Many of us only focus on taxes at the end of the calendar year or as we prepare our annual tax return. But there are many factors we may not be thinking about that could have tax implications throughout the year. Integrating tax-smart strategies into your holistic financial plan may help you lower your tax bill and give your money more of a chance to potentially grow over the long term.
4 ways to help reduce your taxable income
- Start with maximizing your retirement contributions
Fortunately, you can reduce your taxable income dollar-for-dollar with yearly contributions to your 401(k), traditional IRA, and other retirement accounts. People who have access to a workplace retirement plan can contribute up to the maximum of $23,500 for 2025, and people 50 and older can make catch-up contributions of $7,500. And starting this year, those between ages 60 and 63 can make catch-up contributions of $11,250 in place of the $7,500 limit.
Contribution limits to IRAs remain $7,000 for 2025, the same as for 2024 (catch-up contributions also remain $1,000 for 2025). 401(k) contributions do not have income limits for contributing but IRAs do. Learn more about how much of your traditional IRA contribution you may be able to deduct.
- Take advantage of an HSA if eligible
If you're eligible to contribute to an HSA because you have a high-deductible health plan, contribution limits are now $4,300 for individuals and $8,550 for families for 2025, with an additional $1,000 in catch-up contributions for those over 55 and not enrolled in Medicare. If both spouses are covered by a family high-deductible health plan and share an HSA, they are eligible for one catch-up contribution of $1,000 if one of them is 55 or older and not enrolled in Medicare. If both are 55 or older and both are not enrolled in Medicare, however, and they each want to make a catch-up contribution, they must do so in separate HSAs, resulting in a $10,550 overall limit.
- Explore charitable giving opportunities
Nonprofits do invaluable work domestically and around the world, supporting communities affected by natural disasters, war, and economic instability. And there are tax-smart strategies to help the causes you care about that also make sense for your finances, even through ups and downs in the market. Here are 8 tax-savvy strategies that may help you make more of a difference.
- Consider itemizing your deductions
When you prepare your federal tax return, the IRS gives you a choice: You can claim a standard deduction—a set amount available to all eligible taxpayers (amount varies based on your filing status)—or you can itemize your eligible expenses and deduct that total from your taxable income instead. Both deduction types reduce your taxable income and how much you owe the government in taxes as a result. But you can only use one deduction option each year.
There are 5 main categories of itemizable deductions, subject to various limitations, and if these categories add up to more than the standard deduction, you may want to itemize. Here are some considerations for making that decision.
Tax-smart investing strategies
While investing with taxes in mind is important, it's not always easy. It can involve decisions related to the timing of the purchase or sale of stocks, the asset classes you choose, whether you hold them in tax-deferred or taxable accounts, and the order in which you draw down your assets. A tax-smart portfolio begins with the right asset mix for your time horizon and risk tolerance with techniques layered on that are designed to help mitigate your tax bill. Below are 5 strategies to consider.
- Find the right location
You're likely to have different types of accounts that can be aligned with specific financial goals. Some accounts, like brokerage accounts, are subject to income or capital gains taxes every year on any income earned or capital gains realized, while others (retirement accounts) can have tax advantages, such as tax-deferred growth (traditional or Roth accounts) or potential tax-exempt withdrawals (only Roth accounts).1 Learn more about asset allocation and see if you’re invested in the right accounts.
- Consider adding tax-efficient assets
For taxable brokerage accounts, you can consider adding assets that generate little or no taxable income, if they suit your overall investment strategy. For example, some types of investments—think bonds, bond funds, and high-turnover, actively managed stock mutual funds—can have bigger tax consequences. Consider putting the higher-tax investments in tax-advantaged accounts.
- Manage capital gains
Hanging onto securities for at least a year and a day offers investors rewards from a tax standpoint. Gains on investments held for a year or less are taxed at your federal ordinary income rate, which can go as high as 37%. But anything held for over a year is taxed at the lower federal long-term capital gains rate (up to 20%, depending on your taxable income). For high-income earners, either short- or long-term gains may be subject to the additional 3.8% net investment income tax. And remember, state and local taxes may also apply. Note—these are the current income tax rates and are subject to change.
