When it comes to taxes, everyone is looking for a way to save. Although the tax code is complicated and involves many moving parts, some simple strategies can help you reduce your tax bill.
Knowing when to itemize deductions and when to take standard deductions is important. It’s not always easy to figure out which is best for your situation, but here are some strategies that may help:
Make Changes to Your W-4
The W-4 is a form you give your employer to tell them how much tax to withhold from your paychecks. You can modify your W-4 at any time.
– If you had a large tax bill this year and don’t want another one next year, increase your withholding so you owe less while filing your tax return.
– If you received a sizable refund, lower your withholding; otherwise, you risk living on less of your paycheck throughout the year.
Make IRA Contributions
Individual retirement accounts are classified into Roth IRAs and traditional IRAs. A traditional IRA contribution may be tax deductible, but the amount depends on your income and whether a workplace retirement plan covers you or your spouse.
Set Aside Money for College
Setting aside money for your child’s education can also help you save on your taxes. Contributing to a 529 plan is a popular option. Contributions are not deductible on federal income taxes, but you can deduct them on your state return if you contribute to your state’s 529 plan.
Contribute to Your FSA
Every year, the IRS allows you to direct tax-free dollars from your paycheck into your FSA, so if your employer provides a flexible spending account, you should take advantage of it to reduce your tax bill. You can use the money for medical and dental expenses during the calendar year, but you may also use it for related items.
Contribute to Your Dependent Care FSA
The dependent care FSA is another helpful way to reduce your tax bill. The IRS will permit your employer to contribute up to a certain amount of your pay to a dependent care FSA account during a tax year, allowing you to avoid paying taxes on that income. Coverage varies by employer, so review your plan thoroughly.
Contribute to Your HSA
If you have a health care plan with a high deductible, you may reduce your tax burden by contributing to a health savings account, a tax-free account that you can use to pay for medical expenses.
HSA contributions are tax-deductible, and withdrawals are tax-free if used for legitimate medical expenses. Although your employer may provide an HSA, you can also open your account.
See if You Qualify for Earned Income Tax Credit (EITC)
You may be eligible for a tax credit based on your income, marital status, and number of children. A tax credit reduces your actual tax liability dollar for dollar, as opposed to a tax deduction, which only lowers the amount of your income subject to tax.
Give It to Charity
Charitable contributions are tax-deductible. Donating clothes, food, old sporting equipment, or household items can reduce your tax bill if they go to a legitimate charity and you receive a receipt.
Sell Any Investments that Are Dragging Down Your Portfolio
Knowing you’ll get a tax break may make it easier to eliminate some of the bad stock picks that have been dragging down your portfolio.
You can deduct losses on investments, which you can use to offset any taxable capital gains. However, tax avoidance should never be used as a substitute for prudent investing. Sell a stock only if it truly no longer serves your portfolio.
