As we quickly approach April 15, getting taxes prepared and filed is moving to the top of to-do lists. From the simplest 1040 form to very complex tax filings for businesses, paying taxes is something we’re all too familiar with. Along with preparing and filing comes the inevitable question:
How can I save on taxes?
Tax saving strategies come in many forms. Let’s review some common ways to reduce your tax liability and also some methods that you may not have considered.
Of course, to best strategize on how to minimize your taxes it is best to review everything with a certified financial planner to ensure that your methods and plans meet legal requirements.
Keep Track of Your Charitable Donations
Your donations are tax deductible if you itemize your deductions. This is a great way to reduce your taxable income by a few thousand dollars every year (or more!). The nice part about charitable donations is that any donation counts, not just cash. If you unloaded some old furniture and clothing at The Salvation Army, for example, the value of that donation can be deducted. Just make sure to get a receipt from the organization to which you are donating. Note that all non-cash donations require a receipt, and so do cash donations over $250. It’s best to keep receipts for all of it, to avoid complications in the event of an audit.
Set Up a 529 Plan for Your Child
529 Plans are run at the state level, and so there is no federal tax deduction. But there may be deductions for your state income tax calculations. Regardless of deductions, the plans provide tax free growth. If you are planning to help pay for your child’s higher education anyway, this is a great way to plan for it without risking investment related growth taxes.
Check with your individual state to find out what the rules are for you. There are a number of sites that provide “finders” to help you sort through the available 529 plans and make a choice that is right for you. Your financial advisor can also help sort through the myriad choices you’ll find.
Max Out Your 401k Savings
Since you’re not taxed on money that is taken directly from your paycheck to your 401k, you should max out that savings. In 2020, the maximum you can contribute is $19,500.00. If you’re 50 years or older, you can contribute an additional $6,500 to your 401k to catch up on savings.
Another compelling reason to max out your 401k is that many – employers match part of your contribution. This is free money (for you) and should absolutely be leveraged.
Save Money in an IRA
Individual Retirement Accounts (IRA’s) are another great tool to use specifically for retirement savings and can also reduce your tax liability. However, your savings may or may not be deductible depending on your individual situation. If you’re covered by another plan at work, or even if your spouse is covered by another plan, there are complexities and rules about what you can deduct.
In addition to rules governing the number of and types of retirement accounts you can use, there are also rules governing deductibility based on your income.
For IRA’s it is always best to discuss with your retirement advisor to make sure you are using the right savings vehicle and deducting the maximum allowable amounts from your income when filing taxes.
Don’t Aim for a Huge Refund
If you get a large tax refund each year, you may be missing an opportunity. The reason for a tax refund is that you paid too much throughout the year, and the government is paying you back for your over-payments.
But what could you have done with that money?
Instead of paying the government more money than required, you should be using every available savings dollar you have to fund your retirement accounts. If your retirement accounts are maxed, you can still put extra money to work in a brokerage account, or other investment.
Adding more fuel to this fire is that if you accumulate a pool of money, compounding over time will help it grow. The more you have at a younger age, the more pronounced the compounding effect will be.
Aim to have a tax return that results in a near zero-dollar balance due, or owed, when you file taxes. That will ensure that you are not over-paying and also that you won’t get stuck with a large tax bill come April.
There is always the temptation to over-pay and use it as a forced savings. This may work, but it is not the right tax saving strategy. Talk to your investment advisor or retirement planner about how you can dial in your withholding and maximize your savings and get the best outcome for your personal circumstance.
Some Health Care Costs May Be Deductible
Health Savings Accounts (HSA’s) may be a good way to save money for health care and also protect that money from being taxed.
Particularly with high deductible plans, an HSA may provide great benefit. When you fund your HSA, the moneys used are deductible, so you’re reducing your taxable income. On the withdrawal side, you will not be taxed either. You just need to use the money for approved, health care related expenses.
These tax saving strategies are available to most people and can be fine-tuned with the help of a financial advisor. With some smart planning, you can reduce your tax liability and set yourself up for a comfortable retirement.
Ready to start planning? Call or contact Dechtman Wealth Management Advisors today and we’ll help you get started.
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