- Choose withdrawals carefully
If you want or need to withdraw from a taxable account, consider how it may impact both the investment mix as well as your tax bill, since securities with a low cost basis will incur higher realized capital gains when sold. If you have retirement accounts, consider rebalancing your portfolio in those accounts following withdrawals, since you won't incur capital gains on trades within tax-advantaged accounts. Consult a tax advisor to determine the withdrawal strategy that works for you and see example withdrawal strategies below.
- Harvest losses
Sometimes an investment that has lost value can still do some good—or at least, not be quite so bad. The strategy that changes an investment that has lost money into a tax winner is called tax-loss harvesting. Tax-loss harvesting may be able to help you reduce taxes now and in the future. It allows you to sell investments that are down, replace them with reasonably similar investments, and then offset realized investment gains with those losses. If you have a net realized loss for the year, you can offset up to $3,000 of ordinary income with your losses and carry forward remaining losses to future years. The end result is that less of your money goes to taxes and more may stay invested and working for you.
Tax-smart withdrawal strategies
Retirement probably means no more regular paycheck, and you may need to turn to your investments for income. As a starting point, Fidelity suggests you consider withdrawing no more than 4% to 5% from your savings in the first year of retirement and then increase that first year's dollar amount annually by the inflation rate. But from which accounts should you be taking that money? The impact of taxes is just as important to consider now as it was when saving for retirement.
There are several approaches you can take, but the 2 most common are a traditional approach and a proportional approach.
A traditional approach is to withdraw first from taxable accounts, then tax-deferred accounts, and finally Roth accounts where qualified withdrawals are tax-free. The goal is to allow tax-deferred assets the opportunity to potentially grow over more time.
A proportional approach may make sense for people with multiple retirement savings accounts and relatively even retirement income need year over year. Once a target amount is determined, an investor would withdraw from every account based on that account’s percentage of their overall savings. The effect can be a more stable tax bill over retirement and potentially lower lifetime taxes and higher lifetime after-tax income.
Read through an example of each strategy here and estimate the potential effect of retirement income strategies on your taxes with Fidelity’s Retirement Strategies Tax Estimator.
Who can help you make a plan and how?
With either a tax professional or a financial professional there are different levels of service or help available depending on your unique situation. Both types of professionals can play a critical role in helping you manage your finances, and their specialties can complement each other.
A financial professional is knowledgeable in a broad range of financial-related considerations and can offer guidance on:
- Overall financial wellbeing (budgeting, debt management, saving, etc.)
- Investment strategies/management (fees may apply)
- Retirement planning
- Wealth management
- Tax-smart investing2
Read our guide to finding and working with a financial professional for more information or call us at 800–343–3548 to get started.
Tip: When looking for a financial professional, a CERTIFIED FINANCIAL PLANNER® (CFP®) is a widely recognized certification in the realm of finance.
A tax professional is knowledgeable in tax laws and regulations and can offer guidance on:
- Preparing and filing annual returns
- Ensuring tax compliance
- Specific tax-related matters
To find a qualified tax professional, try the Federal Tax Return Preparers with Credentials and Select QualificationsOpens in a new window tool.
Tip: When looking for a tax professional, a Certified Public Accountant (CPA) is a widely recognized certification in the realm of tax advising.
The bottom line
Taxes can be complicated, but with careful planning, it’s possible to implement strategies designed to make your taxes more efficient. However, some of these strategies can be complex and very time-consuming. A tax advisor or financial professional can help you identify the best approach for your specific situation.
At Fidelity, we are committed to helping your money money work harder for you. To help achieve that goal, within certain managed accounts we offer we've developed a comprehensive, tax-smart approach,2 which we apply throughout the year, that goes beyond purchasing tax-efficient investments or conducting year-end tax-loss harvesting. Learn more about Fidelity’s tax-smart investing approach.