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