the amount of taxes you owe.

Here are a few tax credits you may be able to take advantage of when you file your return.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is designed to benefit working individuals and families with low to moderate incomes.

It's a refundable credit, meaning it reduces the amount of taxes you owe. It even can result in a refund if the credit exceeds the tax you paid for the year.

The credit amount varies by income, filing status and the number of qualifying children you claim as dependents. For 2024, the maximum EITC amount is $7,830 for qualifying taxpayers with three or more children.

Child Tax Credit

The Child Tax Credit (CTC) is for families with qualifying dependents younger than 17 at the end of the tax year. For 2024, the credit is up to $2,000 per child, with up to $1,700 being refundable.

The CTC is subject to income thresholds. You qualify for the full credit if your annual income is not more than $200,000 ($400,000 if you're married and file a joint return). Higher-income earners may be able to claim a partial credit.

Saver's Credit

The Retirement Savings Contributions Credit—better known as the Saver's Credit—targets low- to moderate-income taxpayers who save for retirement.

By contributing to a qualified retirement plan, such as an IRA, 401(k) or other eligible retirement account, you may receive a credit of up to 50% of your contribution. The maximum credit is $1,000 for individuals and $2,000 for married couples filing jointly.

4. Consider tax-loss harvesting

Tax-loss harvesting is a strategy investors use to reduce their tax liability by selling investments that have experienced a loss to offset the capital gains realized from other investments.

For example, say you have $10,000 in capital gains from selling Investment A. Meanwhile, Investment B has lost $7,000 in value. Before year-end, you could sell Investment B and use that $7,000 loss to offset the capital gain from Investment A. By harvesting that loss, you pay only capital gains taxes on a net gain of $3,000, rather than the full $10,000.

Keep in mind that the wash-sale rule prohibits buying a "substantially identical" security 30 days before or after the sale that generated a loss. Violating the wash-sale rule disallows the loss deduction.

5. Explore 529 plans for educational expenses

A 529 plan is a tax-advantaged account that allows you to save for future educational expenses.

Contributions to a 529 plan are not deductible on your federal tax return, but earnings in a 529 account grow tax-free. Withdrawals are also tax-free when you use the money to pay for qualified education expenses. Additionally, many states offer state income tax deductions or credits for contributions to a 529 plan, which can directly reduce your state tax liability.

You can use funds in 529 plans to cover qualified expenses at any accredited college or university. This includes tuition, mandatory fees, books, supplies and equipment required for enrollment or attendance. You also can apply up to $10,000 per year toward private K–12 tuition.

Couple around 60 looking at laptop
Are you prepared for the Tax Cuts & Jobs Act sunset?
It's been six years since the Tax Cuts and Job Act (TCJA) overhauled the federal tax code, ushering in sweeping changes that affected businesses and individuals. However, after 2025, many of the act's tax law changes are scheduled to expire.

As the planned TCJA sunset nears, consider reviewing your financial strategy to see if you need to make any adjustments.

Learn more about the potential implications

6. Be strategic with asset location

Asset location is a tax optimization strategy that involves placing investments in accounts that offer the most tax efficiency based on their expected return and tax treatment.

The idea behind asset location is to hold investments that generate taxable income, such as bonds and dividend-paying stocks, in tax-deferred accounts such as IRAs and 401(k)s. You don't have to pay taxes on the earnings in these accounts until you start taking withdrawals—potentially at a lower tax rate in retirement.

On the other hand, you should hold investments that benefit from lower long-term capital gains rates, such as stocks or mutual funds held for more than a year, in taxable accounts.

To execute an asset location strategy, work with your financial advisor to:

  • Identify your taxable, tax-deferred and tax-exempt accounts. Taxable accounts include individual or joint brokerage accounts. Tax-deferred accounts might be traditional IRAs or 401(k)s, and tax-exempt accounts could include Roth IRAs or Roth 401(k)s in which withdrawals can be tax-free in retirement.
  • Review the types of investments you hold and their expected returns. Income-generating investments might be best for tax-advantaged accounts where that income is tax-deferred.
  • Align investments with account types. Place income-generating investments such as bonds or dividend stocks in tax-deferred accounts to shield their returns from immediate taxation. Investments that may appreciate significantly over time may be better suited for taxable accounts to take advantage of lower long-term capital gains tax rates.
  • Revisit your strategy for maximum effectiveness. Asset location isn't a set-it-and-forget-it strategy. Regularly review and rebalance your portfolio to adapt to changes in market conditions and your financial situation.

7. Use charitable contributions to lower taxable income

Charitable giving feels good and helps others in need—and it also can lower your taxable income.

To get a tax benefit for your donations, you must itemize deductions. This means your total itemized deductions, including mortgage interest, state and local taxes, out-of-pocket medical expenses and charitable contributions, must be greater than the standard deduction available for your filing status. Limits and minimum thresholds may apply, consult with your tax professional for more information.

This is a hurdle for many people because the standard deduction for 2024 returns (those filed in 2025) is $29,200 for married couples filing jointly and $14,600 for single people.2

One way to overcome this hurdle is a strategy known as bundling or bunching contributions. This involves making multiple years' worth of charitable donations in a single tax year.

For example, if you typically donate $5,000 annually and find yourself just below the itemization threshold, you could consider donating $15,000 every three years instead. This could elevate your contributions to a level at which itemizing deductions becomes advantageous, providing you with a greater tax benefit for that year.

Conclusion

We've explored how to reduce your taxable income, strategies that include maximizing retirement contributions and leveraging tax credits to tax-loss harvesting and asset location.

Talk with a Thrivent financial advisor to navigate these options and identify the most effective strategies for your specific situation. Your advisor understands your financial circumstances and goals and can help you take advantage of these and other tax-saving opportunities.
1For 2024, your contribution deduction is reduced you are an active participant in an employer-sponsored retirement plan and your MAGI is between $77,000 and $87,000 on a single return and $123,000 and $143,000 on a joint return. If you're married filing jointly and an active participant in an employer sponsored retirement plan and your spouse is not, the deduction for your spouse's contribution is phased out if MAGI is between $230,000 and $240,000. If you're a married taxpayer who files separately, consult your tax advisor.

2There are some exceptions for single filers over age 50 and joint filers over certain ages. See https://www.irs.gov/publications/p505 for more information.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Offered through a brokerage arrangement with Thrivent Investment Management Inc. 529 college savings plans are not guaranteed or insured by the FDIC and may lose value. Consider the investment objectives, risks, charges, and expenses associated before investing. Read the issuers official statement carefully for additional information before investing. Investigate possible state tax benefits that may be available based on the state sponsor of the plan, the residency of the account owner, and the account beneficiary. Consult with a tax professional to analyze all tax implications prior to investing.

Dividends are not guaranteed.

Investing involves risk, including the possible loss of principal. The product prospectus, portfolios' prospectuses and summary prospectuses contain more complete information on investment objectives, risks, charges and expenses along with other information, which investors should read carefully and consider before investing. Available at thrivent.com.
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