In observance of tax day- we figured we’d share a few ways to save money on taxes…ya know, for next year. The main way to ‘save on taxes’ is to reduced your taxable income. The good news is the IRS rewards you if you save for retirement, health, education, or if you donate. In the end these are all pretty positive things to contribute to anyways.
- Contribute to your qualified retirement accounts. You can contribute up to $5,500 on an annual basis into your IRA if you’re under 50 / $6,500 if you’re 50 or older. These number are adjusted for inflation and they can change over time.
You can contribute $18,000 on an annual basis into your 401(k) if you’re under 50 /$24,000 if you’re 50 or older.
Say you are 40 years old- you can save $5,500 into your IRA and $18,000 into your 401(k) and reduce your taxable income by a total of 23,500 in one year! That’s money you can stash away for retirement! You will eventually have to pay taxes on that money when you use it, so it’s best to work with a financial professional to see if that’s the best case for you.
If your medical expenses exceed 10% of your adjustable gross income, you can deduct them from your income. There are some exceptions, so make sure to consult your tax advisor.
You can also utilize a Health Savings Accounts (HSA). These accounts can be contributed to from payroll deduction (before taxes) or can be written off (if contributed after taxes). Furthermore, interest on this money is earned tax free! You can pay for medical expenses without having to pay taxes on this money. Depending on what tax bracket you’re in or how high your medical expenses are that could be a huge savings!
3. Childcare Expenses. I’m not a parent, but word on the street is that children are expensive. Information found on TurboTax gives an outline of tax savings. so make sure you keep those daycare bills!
“If you paid a daycare center, babysitter, summer camp, or other care provider to care for a qualifying child under age 13 or a disabled dependent of any age, you may qualify for a tax credit of up to 35 percent of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children or dependents.”
Additionally, while it wont save you this year, you can Put money into college savings accounts. The earnings will be tax free if used for qualified education expenses. It’s more of a long term strategy, but if you plan on sending your kids to college (or going to college yourself) it’s a way to take advantage of the market and avoid taxes later. Therefore, it might be worthwhile to look into.
4. Donate. Charitable contributions are an easy way to reduce your taxable income. Most people tend to donate throughout the year anyways, just make sure you get itemized receipts of what you donate. This way you can write your donations off.
Your deduction is limited between 30%-50% of your adjusted gross income & your donations are valued at fair market value.
5. Deduct capital losses- The IRS also gives you a break if you take a loss in your investments. If some of your portfolio is down and you’re looking to sell it anyways, you can sell it before the year’s end and record the loss. You can deduct $3,000 annually if filing single or $1,500 annually if married filing separately. If you take a hit that’s bigger than $3,000 you can carry the loss over to other years.
On the flip side- if you have some holdings that are up and you want to sell- you may want to wait until January 1st to sell that way you can report them on next year’s income.
And there you have it folks- investing in retirement, health, education, charity can have positive benefits in more ways than one!