9 Tax planning strategies you should know

Welcome to your crash course on tax strategizing for parents. As a family, you deserve all the tax breaks you can get, and these tips are here to help. 

Whether you think of yourself as a tax expert or need more of a Taxes 101, here are nine tax planning strategies to help your family save more.

1. Defining your tax bracket

A tax bracket defines your income tax liability based on your earnings. Moving into a higher bracket means you'll owe a higher percentage — but only on earnings within that bracket.

Say you're married with a combined taxable income of $100,000 annually. Based on 2024 tax brackets, you'd owe:

• 10% on combined income up to $23,200

• 12% on remaining income up to $94,300

• 24% on remaining income up to $201,050

That significant jump is intentional. The Internal Revenue Service (IRS) built a bigger cushion into middle-income brackets to account for inflation.

Your bracket tells you how much you'll owe at tax time, and you can use that number to plan your savings.

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2. Understanding the difference between tax deductions and tax credits

Credits and deductions are two ways to reduce your tax burden, but they work differently:

• Deductions: These lower your taxable income. Say you and your spouse take home $100,000 a year and take the 2024 standard deduction of $29,200. When you file your tax returns, your taxable income will drop to $70,800.

• Credits: These reduce the amount of tax due. If you claim the Child Tax Credit for your two children under 17, your taxable income will be the same, but the IRS will subtract $4,000 from your tax bill. That number may be different depending on your other circumstances.

As always, all numbers are hypothetical when discussing tax planning strategy. The IRS changes its benchmark numbers every few years, but the basic concepts remain unchanged.

3. Choosing between standard deductions and itemizing

Income tax forms give you two options for deductions: you can itemize deductions or claim the standard deduction. 

Most taxpayers can claim the standard deduction. One possible exception is if you're married and filing separately — if your spouse itemizes, you have to itemize, too.

To itemize, you need records of all your deductible expenses. Common deductions include charitable donations, mortgage interest, real estate taxes, and medical costs above a certain income percentage. 

The IRS advises itemizing if your deductions total more than the standard allowance. However, since that deduction is now close to $30,000, many families will find the standard version easier and more financially sound.

4. Deducting charitable contributions

If you choose to itemize, your charitable contributions are deductible up to a set limit, typically 60% of your adjusted gross income, with certain exceptions. 

You can maximize your giving impact by donating stocks or bonds worth more than what you paid for them. These are called appreciated securities. You'll owe income taxes on them if you sell. If you donate, you avoid that tax, and you can deduct the fair value of that stock.

Another option is to lump several years' worth of donations into one year. If you usually donate $5,000 to charity, put that amount into an account and donate when the total is high enough to justify itemizing.

5. Maximizing retirement account contributions

Saving for retirement can help you save on taxes, too. There are three basic retirement tax planning strategies:

• Contribute pre-tax earnings to an employer-sponsored plan: You'll reduce your taxable income, and contributions grow tax-free until you withdraw. Plus, many companies offer employer matches, which you don't pay taxes on until you withdraw.

• Contribute to a traditional Individual Retirement Account (IRA): You can deduct contributions if you don't have a retirement plan at work or your income is below a specified level.

• Contribute to a Roth IRA: You contribute from taxed income, but withdrawals are tax-free. This option is especially valuable if you'll be in a higher tax bracket in retirement.

Whichever strategy you choose, see if you qualify for the IRS Saver's Credit. The credit is available to account holders 18 or older who aren't dependents or students. It's worth up to 50% of your contributions, depending on your income.

6. Utilizing health savings accounts (HSAs) effectively

If you have a high-deductible health plan, an HSA can reduce your tax bill and help you prepare for medical expenses. HSAs are private accounts commonly available through banks and other financial institutions. You can likely open an HSA somewhere you already have an account.

Contributions to an HSA are tax-deductible, and you don't pay taxes on withdrawals for medical purposes. You can use those withdrawals to pay healthcare costs for yourself and your immediate family, including your spouse and any dependents, even if that person has a separate insurance plan.

7. Optimizing your withholdings: W-4s, freelancing, and gig work

If you earn a salary or wages, your employer withholds money to cover your taxes. You tell the company how much to withhold by filling out a W-4. 

The form guides you through the selection process, but you can ask for extra withholding. The IRS recommends that approach if you have multiple jobs or income sources like freelancing or gig work, which don't deduct taxes. 

If you or your spouse makes $400 or more from self-employment, including gig work, the self-employment tax will apply. It covers the employee and employer portion of Social Security and Medicare, totaling 15.3% of your taxable income. 

Increasing withholding from your salary or wage job may help you cover that amount. If you still owe $1,000 or more, you'll need to set up estimated tax payments. The IRS lets you pay these automatically, so you don't need to worry about penalties.

8. Income-splitting strategies for families

There are a couple of more advanced tax planning strategies you can utilize, too. The first is income splitting, which lets you redistribute income among family members. 

For example, say your salary places you at the lower end of a high tax bracket. Your spouse is in the middle of a lower bracket, so you shift part of your salary to them. They don't move from their current bracket, but you drop into a lower one.

The rules of income-splitting can be complex. Consider working with a professional, and always keep detailed records. Record-keeping is always essential for the IRS, especially when you get into advanced tax strategies. 

9. Investing tax-efficiently: Strategies for success

Investment tax planning strategies take money management to the next level, and you can do it without being a Wall Street pro.

For example, say one of your stocks is doing well and you want to sell. If you sell before you've held it for 12 months, you'll owe 40.8%  in short-term capital gains tax. If you hold onto that stock until a year has passed, you'll owe the long-term capital gains tax, which is much lower at 23.8%.

Of course, not all stocks earn money. Investing always carries the potential for a loss, but tax loss harvesting can turn those losses into benefits.

Say one of your stocks lost $5,000 this year. You have another stock that gained $3,000 in value. You sell them both. 

Ordinarily, you'd have to pay taxes on that $3,000. But by harvesting that $5,000, you cover the gain and have $2,000 left over. That typically counts as $2,000 off the rest of your taxable income.

Become a money and tax season pro with Greenlight

So, there you have it: nine tax tips for parents like you. There's much more to learn about taxes, investing, and saving, all of which would be great lessons for you to explore with your kids.

With Greenlight Infinity, your whole family can build confidence and money smarts. It's an all-in-one money and family safety app with location alerts, parent-approved investing, and debit card options for kids and teens. Try Infinity as a family today.