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Feb

26

2025

Dear SoFi, How do I reduce my tax burden?

By Brian Walsh | | Comments Off

This article appeared in SoFi's On the Money newsletter. Not getting it? Sign up here.

Dear SoFi, How do I reduce my tax burden?
(submitted by Michelle Maria Nicholas, a member of SoFi’s Ambition Club on Facebook)

Dear Michelle,

That’s a great question. And you’re in good company looking for ways to save on your tax bill. Over half of people in a Pew Research poll reported being frustrated by the complexity of the federal tax code (frankly, we’re surprised it’s not even higher.) And an increasing share of Americans — 56% in 2023 — think they’re paying more than their fair share of taxes, considering what they get from the federal government in return.

If you’re strategic, however, your taxable income (which determines what you owe in taxes) can be a lot lower than your total income. You might even discover you’ve been paying tax on things you don’t have to (like medical or childcare bills.)

Here are some of the most common ways to lower your tax burden:

Max Out Your 401(k) or Traditional IRA

Every dollar you put into these types of retirement plans lowers your tax bill, assuming you make pre-tax or tax-deductible contributions. You can contribute up to $23,500 ($31,000 if you’re over 50) to a 401(k) or similar workplace retirement plan this year. With a traditional IRA, the limit is $7,000 ($8,000 if you’re 50 or over.)

You will have to pay taxes on whatever you withdraw when you retire, but for now, you’re lowering your tax burden and building financial security.

Max Out Your HSA

If there ever was a tax-saving secret, it’s the Health Savings Account, or HSA. Unlike just about any other type of account, an HSA offers a triple tax advantage: Your contributions are tax-deductible, you don’t pay taxes on any earnings you make from investing those funds, and withdrawals — as long as they’re for qualifying healthcare expenses — are also tax-free.

The catch is you have to be covered by a high-deductible healthcare plan to contribute to an HSA, but that’s definitely worth considering if you have choices.

You can set aside up to $4,300 this year in an HSA ($8,550 for family plans.) You’ll pay tax and a penalty if you don’t use it for qualifying medical expenses, but after you turn 65, the penalty goes away. Spoiler alert: You’ll probably have plenty of healthcare expenses in retirement anyway.

Note: Even if you’re fit as a fiddle, consider using an HSA as a retirement savings tool. It goes with you wherever you go (even if you change jobs and your health insurance changes,) and unlike a Flexible Spending Account, you don’t lose money you don’t use.

Don’t Forget FSAs

A Flexible Spending Account, or FSA, works similarly to an HSA, but you don’t need to have a high-deductible healthcare plan to have one. By setting aside pre-tax money in an FSA, you’ll lower your taxable income.

There is one huge difference, however: You have to gauge exactly what you’ll spend in a given year, since you’ll lose any unspent funds. FSAs can be used for medical expenses or dependent care (even summer camp!) The 2025 contribution limit is $3,300 or in the case of dependent care, $5,000 per household.

Make Sure You’re Not Better Off Itemizing

The IRS lets us subtract a certain amount from our taxable income each year. We can either take the “standard deduction” for our tax filing status — a predetermined amount that is reset each year (and nearly doubled in 2018 because of The Tax Cuts and Jobs Act) — or we can add up tax-deductible expenses like mortgage interest, student loan interest, business expenses, state income taxes and anything else that qualifies. (Here’s a list.) While most of us are better off taking the standard deduction, make sure your individual deductible items wouldn’t add up to more.

Make Sure You’re Getting All the Tax Credits You’re Owed

Tax credits will often lower your tax bill dollar-for-dollar, whereas deductions shrink the amount of overall income you owe taxes on. So it’s worth looking at the IRS’s list of credits to make sure you’re claiming everything you can. Think of it like a menu for tax savings. Have children? That’s a credit of up to $2,000 per child. Buy a new electric car? It could be worth a credit of up to $7,500.

Consider Tax-Loss Harvesting

If you make money from investing, in the stock market or otherwise, you have to pay long- or short-term capital gains tax. But there’s often a way to reduce that bill through what’s known as tax-loss harvesting. This involves selling assets that have dropped in value (to trigger an investment loss) in order to offset the capital gains tax you owe from profiting on other investments.

