Five things to consider when it comes to keeping more of your income.
1. Consider deferring your income to limit your current income tax liability
By deferring income to a later year, you can minimize your current income tax liability and invest the money you’d otherwise use to pay income taxes. And when you later report the income, you may be in a lower income tax bracket.
Certain retirement plans can help you postpone the payment of taxes on your earned income. With a traditional 401(k) plan, for example, you contribute part of your salary into the plan, paying income tax only when you later withdraw money from the plan (withdrawals before age 59½ may be subject to a 10% penalty tax in addition to regular income tax unless an exception applies). This allows you to postpone tax on part of your salary and take advantage of the tax-deferred growth of any investment earnings.
There are many other ways to postpone your taxable income. For instance, you can contribute to a traditional IRA, buy permanent life insurance (the cash value part grows tax deferred), or invest in certain savings bonds. Discuss your tax planning options with a tax professional.
2. Shift income to family members to lower the overall family tax burden
You may also be able to minimize your federal income taxes by shifting some income to family members who are in a lower tax bracket. For example, if you own stock that produces dividend income, one option might be to gift the stock to your children. After you’ve made the gift, the dividends will represent income to them rather than you, potentially lowering your family’s overall tax burden. Remember, in 2025, you can make a tax-free gift of up to $19,000 per year per recipient without incurring federal gift tax.
However, under kiddie tax rules, for children under age 18, or children under age 19 (or full-time students under age 24) who don’t earn more than one-half of their financial support, any unearned income over $2,700 (in 2025, $2,600 in 2024) is taxed at the parents’ tax rates. Also, be sure to check the laws of your state before giving securities to minors.
3. Deduction planning involves proper timing and control over your income
Part of minimizing federal income tax is taking advantage of all deductions you are entitled to and timing them most beneficially.
As a starting point, you’ll have to decide whether to itemize your deductions or take the standard deduction. Generally, you’ll choose whichever method lowers your taxes the most. If you itemize, be aware that some deductions (for example, medical expenses) are allowed only to the extent the deduction exceeds some percentage of your adjusted gross income (AGI). In cases where your deductions are affected by your AGI, you might look at ways to potentially increase your allowable deductions by reducing your AGI. To lower your AGI for the year, you can defer part of your income to next year, buy investments that generate tax-exempt income, and contribute as much as you can to qualified retirement plans.
Because you can sometimes control whether a deductible expense falls into the current tax year or the next, you may have some control over the timing of your deduction. If you’re in a higher federal income tax bracket this year than you expect to be in next year, you’ll want to consider accelerating deductions into the current year. You can accelerate deductions by paying deductible expenses and making charitable contributions this year instead of waiting until next.
4. Investment tax planning uses timing strategies and focuses on your after-tax return
You can also minimize tax by making tax-conscious investment choices. Potential strategies can include the use of tax-exempt securities and intentionally timing the sale of capital assets for maximum tax benefit.
Although income is generally taxable, certain investments generate income that’s exempt from tax at the federal or state level. For example, if you meet specific requirements and income limits, the interest on certain Series EE bonds (these may also be called Patriot bonds) used for education may be exempt from federal, state, and local income taxes. Also, you can exclude the interest on certain municipal bonds from your income in certain situations. And if you earn interest on tax-exempt bonds issued in your home state, the interest will generally be exempt from state and local tax as well. When comparing taxable and tax-exempt investment options, you’ll want to focus on those choices that maximize your after-tax return.
In most cases, long-term capital gain tax rates are lower than ordinary income tax rates. That means the time you hold an asset before selling it can make a big tax difference. Since long-term capital gain rates generally apply when an asset has been held for more than a year, you may find it makes good tax sense to hold off a little longer on selling an asset you’ve held for only 11 months. Timing the sale of a capital asset (such as stock) can help in other ways as well. For example, if you expect to be in a lower income tax bracket next year, you might consider waiting until then to sell your stock. You might want to accelerate income this year by selling assets, though, if you have capital losses this year that you can use to offset the resulting gain.
Note: A tax professional can help you decide what choices are right for your specific situation.
5. Year-end planning focuses on your marginal income tax bracket
Year-end tax planning, as you might expect, typically takes place in October, November, and December. At its most basic level, year-end tax planning generally looks at ways to time income and deductions to give you the best possible tax result. This may mean postponing income to the following year (thus postponing the payment of tax on that income) and accelerating deductions into the current year. For example, assume it’s December, and you know you’re in a higher tax bracket this year than you will be next year. If you can defer the receipt of income until the following year, you may be able to pay less overall tax on that income.
A local client advisor at Arvest Wealth Management can help you work toward your financial goals by developing a holistic financial planning strategy tailored to your specific needs and in collaboration with your third party tax advisor.
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