The Two Types of Tax Reduction
Tax strategies fall into two categories. Above-the-line deductions reduce your Adjusted Gross Income (AGI) — these are most powerful because a lower AGI also increases eligibility for other credits and deductions. Below-the-line deductions (the standard deduction, itemized deductions) come after AGI and reduce taxable income further. Maximize above-the-line first.
Maximize Pre-Tax Retirement Contributions
Biggest single lever for most Americans
Contributing to a 401(k), SEP-IRA, or Solo 401(k) reduces your taxable income dollar-for-dollar. A $23,500 401(k) contribution in the 22% bracket saves $5,170 in federal tax plus reduces your state tax bill. This is the single highest-impact tax strategy for most working Americans.
Pros
- Dollar-for-dollar AGI reduction
- Reduces federal + state tax
- Builds retirement wealth simultaneously
- Employer 401k is most convenient
- SEP-IRA for self-employed
Cons
- Money locked until 59½
- Required minimum distributions
- Still taxed at withdrawal
Contribute to an HSA
Triple tax advantage — the best account in tax law
For HDHP enrollees, HSA contributions are deductible, grow tax-free, and are tax-free on withdrawal for medical expenses. After 65, withdraw for anything (taxed like IRA). Single biggest tax advantage per dollar available to qualifying Americans.
Pros
- Triple tax benefit
- Rolls over indefinitely
- Invest in index funds for growth
- Acts as second retirement account
- Deductible even if you don't itemize
Cons
- Requires HDHP plan
- Not available to Medicare enrollees
- Must document medical expenses
Tax-Loss Harvesting
Turn investment losses into tax savings
If investments have declined in value, selling them realizes a capital loss that can offset capital gains — and up to $3,000 of ordinary income annually. Losses beyond $3,000 carry forward to future years. Then immediately repurchase a similar (not identical) fund to maintain market exposure.
Pros
- Converts losses into real tax savings
- Unlimited capital gain offset
- $3,000 deduction against income
- Losses carry forward forever
- Maintains market exposure through similar funds
Cons
- Wash-sale rule: can't rebuy identical security for 30 days
- Requires taxable brokerage account
- Need investment losses to apply
The above-the-line deductions most people forget
These reduce AGI without itemizing: student loan interest (up to $2,500), teacher classroom expenses ($300), self-employed health insurance (100%), half of self-employment tax, alimony paid (pre-2019 agreements), and HSA contributions. Claim all that apply before calculating your standard vs. itemized deduction.
| Strategy | Max Tax Savings | Who Qualifies | Complexity |
|---|---|---|---|
| Maximize 401(k) | |||
| SEP-IRA / Solo 401k | |||
| HSA Contribution | |||
| Tax-Loss Harvesting | |||
| Charitable Bunching | |||
| Business Deductions (QBI 20%) | |||
| Roth Conversion (low income yr) | |||
| 529 Contribution (state deduction) | |||
| Defer Income to Next Year | |||
| Accelerate Deductions | |||
| Gift to Charity (stock) | |||
| Dependent Care FSA |
Tax planning vs. tax filing
Most of these strategies must be executed before December 31st — you can't retroactively max your HSA or do tax-loss harvesting after the year ends (except IRA contributions, which are allowed until April 15th). Tax planning is year-round work, not something to think about in April.
See the impact of these strategies on your tax bill
Use the Tax Estimator to model your tax liability before and after key deductions.