7 Tax Rules Frugal People Always Follow
Frugal people don’t like to spend money unnecessarily, so it follows that they don’t like to overpay on taxes either. They are always looking for ways to reduce their tax burdens, enabling them to keep more money in their own pockets to save or invest.
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The key to doing that is finding all of the deductions and write-offs you can possibly use to offset your taxable income. Here are some tax strategies commonly used by people with frugal habits.
Estimate Your Tax Gains
Frugal people don’t blindly walk into tax season without a plan. They estimate their tax gains to determine which financial moves they should make before filing.
“Use your investment data to identify your tax rate and estimate how much you’ll owe on your investment sales so far,” said Adam Nash, co-founder and CEO of Daffy and adjunct personal finance professor at Stanford. “Use this to explore options to lower that tax responsibility before year end.”
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Max Out Retirement Contributions
“If your total tax rate (federal plus state) is less than 49%, then the only way to save money on taxes without coming up on the short end is to contribute to a tax-advantaged retirement account,” said Eric J. Nisall, accountant and founder of Understand Finances. “This is because you are keeping the money in your own control and getting a deduction.”
Frugal people will focus on increasing contributions to their 401(k)s, IRAs or other qualified retirement accounts to reach the maximum contribution limits. This strategy will help boost retirement savings while lowering taxable income.
For 2023, the contribution limit for a 401(k) was $22,500 and the maximum for an IRA was $6,500 ($7,500 for those 50 or older). For 2024, those limits have been increased to $23,000 and $7,000 for an IRA ($8,000 for those 50 or older).
Frugal people know the importance of saving for the future while trying to keep their taxes as low as possible.
Sell Your Investment Losses To Offset Your Gains
“Implement a tax-loss harvesting strategy to offset realized gains,” Nash suggested. “This strategy will help you sell selected stocks at a loss to lower the amount of capital gains tax you owe.”
Frugal people are aware of the importance of cutting their losses. Not every investment is the correct one, and you have to know when to move on.
Nisall did add a warning: “If you sell losing investments, you’re then giving up on those investments potentially recovering and leading to a greater benefit than the tax reduction, so you need to be careful when using this technique.”
Frugal people also take into account multiple perspectives so they make wise tax choices.
Adjust Your Paycheck Withholdings
Frugal people may want to study financial habits to ensure they make the correct decisions based on their situation. As a result, you could change your IRS withholdings with your employer to do your best to pay the right amount.
The IRS offers a tax withholding calculator to change your payroll tax withholdings. You can make changes so that a larger amount of money from your paycheck is withheld for taxes. While this would give the IRS more of your funds throughout the year, you could get a bigger tax return, which could be a pleasant surprise around tax season.
Apply for All the Tax Credits and Deductions You Qualify For
Frugal people do their best to apply for all the tax credits and deductions they qualify for to stretch their money further. Credits can reduce the amount of money you owe in taxes, while deductions can reduce your taxable income. Frugal people understand that they must maximize the credits and deductions they utilize.
What are some credits and deductions to consider here?
Home mortgage interest deduction.
Child tax credit.
Medical expenses deduction.
Home office deduction.
You should review the entire list thoroughly before applying for anything relevant to your situation.
Donate to Charity
While frugal people tend to focus on saving money, they understand the significance of giving back. The tax strategy here is known as “bunching” or “bundling” and the goal is for taxpayers to get access to the charitable deduction. Instead of accepting the standard deduction annually, you can group your charitable contributions for many years into a single tax year. You’ll want to work with a tax professional to ensure you qualify and do this properly.
“With a donor-advised fund, you can contribute to your fund, qualify for the deduction and then decide which charity to support at any time,” Nash said. “Consider the bunching strategy and stack your gift-giving for multiple years in one tax year to reduce your taxable income.”
Consider Going Green
The Inflation Reduction Act was signed into law in 2022, and the package included almost $400 billion for clean energy tax credits as governments work on transitioning toward renewable energy. Individuals can get potential tax credits if they buy electric vehicles or install solar panels, for instance.
Frugal people understand the importance of saving money on utilities and doing what’s best for their households, so they may be more inclined to consider going green. If you install a solar panel system in your home, you could save money on your utilities and get a tax break when filing your return. The solar tax credit can be up to 30% of the system installation cost.
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