If an investor has a net capital loss in a given year, they can deduct up to $3,000.

Here’s a brief example: You have shares in two mutual funds. One has been performing well, the other has lost value. You decide to sell your shares in the better-performing one for $3,000 more than you paid, but that means you’ve got to pay capital gains tax on that profit.

In order to mitigate that burden, you decide to sell your shares in the other mutual fund for $1,000 less than you paid. Now you only have to pay capital gains tax on your net capital gain of $2,000, not $3,000. And then you can buy shares of a substantially similar mutual fund, so your money is still invested in basically the same way.

Keep in mind using this strategy can get pretty involved, so you may want to seek professional help.

Choose Investments That Pay Out Less Frequently

Selling your investments for a profit isn’t the only way to make money from them. But since interest and dividends are taxable income, it’s worth paying attention to which types of investments you’re making. Some pay out more frequently than others, like REITs, certain bond funds, and actively managed funds where the manager makes a lot of trades.

On the flipside, things like index funds and municipal bonds won’t trigger a tax bill as often.

Make Sure You’ve Chosen the Best Filing Status

Finally, don’t overlook your tax filing status. Most couples save money by filing jointly, though there may be situations when filing separately is more advantageous.

With thousands of pages in the tax code, it’s hard not to wonder if you’re leaving money on the table when you file your return. But once you understand some of the basic mechanics — things like deductions, credits and capital gains — things do start to make more sense.

That said, you can always get help from an accountant or tax preparer. They should be able to guide you through the tax savings you’re eligible for now, and help you plan strategies to save even more money down the road.

In financial health,

Brian Walsh
PhD, CERTIFIED FINANCIAL PLANNER®
SoFi Head of Advice & Planning

Image Credit: Bernie Pesko/SoFi

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

OTM2025022601

What You Don’t Know About Taxes Can Hurt You

By Keith Wagstaff | | Comments Off

This article appeared in SoFi's On the Money newsletter. Not getting it? Sign up here.

It’s that time of year when we grab the Advil, wring our hands, and mutter to ourselves: Why are taxes so freaking confusing?

The U.S. tax code is notoriously complex (it’s an estimated 4 million words long.) So it’s no wonder the majority of Americans don’t understand many of the basics, according to Erin Collins, the National Taxpayer Advocate and head of an independent IRS office that represents taxpayers.

In fact, our lack of so-called “tax literacy” is now among the top problems facing U.S. taxpayers — right up there with return processing delays and the growing sophistication of tax-related scams, she told Congress in her annual report last month.

Errors on income tax returns cost the government billions every year. But mistakes cost taxpayers too, according to Collins. More than half of small business owners don’t know there’s a 20% deduction on qualified business income, for example. And roughly 20% of eligible lower-income taxpayers fail to claim the Earned Income Tax Credit.

Here are four other key things many people don’t know:

• When tax returns are due: 45% of Generation Z and 36% of Millennials aren’t sure when they have to file their taxes, according to a Cash App survey cited by Collins. (Mark your calendar: The deadline is April 15.)

• An extension for filing is not an extension for paying. Yes, you can file your taxes after April 15 if you file for an extension, but if you owe the IRS money, it’s still due by April 15. And if it’s late, you may have to pay interest and penalties. (An online tax calculator can help you estimate what you owe.)

• There’s a difference between a tax deduction and a tax credit. Do you know whether a $1,000 tax deduction or a $1,000 tax credit is more valuable, assuming you pay 10% tax on $10,000 of income? It’s the tax credit, which directly lowers your tax bill. (A $1,000 tax deduction would lower your taxable income to $9,000, so you’d pay $900 rather than $1,000 in tax.)

• Getting a refund isn’t necessarily a good thing. A refund means too much of your paycheck was diverted to the IRS, so you’ve basically given the government an interest-free loan. That extra money could have been used to pay down debt or invest in your retirement savings.

