PRACTICAL Tax Strategies

An unexpected tax bill can ruin anybody’s day. To help avoid that unpleasant surprise, here are 12 easy moves many people can make to cut their tax bills. In many cases, you must itemize rather than take the standard deduction in order to use these strategies, but the extra effort may be worth it.

1. Tweak your W-4

The W-4 is a form you give to your employer, instructing it on how much tax to withhold from each paycheck.

• If you got a huge tax bill this year and don’t want      another surprise next year, raise your withholding so you owe less when      it’s time to file your tax return.
• If you got a huge refund, do the opposite and reduce      your withholding — otherwise, you could be needlessly living on less of      your paycheck all year.
• You can change your W-4 any time.

2. Stash money in your 401(k)

Less taxable income means less tax, and 401(k)s are a popular way to reduce tax bills. The IRS doesn’t tax what you divert directly from your paycheck into a 401(k).

• For 2020 and 2021, you can      funnel up to $19,500 per year into an account.
• If you’re 50 or older, you can      contribute an extra $6,500 in 2020 and 2021.
• These retirement accounts are      usually sponsored by employers, although self-employed people can open      their own 401(k)s. And if your employer matches some or all of your      contribution, you’ll get free money to boot.

3. Contribute to an IRA

There are two major types of individual retirement accounts: Roth IRAs and traditional IRAs.

You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make.

• For the 2020 tax year, you may      not be able to deduct your contributions if you’re covered by a retirement      plan at work, you’re married and filing jointly, and your modified      adjusted gross income was $124,000 or more. In 2021, that number rises to      $125,000.

There are limits to how much you can put in an IRA, too:

• For 2020 and 2021, the limits      are $6,000 per year, or $7,000 for people 50 or older.
• You have until the tax-filing      deadline to fund your IRA for the previous tax year, which gives you extra      time to take advantage of this strategy.

4. Save for college

Setting aside money for Junior’s tuition can shave a few bucks off of your tax bill, too. A popular option is to make contributions to a 529 plan, a savings account operated by a state or educational institution. You can’t deduct your contributions on your federal income taxes, but you might be able to on your state return if you’re putting money in your state’s 529 plan. Be aware, too, that there may be gift tax consequences if your contributions plus any other gifts to a particular beneficiary exceed $15,000.

5. Fund your FSA

The IRS lets you funnel tax-free dollars directly from your paycheck into your FSA every year, so if your employer offers a flexible spending account, you might want to take advantage of it to lower your tax bill.

• In 2020 and 2021, the limit is      $2,750.
• You’ll have to use the money      during the calendar year for medical and dental expenses, but you might      also be able to use it for related everyday items such as bandages, pregnancy      test kits, breast pumps and acupuncture for yourself and your qualified      dependents.
• Some employers might let you      carry money over to the next year.

6. Subsidize your Dependent Care FSA

This FSA with a twist is another handy way to reduce your tax bill — if your employer offers it.

• The IRS will exclude up to      $5,000 of your pay that you have your employer divert to a Dependent Care      FSA account, which means you’ll avoid paying taxes on that money. That can      be a huge win for parents of kids under 13 (14 in 2020 due to special      rules for coronavirus), because before- and after-school care, day care,      preschool and day camps usually are allowed uses.
• Elder care may be included,      too.
• What’s covered can vary among      employers, so check out your plan’s documents.

7. Rock your HSA

If you have a high-deductible health care plan, you may be able to lighten your tax load by contributing to a health savings account, which is a tax-exempt account you can use to pay medical expenses.

• Contributions to HSAs are      tax-deductible, and the withdrawals are tax-free, too, so long as you use      them for qualified medical expenses.
• For 2020, if you have self-only      high-deductible health coverage, you can contribute up to $3,550. For      2021, the individual coverage contribution limit is $3,600.
• If you have family      high-deductible coverage, you can contribute up to $7,100 in 2020 and      $7,200 in 2021.
• If you’re 55 or older, you can      put an extra $1,000 in your HSA.
• Your employer may offer an HSA,      but you can also start your own account at a bank or other financial      institution.

8. See if you’re eligible for the Earned Income Tax Credit (EITC)

The rules can get complex, but if you earned less than $57,000, the earned income tax credit might be worth looking into.

