Six Tips to Reduce Your Taxes
Six Tips to Reduce Your Taxes
Posted on May 15, 2014
Filing tax returns is rarely a pleasant experience.
Small changes to the tax code last year had some significant impacts for many people this year. If you found yourself owing too much, there are steps you can take now to reduce your tax burden come next April 15.
- If your employer offers a retirement plan (401K, 403B, etc.), take full advantage by contributing the maximum amount you’re able because contributions to these qualified plans are not subject to income tax. If you’re over 50 years old, you can contribute $23,000 a year; if you’re under 50, you can contribute $17,500. There’s also an option for those who are self-employed: talk to a professional about setting up a SEP IRA or simple IRA to take advantage of similar tax breaks.
- If your employer offers one, consider opening a Health Savings Account (HSA) or Flexible Savings Account (FSA), which enable you to put money aside for health and medical expenses. These accounts are funded with pre-tax dollars, reducing the total income that’s taxed for the year and letting you use pre-tax funds to pay for healthcare expenses.
- If you have children and are saving for their college education, consider opening a 529 plan for them. Contributions to these plans are exempt from state income taxes (though not federal taxes).
- In addition to your employer’s retirement plan, you can open an Individual Retirement Account (IRA). With traditional IRAs, qualified contributions are not subject to income tax. (Roth IRAs are post-tax dollars, meaning contributions are not tax-deductible, but they can deliver tax savings down the road.)
- If you owed too much in taxes, you may want to review the number of exemptions you’re claiming on your W-2 form. If the number is too high, less money is being withheld throughout the year, leaving you owing the government at the end of the year. Of course, the opposite is also not ideal: though many people want the “big refund” come tax time, ideally you should only pay the amount you actually owe. If you pay too much, you do get that refund, but it means that the government has had the use of your money all year instead of you being able to invest it or save it in an interest-bearing savings account.
- For those with higher levels of discretionary income, contributions to qualified non-profit organizations can be tax deductible. If you have a favorite charity, you can let them know with a financial contribution.
Of course every situation is different, so talk to your tax professional to learn if these tips could work for you. If you don’t already work with an accountant or other qualified professional, you may want to initiate the process, especially if you have any special circumstances such as being self-employed, owning rental property, having sold investments, owning depreciating assets, etc.
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