So what? The average taxpayer spends 13 hours filing a 1040 return and, still, mistakes are common. Improving your financial literacy will not only help you during tax time but will make it easier to navigate through other milestones like saving for retirement, buying a house, or starting a business. Don’t bury your head in the sand. It’s worth investing some time to understand the basics — even if it makes you a little crazy.

How to Protect Yourself From Financial Frenemies

By Samantha Leal | | Comments Off

Many of us have heard of frenemies — those so-called friends who are also enemies in some way, causing tension and forcing us to deal with lots of passive-aggressive behavior or even downright sabotage.

But what about financial frenemies? These are people in your social or professional circle who pressure you about money, often undermining your own financial well-being in the process. They may guilt you into covering the bill, insist you splurge with them, or take every chance they get to one-up your financial accomplishments.

At best, having financial frenemies in your life is a challenge; at worst, it’s perilous. But don’t feel stuck if this is sounding familiar. Setting money boundaries, while sometimes uncomfortable, can make a huge difference to your sanity and your wallet. And let’s face it, with today’s increasingly unpredictable economy, every little bit of financial security feels precious.

Do You Have Financial Frenemies?

A financial frenemy can be anyone in your life who undermines you financially, regardless of motivation. Some are just careless or oblivious. Others, insecure or envious. A few may be manipulative or even malicious.

Mary Beth Storjohann, a CERTIFIED FINANCIAL PLANNER® practitioner who wrote Work Your Wealth, groups financial frenemies into six main categories. The first three can actually hurt you financially, while the others take more of a toll on your mental health.

• The Entitled Frenemies: These people frequently ask you to cover them (“Can you spot me? I’ll pay you back!”) but almost never repay. They take advantage of your generosity (or hatred of awkward situations) — sometimes without even realizing it.

• The Budget Busters: These people often encourage reckless and wasteful spending, derailing your financial plans with lots of talk about treating yourself. (“You deserve it!”)

• The FOMO (Fear of Missing Out) Frenemies: These people pressure you to overspend just like budget busters do, but their motivation is tied to cultural pressures and the latest trend. This makes them short-sighted about their (and your) spending. (“Come on, just this once!”)

• The One-Uppers: These people constantly measure your financial choices against their own, trying to burst your bubble or pressuring you to keep up. (“You got a $1,000 bonus? Nice! I just got a $10,000 raise.”)

• The Priers: These people are just plain nosey. They are always asking money questions that make you uncomfortable. (“How much do you make? What did your car cost?”)

• The Green-Eyed Monsters: These people are envious of your financial accomplishments. They see everything as a competition, always striving to outdo you, and often blaming you for their insecurity. (“Must be nice to be able to afford that.”)

How to Handle Financial Frenemies

It’s hard to set limits with a financial frenemy until you face that there’s a need. So ask yourself: How often do you feel uncomfortable with a friend because of money? Do you feel resentful? Or guilty? What about patterns — are there certain situations that always seem to throw your budget out of whack? Do you feel regretful about your spending whenever you’ve just spent time with a certain friend? Is there one person who can make any conversation about money?

Setting boundaries requires some confidence and a willingness to feel uncomfortable, but it’s usually well worth it. Be prepared to refrain from certain activities and say no (an email or text works if facing them is hard.) In some cases, you may even want to cut ties with your financial frenemy.

While every situation is different, clear, consistent communication is critical to setting any limits. Here are some other helpful tips.

Stay Firm in Your Financial Goals

Friends often have different incomes. If someone tries to pressure you into joining them on an expensive vacation or a big dinner you can’t afford, be upfront that you can’t, and stand firm. You can even blame your financial planner (imaginary or not) to make it feel less personal, according to Storjohann.

For example: “That sounds like an amazing trip, but I’m focusing on my savings right now. Let’s plan something that fits both our budgets.” Or, “I wish I could, but my financial planner says I need to forgo vacations for a while so we can save for a house.”

