No one wants to fork over their hard-earned money to Uncle Sam. Follow these tax strategies to keep more of what you made this tax season.
Whether you’re self-employed or work for someone else, the money you earn should stay in your bank account as much as possible rather than go to the government. Too many of us just assume there’s nothing we can do when it comes to taxes.
The average American pays $16,615 every year to Uncle Sam, says the most recent IRS data. That’s a big chunk of change. There are ways to cut the amount you send to the Feds though.
1. Max out your retirement contributions
The more money you can put into retirement accounts, the lower your tax burden. While you may not be able to enjoy that money now, at least you are not giving it away forever. Instead, it waits for you and grows in the meantime.
Your best bet is the 401(k) because the IRS lets you contribute without taxing that amount. It only taxes what is left over. If you’re a freelancer or business owner then you can take a similar path by contributing to a SEP IRA instead of a 401(k). You can put up to 25 percent of your net income away, tax-free.
Another strategy is catch-up contributions. Those allow you to save up to $6,500 in an IRA and $22,500 in a 401(k) for filers under age 50. If you happen to be over 50, then those amounts go up to $7,500 and $30,000, respectively.
2. Leverage losses from investments
It’s hard enough to make money, but when you invest and lose money it’s frustrating. On the bright side, you can turn losses into gains by selling bad investments at a loss. This can offset capital gains you made elsewhere.
If your losses match your gains, then, in theory, you’ve been able to wipe away any tax owed off the total. Or, if your losses exceed your gains, then you can apply up to $3,000 in losses toward your ordinary income. This can be an ideal tax reduction strategy if your income turned out to be more than expected for the year and might have pushed you into a higher tax bracket.
3. Invest in a Health Savings Account (HSA)
This account is similar to a 401(k) or SEP IRA because your contributions immediately reduce your taxable income. But there’s one more advantage to it. Putting money into an HSA lets you grow that money tax-free. When you need to pay for certain medical expenses, you can take money out to do so. Some qualifying medical expenses include contact lenses, doctor visits, acupuncture, and more.
You can contribute up to $3,850 if you have individual health insurance coverage or $7,750 if you have family health insurance coverage. If you’re 55 or older, then you can also contribute another $1,000 as a catch-up contribution.
You can only open an HSA if you currently have a high-deductible health insurance plan.
4. Deduct 529 savings plan contributions from state taxes (if your state allows)
It may feel like your kids cost you an arm and a leg, but they can actually help you with your taxes. If college is on the horizon, now’s the time to address how to pay for it and reduce your tax burden simultaneously. Open a 529 plan.
Even if you don’t have your own kids to start a plan for, you can do so for nieces, nephews, friends, and grandkids. You can even open a 529 if you are going to go to college in the future.
Although contributions to 529 accounts aren’t tax-deductible at the federal level, the invested funds grow tax-free. Depending on the state you live in, you may be able to deduct 529 contributions from state taxes. More than 30 states and Washington D.C. either allow tax deductions or tax credits for 529 contributions.
5. Contribute to a Flexible Spending Account (FSA)
If your employer offers flexible spending accounts, then use this financial vehicle to steer more money away from your tax bill. You can use pre-tax funds to make contributions to your FSA. The balance in your FSA can be used to pay for qualifying out-of-pocket medical expenses (similar to an HSA).
Consider enrolling in a dependent care FSA. This lets you move funds away from the taxable income column and toward child care or care for a disabled family member.
Pay attention to important FSA rules, though. You can only open an FSA during your employer’s open enrollment period. Also, many FSA plans are structured so that you’ll lose funds if you don’t spend it within a designated time period.
6. Bundle itemized deductions
Certain tax deductions, such as medical expenses, charities, and mortgage interest, are only available if you itemize deductions. Now that the standard deduction has been increased, it may not always make sense to itemize.
However, there’s still a way to leverage those itemized deductions: bundle them together. For example, you can make two years’ worth of deductible payments or contributions within one taxable year. You can opt to prepay mortgage interest by making additional payments throughout the year.
Medical expenses or giving to charity can be costly, but they repay you in significant tax savings beyond the normal standard deduction now given.
7. Make energy-efficient upgrades to your home
You may have heard that energy-efficiency tax benefits are being phased out, but don’t listen to hype from solar panel companies trying to pressure you into buying. There are still many residential renewable energy tax credits available to homeowners right now.
These tax credits include solar panel installation and solar-powered water heater installation. There are other tax credits to leverage, like wind turbines, renewable-energy fuel cells for residential power generation, and geothermal heat pumps.
Your tax credit can equal as much as 30 percent of the cost of the energy-efficient home improvement project. Plus, there is no maximum limit on the tax credit amount to claim except for those claimed for fuel cell installation. Tax credits are available for your primary residence and any secondary homes you own.
Published by Debt.com, LLC