Tax tips & pitfalls: What to know to maximize your money

Tax season can feel like navigating a maze. Without a good map, you can get lost, potentially resulting in overpaying taxes or, worse, owing penalties for mistakes.

While most people aim to pay what they owe—no more and no less—the tax system's complexity often leads to missed opportunities to build tax efficiency into your financial strategy. From forgotten deductions to overlooked tax credits, even minor tax mistakes can add up and impact your financial health in ways you might not realize.

When preparing your income tax return, consider these tax strategies to minimize your tax liability: reducing taxable income, maximizing tax deductions and credits and having the right documentation in place. Following these tax planning tips helps to ensure you won't pay more than you need to come tax season.

In the U.S., income is taxed in brackets. Taxpayers who have lower income levels are taxed at lower rates while higher-earning taxpayers are charged higher rates. Projecting which tax bracket you'll be in helps you identify opportunities to reduce your taxable income, potentially lowering your overall effective tax rate.

Here are some common pitfalls and tips for managing your taxable income:

Tax-advantaged accounts usually reduce your taxable income. Typically accounts fall into three categories: tax now, tax later and tax never.

• Tax now. You pay taxes upfront on tax now accounts like checking and savings accounts, certificates of deposit (CDs), mutual funds and U.S. treasuries. These are not considered tax-advantaged because you pay the taxes right away, but they are relevant to diversifying your tax strategy.
  
• Tax later. With tax later accounts, you don't pay taxes on earnings from the account as you earn it, but your tax liability kicks in when you withdraw funds, often in retirement. Examples include employer-sponsored retirement plans like 401(k)s and 403(b)s, traditional IRAs and variable and fixed annuities.
  
• Tax never. A tax never account involves investing after-tax dollars but potentially being able to withdraw your money and its earnings later without paying additional taxes. For example, when you contribute to Roth IRAs or Roth 401(k)s, you fund them with dollars you've paid taxes on, but withdrawals after retirement age are not taxed. Health savings accounts (HSAs), and 529 plans also allow tax-free growth and tax-free withdrawals for qualifying expenses.

Be aware that many tax later and tax never accounts have annual contribution limits and deadlines. Missing the cutoff date or putting in too much money can mean penalties or losing out on valuable tax savings.

The interest earned on savings accounts, CDs and bonds is taxable if held in a taxable account, but it's easy to forget about it during tax planning and preparation. Even small amounts of unreported interest can lead to audits or penalties. Keep track of all Form 1099-INTs and 1099-OIDs from your financial institutions and include this income in your tax return.

Cashing in on investment gains can trigger unexpected tax liabilities. Discuss your investments with your financial advisor to ensure your income tax expectations align with your investment strategy so you aren't surprised come tax season. Some areas to consider include:

• Capital gains taxes. Short-term capital gains (from assets held less than a year) are typically taxed at higher rates than long-term gains. Avoid emotional investing or frequent trades that may result in taxable short-term gains.
  
• Tax-loss harvesting. You may be able to offset capital gains with capital losses by selling underperforming assets. But watch out for wash sale rules, which disallow loss deductions if you repurchase a substantially identical asset within 30 days before or after the sale.

Donations to charities and nonprofits have a dual benefit: You're helping others and causes that are important to you while potentially reducing your taxable income.

To maximize the tax benefits, consider:

• Donating appreciated assets like stocks. Giving stock to charity offers the added advantage of deducting the market value without paying capital gains tax on the appreciation.
  
• Making a qualified charitable distribution. If you take a required minimum distribution (RMD) from your IRA but don't need it all for income, you could donate it directly to a qualifying charity as a qualified charitable distribution (QCD). These donations count toward your annual RMD but don't count as taxable income.

Tax credits and deductions are powerful tools for reducing your tax liability, but they work differently. Tax deductions lower your taxable income while tax credits directly reduce the taxes you pay dollar for dollar, making them even more impactful. Claiming deductions and credits you don't qualify for could lead to penalties or even audits, and not claiming deductions or credits that you do qualify for could cause you to pay more than you owe in taxes.

Here are some common tax credits and deductions to remember:

• The Earned Income Tax Credit benefits low- to moderate-income workers, particularly those with children. The amount varies based on income, filing status, and number of dependents. Because it's a refundable credit, it could result in a refund even if you don't owe taxes.
  
• The Child Tax Credit is available to parents of qualifying dependents under age 17. It reduces your tax liability and, in some cases, offers a refund.
  