Declare a New Policy

If you’ve got a frenemy (a close friend, a work colleague, or even a gym buddy) who always seems to forget to Venmo you after drinks out, blame your “new policy” when you tell them you can’t cover the bill. This not only depersonalizes your rejection, but takes the focus off of that specific interaction. After all, a policy is a policy.

For example: “I’ve decided to stop lending money to friends — it’s just a new policy to keep finances separate. Hope you understand.”

Redirect the Conversation

If someone is constantly bringing up money, comparing their financial situation to yours, or trying to get you to share financial details, try redirecting the conversation. Not only might it help you avoid being triggered, but it’s a kind way to let them know you just don’t want to go there.

For example: “Everyone has different priorities when it comes to money. I’m really happy with the choices I’m making for myself.” Or, “I’m not comfortable getting into details. It’s nothing personal, I just never divulge that sort of thing. Anyway…”

Surround Yourself with Financially Supportive People

Simply put, find friends who understand where you’re coming from. They don’t have to share your financial priorities, but they should appreciate and support them — and reinforce your responsible financial habits rather than challenge them. That said, don’t give up too quickly if your existing social circle isn’t supportive. Make sure they know how you feel. After all, no one is a mind-reader, and they may not realize how they’ve been affecting you.

For example: “I’d really love your support here. I’m trying to be more mindful of my spending, so I’d appreciate it if we could find activities that help me keep my budget.”

Role Play

No one likes being uncomfortable, but setting money boundaries is a lot easier if you can tolerate awkward situations. Try practicing what you would say to a financial frenemy by role playing with a close friend you trust. The harder they make it for you, the better you’ll get at navigating impromptu situations, so tell them to let loose!

When Money Boundaries Matter More

A financial frenemy’s bad influence can be particularly damaging when your job or financial situation is less stable. That’s precisely when you shouldn’t be making impulsive purchases or taking on unnecessary credit card debt. So don’t feel guilty or selfish about setting clear limits and forging healthier relationships. You deserve to prioritize your own financial well-being.

Image credit: Bernie Pesko/SoFi Source: PeopleImages/iStock

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.

SoFi isn't recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

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Why You and Your IRA May Want to Go Back in Time

By Lindsay VanSomeren | | Comments Off

This article appeared in SoFi's On the Money newsletter. Not getting it? Sign up here.

There’s an old adage about saving and investing: The best time to start was yesterday. The second best is today. Well, when it comes to your IRA, you can do both.

Here’s how. Unlike employer-provided retirement accounts like 401(k)s, IRAs are individual retirement arrangements, so in a sense, the timing is between you and the IRS. Since you don’t file your 2024 taxes until 2025, you actually get until the filing deadline — April 15 — to make 2024 contributions. You can even start an IRA now for 2024.

But why would you want to mark any of your contributions down for 2024 versus 2025?

A few reasons. First off, there are annual limits to what you can save in any tax-advantaged retirement account. For IRAs, the cap for both 2024 and 2025 is $7,000 each year, or $8,000 if you’re 50 or older. That means anything you can mark as a 2024 IRA contribution frees up more room to save toward this year’s limits.

Second, if you have a traditional IRA, you may be able to deduct those 2024 contributions from your income, lowering your tax burden. Your contributions are fully deductible unless you or a spouse are covered by a retirement plan at work and you earn over a certain amount. (If you’ve already filed your 2024 tax return, you can amend it.)

Third, IRAs and other long-term investment vehicles let you leverage the power of compound growth, giving your contributions and any earnings from those contributions time to grow. If, for example, you saved $7,000 a year for 20 years and your investments had a 6% annual return, you’d end up with about $257,000, including earnings of roughly $117,000. Not too shabby.

(If you have or open an IRA with SoFi, you’ll also get a nice little reward — a 1% match on contributions made by April 15.)

So what? Maximizing tax-advantaged retirement accounts is one of the best ways to save for your future. And over half of Americans worry they won’t have enough saved by their retirement, according to the National Institute on Retirement Security.

If your employer offers a 401(k) plan with matching contributions, it’s best to save there first. You can set aside a lot more, and the match is free money. Otherwise, an IRA offers many of the same benefits, but with more flexible timing.

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