Taxes are a hot topic these days. Various politicians are using their tax agenda to position themselves for the next Presidential election. We are learning about who pays them (almost half of Americans don’t pay a dime!), how should people be taxed going forward, and debating on what is a “fair system”.
Paying tax is our duty as working Americans. No doubt about it. It’s not fun, but those are the rules of engagement. Our system in the U.S. is progressive, meaning the more income you make, the higher your tax rate. Thus it is natural for us to make sure we aren’t paying more tax than is necessary.
I’m not advocating for anyone to avoid paying tax, nor seek ways to evade them. But by playing within the “rules”, there are some things that you can be doing to minimize the impact. Here are 5 things which may, in fact, cut your tax bill:
1. Add more to your retirement account
Most people know that adding to a 401k can reduce taxable income. Contributions to such plans help lower taxes by reducing taxable income. If a 401k (or 403b, 457, etc.) are not provided by an employer, consider a traditional IRA contribution or small business plan if you are self-employed.
Now would be an excellent time to review your accounts to see if you are contributing to the max allowed. If not, make it happen by year-end.
2. Take advantage of tax-friendly opportunities
If you are investing in taxable accounts, seek investments that are tax-efficient – including municipal bonds as an example. If working for a company, consider your employer’s FSA (flexible spending account) HSA (health savings account), or dependent care offerings. These would be great ways to get tax benefits for items that you will be spending money for anyways.
If saving for a child’s education, some 529 plans allow for deductions in your home state. The seldom-used “Coverdell Education Savings Account” can only take $2k per year per child, but these accounts can be used to offset future educational costs and provide a deduction as well. And if you are interested in pursuing your own academic interests – GO BACK TO SCHOOL! There are some learning credits that also give the opportunity to lower your tax bill.
3. Donate to charity
In addition to feeling good about donating to worthy causes, the IRS allows taxpayers to potentially make itemized deductions on their return for gifts made to qualified charitable organizations.
People can make donations of money of course, who doesn’t like green cash! Or you may consider donating appreciated stock or make noncash contributions like (such as donating electronic equipment or a vehicle).
4. Tax-loss harvesting
If you have investments that are currently lower in value than since initially purchased, it might be a good idea to sell them and use the loss to offset capital gains. And if losses exceed gains in any given year, you can potentially carry the loss over to later years.
In other words, if you cannot fully use the loss this year because it exceeds the limit, offset some ordinary income and you continue to use it in future years until fully used. Losses can be used constructively if done right.
5. Get the timing right
There is a big difference between doing something on January 1 versus the day before. So you may be strategic about a large expense that is coming up, as well as deferring income that is coming due. For a mortgage payment, you might want to pay a couple days earlier than normal as it could help you allocate that month’s worth of mortgage interest towards 2019 versus 2020.
Of course, I always recommend having a professional prepare your taxes. Free (or low cost) tax preparation software can save you a few bucks, but it also increases the chance of you overlooking some valuable opportunities. The incremental charge of paying a CPA or enrolled agent to have it done for you can oftentimes pay for itself, and then some.
Now that’s I’ve highlighted my most common ways to save in taxes, it’s time to consider this: what you are doing with those savings? Are you going to spend it, or save it? I’m curious to know what you might do with any incremental savings….shoot me a note!