Six Essential Tips to Know Before Filing Your Taxes

Written by Aiden Cox

As tax season approaches, it’s important to start planning early—if you’re a younger individual who is navigating taxes for the first time or looking to minimize your tax liability. Whether you’re a W-2 employee, self-employed, or balancing both, there are several tax strategies you should be aware of to ensure you’re making the most of your financial situation.

From investment income and IRA distributions to real estate and tax reduction strategies, understanding these key areas can help you optimize your tax filing and potentially save money in the long run.

1. Investment Income: What You Need to Know

Whether you’re just starting to build your investment portfolio, or you’ve already begun accumulating assets, it’s important to understand how different types of investment income are taxed.

• Qualified Dividends: If you’re receiving dividends from stocks or mutual funds, some may qualify for lower tax rates (long-term capital gains rates). It’s worth checking whether your dividends fall into this category, as it could reduce your tax burden.
• Interest Income: Interest from savings accounts or bonds is taxed at ordinary income tax rates, which may be higher than capital gains rates. If you’re earning significant interest income, it’s important to understand the impact it will have on your taxes.
• Capital Gains: If you’ve sold investments (stocks, real estate, etc.) and made a profit, you’ll need to report the capital gains. For investments held longer than one year, you’ll benefit from lower long-term capital gains tax rates. If you’ve sold something within a year, expect to pay higher short-term rates. If you’re actively investing, tax planning is essential to managing gains and losses.

2. IRA Distributions and Planning for the Future

Even if retirement may feel like a distant goal, taking steps now can reduce your future tax burden. If you’re self-employed or working a side hustle, IRAs can be a powerful tool to save for the future and minimize taxes today.

• Traditional IRA: Contributions to a Traditional IRA are made with pre-tax dollars, meaning they reduce your taxable income for the year you contribute. However, keep in mind that when you withdraw from your IRA during retirement, you will pay taxes on the distributions.
• Roth IRA: Roth IRAs don’t give you a tax break today, but they do provide tax-free withdrawals during retirement if certain conditions are met. Contributions to a Roth IRA are made with after-tax dollars, meaning you won’t get an immediate tax reduction, but you will benefit in the long run by avoiding future taxes on growth.
• Contribution Limits: As a younger individual, contributing to an IRA now (while you’re still in a potentially lower tax bracket) can pay off in the future. The contribution limit for IRAs in 2025 is $7,000 ($8,000 if you’re 50 or older), and contributing to your retirement early can result in significant long-term tax advantages.

3. Roth Conversions: A Smart Strategy for Younger Individuals

A Roth conversion can be a useful strategy for younger individuals, especially if you are in a lower tax bracket now but expect to earn more in the future. Converting funds from a Traditional IRA to a Roth IRA allows you to pay taxes on the converted amount today (when your tax rate might be lower) rather than during retirement.

• Tax Implications: While you’ll need to pay taxes on the amount converted, the benefit is that future withdrawals from a Roth IRA will be tax-free, provided you meet certain conditions (age 59½ and a 5-year holding period).
• Partial Conversions: If you’re just starting your career and don’t anticipate a high income this year, you might consider converting a portion of your Traditional IRA to a Roth IRA to minimize the taxes you owe. Spreading the conversion over several years can help you manage your taxable income and keep you in a lower tax bracket.

4. Real Estate: What to Keep in Mind

If you’re a young professional who owns real estate, whether it’s a rental property or your first home, there are tax considerations you should be aware of to maximize your savings.

• First-Time Homebuyer: If you’ve purchased your first home, you may be eligible for certain tax credits or deductions, such as the mortgage interest deduction or property tax deductions. These deductions can help reduce your taxable income and lower your overall tax liability.
• Rental Property: Owning a rental property can provide a stream of income, but it also comes with tax responsibilities. Rental income is taxable, but you can offset this with deductions related to property management, repairs, insurance, and even depreciation. Depreciation is a particularly useful tool, as it allows you to deduct the cost of your property over time, reducing your taxable rental income.
• Capital Gains: If you’ve sold a property and made a profit, you may owe capital gains tax. However, if you sold your primary residence, you may qualify for the home sale exclusion, which allows you to exclude up to $250,000 ($500,000 if married) of capital gains from taxes, as long as you meet the ownership and use tests.

5. Tax Reduction Strategies for W-2 and Self-Employed Individuals

Whether you’re working a traditional W-2 job, self-employed, or juggling both, there are several tax-saving strategies to consider. Here are a few options that could reduce your tax liability:

• Maximize Retirement Contributions: If you’re employed, check if your employer offers a 401(k) or similar retirement savings plan. Contributing to a 401(k) or a Traditional IRA reduces your taxable income, which can lead to significant tax savings. For self-employed individuals, consider a SEP IRA or a Solo 401(k) to maximize contributions and reduce your tax liability.
• Self-Employed Deductions: If you’re self-employed, you can deduct business expenses such as home office costs, supplies, mileage, and other necessary business-related expenses. These deductions reduce your taxable income and can significantly lower your tax bill.
• Health Savings Account (HSA): If you have a high-deductible health plan, contributing to an HSA can be a tax-smart move. Contributions are tax-deductible, reducing your taxable income, and withdrawals for qualified medical expenses are tax-free.

6. Seek Professional Guidance

Understanding taxes can be challenging, especially if you’re self-employed, have investment income, or are trying to plan for your future. A financial advisor or tax professional can help you make sense of your options and ensure you’re using the most effective strategies to reduce your tax liability. They can also help you make smarter decisions when it comes to investing, retirement planning, and real estate.

Conclusion

Filing taxes doesn’t have to be daunting, and it’s never too early to start planning for your financial future. Whether you’re a W-2 employee or self-employed, understanding the tax implications of investment income, IRA distributions, Roth conversions, real estate transactions, and available tax reduction strategies can help you make smarter decisions. By planning early and taking advantage of tax-advantaged accounts, you can set yourself up for financial success both now and in the future.

If you have questions or need help with your tax planning, our team is here to help. We can guide you through strategies to reduce your tax burden, optimize your financial decisions, and secure your long-term financial goals. Reach out today to get started!

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