Paying your fair share doesn’t have to mean paying an arm and a leg. When it comes time to file your taxes, make sure you’re maximizing your opportunities and making the most of your money. Check out these 4 tips to help you lower your taxes this year:
- Consider maxing out your retirement contributions. Contributions to traditional IRA accounts are tax-deferred, which means that money you contribute now reduces your taxable income and saves you money on your tax bill. These aren’t traditional deductions. You don’t have to itemize to get the benefit, so go ahead and make the most of this perk. Just remember that tax-deferred isn’t a “get out of tax-free card.” With these contributions, taxes are delayed until you withdraw the money, at which point they will be taxed as part of your income in that year. If you think you will be in a higher tax bracket later, it might make more sense to pay the taxes now with a Roth IRA.
- Try a flexible spending account. A flexible spending account (FSA) is a special account that you can use to pay for qualifying medical and dental expenses throughout the year. Contributions made to an FSA are pre-tax, meaning they reduce your taxable income. This is a great way to offset some medical expenses without having to itemize. Some employers offer FSA contribution matching, so check and see if that is available to you. Funds in an FSA can be used to pay for medical care, medical devices, prescription medications and even over-the-counter (with a doctor’s note).
- Consider bundling payments. Payments such as property taxes and student loan interest, can be deducted from your taxable income. This reduces the amount of tax you will be required to pay. The concept of bundling payments means that you can make multiple payments in a single year, thus increasing the available deduction. To make the most use of this, you will need to itemize your deductions one year, and take the standard deduction the next. Just be aware that the deductions can max out, so don’t overdo your bundles.
- Don’t forget those charitable contributions. Giving back is a great way to lower your tax liability. Charitable contributions made to qualified organizations (churches, veterans organizations, non-profit groups, etc. – see IRS.gov for a full list) can be deducted up to 30 to 50% of your adjusted gross income. Remember, you will need to itemize your deductions to receive credit for these contributions. Bundling can even work with your charity contributions. Doubling your annual charity budget this year may give you just the boost you need to push you over the edge.
Taxes may be complicated, but the deductions, credits, and reductions are an important part of the system. Understanding how to navigate tax season means finding the right strategy for your financial situation. With these 4 tips, you can be on your way to lowering your tax payments in no time. For more help navigating your taxes, we recommend reaching out to your financial advisor.