• The Saver's Credit encourages low- and moderate-income earners to contribute to retirement savings plans, such as IRAs and 401(k)s. It provides a credit of up to 50% of your contributions ($1,000 single or $2,000 if married filing jointly), depending on your income level.
  
• The American Opportunity Tax Credit is available if you or your dependents are pursuing higher education. It allows you to claim up to $2,500 per eligible student for tuition, fees, and course materials.

Good record-keeping is the backbone of any tax-saving strategy. Having a complete set of documents helps you file an accurate return and can protect you in case of an audit.

Here are some best practices to follow and pitfalls to avoid when it comes to tax documentation:

• Review last year's return. Your prior-year tax return is an excellent starting point for this year's preparation. It helps you identify credits and deductions, taxable income sources you may have overlooked and carryovers like unused losses.
  
• Sign and date your return. It may sound simple, but forgetting to sign and date your tax return is a common mistake for paper filers. The IRS considers an unsigned return invalid and won't process it.
  
• Provide all necessary documentation. Incomplete or missing documents can delay your tax processing and may trigger IRS scrutiny. You don't need to submit every tax document or receipt to the IRS, but you must include any forms showing tax withheld (if you file a paper return) and qualified appraisals for non-cash donations worth over $5,000.
  
• Meet the deadlines. The filing deadline for individual taxpayers is typically April 15, but an extension gives you an additional six months (typically until October 15) to file. Remember, an extension doesn't give you more time to pay taxes owed. You still need to estimate and pay any tax due by April 15.
  
• Keep records organized. The IRS recommends keeping tax records for at least seven years. Organized records make it easier to verify information during audits and reference past returns for planning future tax strategies. Whether your records are physical or digital, store them in a secure but easily accessible location.

Some situations bring extra responsibilities at tax time. If you've lost a loved one or own a business, there may be additional steps to take to avoid errors and unexpected challenges.

If you're the executor of an estate, you may need to file the deceased person's final tax return to report income and deductions up to the date of their passing. Here are a few tips to do it right:

• File their final return using their name and Social Security number, just as it would have been during their lifetime.
• Pay any taxes owed by the estate before distributing assets to beneficiaries.
• If the estate earns income after the date of death (e.g., from investments or a rental property), you may need to file a separate Form 1041 for the estate or trust.

It's a good idea to consult a tax professional if it's your first time handling a deceased person's taxes.

If you own your own business or you're a self-employed freelancer or independent contractor, you don't have an employer to withhold taxes from your income. Instead, you have to keep track of your taxes owed. It's most helpful to make sure you pay only what you owe if you submit estimated taxes throughout the year.

Estimated taxes cover income and self-employment taxes (Social Security and Medicare contributions). Payments are typically due on April 15, June 15, September 15, and January 15 of the following year. Failing to make these payments on time can result in penalties, even if you pay your total tax liability in full by April 15.

To avoid problems, work with a tax pro or use the worksheets included in Form 1040-ES to calculate your quarterly payments.

Most people don't look forward to tax filing, but it doesn't have to be stressful. Here are a few final tax-saving tips to help the season go smoothly.

• Verify all information before submitting your return. Even small errors can lead to big problems when filing your taxes. Double-check everything on your return, including names, Social Security numbers, addresses, income, deductions and banking information for direct deposits. It's worth the extra attention to avoid IRS notices or processing delays.
  
• Seek professional tax assistance. A tax professional can offer valuable guidance—especially if you have multiple income streams, own a business or aren't sure how to claim deductions or credits. They can also help you plan for the year ahead, identifying opportunities to optimize your tax strategy beyond just filing your return. For additional tax guidance, explore the resources available on the IRS website.
  
• Use tax software and electronic filing. Tax software simplifies the filing process and helps reduce errors with built-in checks and prompts to ensure you don't miss available deductions or credits. E-filing combined with direct deposit is the fastest way to receive a tax refund. You can usually receive your refund within 21 days, as opposed to six to eight weeks for a paper return.
  
• Know you can correct mistakes. If you discover an error after you've filed, don't panic. You can amend your return to correct errors and minimize potential penalties or delays.

Filing taxes isn't just about compliance; it's about responsibly paying what you owe and nothing more so you can preserve your hard-earned money and financial stability.

If you need help, a financial advisor can help you plan proactively with tax efficiency in mind. Thrivent financial advisors will work with you and your tax professional to guide you through informed decisions year-round that can reduce your taxable income, optimize your deductions and credits and make sure you have the documentation you need.

By combining thoughtful planning and professional support, you can confidently approach tax season—protecting your finances while maximizing the opportunities to save.