Depending on your income, marital status and how many children you have, you might qualify for a tax credit of up to almost $7,000 in 2020 and 2021.

A tax credit is a dollar-for-dollar reduction in your actual tax bill — as opposed to a tax deduction, which simply reduces how much of your income gets taxed. It’s truly found money, because if a credit reduces your tax bill below zero, the IRS might refund some or all of the money to you, depending on the credit.

9. Give it away

Charitable contributions are deductible, and they don’t even have to be in cash.

If you’ve donated clothes, food, old sporting gear or household items, for example, those things can lower your tax bill if they went to a bona fide charity and you got a receipt.

Many tax software programs include modules that estimate the value of each item you donate, so make a list before you drop off that big bag of stuff at Goodwill — it can add up to big deductions.

10. Keep a file of your medical expenses

If you’ve been in the hospital or had other costly medical or dental care, keep those receipts.

• In general, you can deduct      qualified medical expenses that are more than 7.5% of your adjusted gross      income for that tax year.
• So, for example, if your      adjusted gross income is $40,000, anything beyond the first $3,000 of your      medical bills — 7.5% of your AGI — could be deductible. If you rang up      $10,000 in medical bills, $7,000 of it could be deductible in this      example.

11. Sell those dogs weighing down your portfolio

Knowing you’re getting a tax deduction might make it a little easier to unload some of those bad stock picks that have been weighing down your portfolio.

• You can deduct losses on stock      sales, which can offset any taxable capital gains you might have. The      limit on that offset is $3,000, or $1,500 for married couples filing      separately.
• One other note: Never let tax      avoidance become a substitute for wise investing. Sell a stock only if it      truly doesn’t work for your portfolio anymore. Don’t do it just to get a      tax break, because if you decide to buy back your stock within 30 days,      the IRS can take back your deduction.

12. Get the timing right

From a tax perspective, there’s a huge difference between doing something on Dec. 31 and doing it a day later. If you know an upcoming expense is going to be tax-deductible, think about whether you can pay for it this year rather than next year. Making January’s mortgage payment in December, for example, could give you an extra month’s worth of mortgage interest to deduct this year. Similarly, if you know you’re near the threshold for the medical-expenses deduction, moving that root canal up might make the pain more bearable if the cost suddenly becomes deductible, too.

13. Consider starting a business.

There are over 100 allowable deductions for a business to use to support it’s functioning. Since we are now limited on what we can deduct on Schedule A, (most use the newest higher standard deduction and give up their mortgage interest and taxes, along with charitable contributions), there are ways to still take advantage of these in some ways on a schedule C. (Make sure you investigate what is allowable and do it right.) 

If you are passionate about something that can be monetized, perhaps even becoming your primary source of income, there are a LOT of benefits:

· Business use of the home

· Hiring the kids

· Business mileage on your vehicle

· Insurance and retirement options

· Travel deductions

· And MANY MANY MORE!

If you are wanting independence and the opportunity to fully express your talents and abilities, there is an option allowed in our country to pursue your hearts desires. I am a firm believer in being self-employed. It offers time, money, and incentive to live a fuller life.

14. Use of windfall gain strategies.

As you become more successful in your life, there are certain items that will create a potential tax liability you can avoid, and still meet many of your life’s desires. Once you have achieved a desired level of living, the balance of your estate and potential windfall gains can be used to meet your personal desires like:

· Greater retirement with limited or no taxes

· Sharing with family and friends

· Giving to charities

· Creating a legacy

Here are some types of potential gains that deserve consideration:

· Recapturing fully depreciated items. (Particularly capital assets.)

· Stocks and Bonds.

· Foreign currencies that have increased significantly. (Potential revaluations)

· Cryptocurrencies.

These strategies could include:

· Gifting Assignments.

· ROTH IRAs.

· Charitable Remainder UniTrust. (CRUT)

For more information on windfall gains and how to plan for them, please visit: www.maxplansforlife.com. There are many great options and the opportunity for a free 30 consultation available on that site. Worth the time if you have ANY of the above-mentioned investments.

Now that we have covered some of the PRACTICAL strategies for taxes, let’s take a look at investments. Press the link below to get to that page.