February 22, 2021
Tax season is right around the corner and it’s time to plan ahead. To pay less and save more on taxes, try to itemize deductions instead of taking standard options. Here are some tips to help.
One way you can reduce your taxable income is by moving money into tax-deferred retirement accounts. IRAs are an easy and accessible way to cut your taxes. You can contribute up to $5,500 into an IRA annually, or $6,500 if you are 50 and older. Some employers offer a 401(k) plan, which has an added bonus of your employer matching your contributions. You should also take advantage of this opportunity to invest in your retirement.
If your healthcare plan has a high deductible, a Health Savings Account (HSA) is a tax-exempt option. Health savings accounts allow you to put money in pre-tax for a variety of medical bills that aren’t covered by insurance. The money you put in escapes all federal taxes, state taxes, and FICA taxes. Not only does it help you reduce income that is taxable, but it helps you plan for your future medical costs.
Setting aside money for your child’s education can help reduce your tax bill. You can do so by setting up a 529 Plan, an investment plan built for educational savings. You can use it to pay for your kids’ college tuition or your spouse’s. Although the contributions are not deductible on your federal tax return, the tax benefits come from your state. Over 30 states offer full or partial deductions on 529 contributions. The funds grow tax-free and withdrawals are not taxed as long as they are for educational purposes.
Charitable donations are tax deductible. The good news is that they do not have to be financial gifts. Anything you donate can help reduce your tax bill as long as they go to a bona fide charity and you receive a receipt for your donation. This applies to clothes, food, household items, and more.
If you receive an unexpected tax bill this year, you can increase your withholding by adjusting your W-4 form. This is the form where you indicate how much tax you want to withhold from your paycheck. If you received a big refund in the previous years, you can reduce your withholding as you are unnecessarily living on less of your paycheck.
Now is a good time to think ahead of the tax season. If you want to save more this tax season, put some time aside to itemize and think it through. If you have any questions about taxes, reach out to your financial advisor.