Thanks to the tax overhaul passed this year, we now live in a new tax environment. A few breaks were dropped, but some new ones were added as well. The first IRS Tax return filed under the new regulations will be in 2022, but the time to hunt for tax savings is now. The following suggestions could pay off handsomely in the months—and years—to come.
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Make the Most of Your Tax-Free Savings
Setting money aside in a tax-deferred retirement plan is one of the most effective strategies to reduce your taxes. Not only are you saving for a secure retirement, but you may also be able to reduce your income enough to fall into a reduced tax rate. If your workplace offers a tax-deferred plan such as a 401(k), be sure you:
- Participating in order to ensure that you do not miss out on any matches that your workplace offers.
- Investing as much money as possible.
Simplified Employee Pensions (SEPs) and individual 401(k)s are two options for tax-favored retirement savings if you run your own firm. Contributions lower your current tax bill while profits grow tax-free for retirement.
Because the contribution limitations for these plans are so large ($55,000 if you’re under 50, $61,000 if you’re 50 or over), they can be a great help if you have a lot of money. IRS Tax Return.
Tap Into the Good Old IRA
Individual Retirement Accounts (IRAs) are a simple, easy-to-use tool to reduce your taxes in the same manner that a 401(k) does. They do, however, adhere to tight guidelines.
If neither you nor your spouse participates in a corporate retirement plan, you can contribute $5,500 to an IRA and deduct that amount from your taxable income – even if you don’t itemise deductions. Your deduction may be limited if you or your spouse have a work-related plan. It is determined by your income. More information can be found in this IRS paper.
Take Advantage of a Health Savings Account
If you buy your own coverage, see if your employer offers an insurance plan that you may combine with a Health Savings Account, or consider starting one yourself. A health savings account allows you to save money before taxes for a variety of medical expenses, such as deductibles, co-pays, and other non-covered medical expenses like eye and dental treatment.
The money you put into an HSA is tax-free (there are no federal income taxes, state or local taxes, or FICA taxes), the balance grows tax-deferred (and can be invested in mutual funds), and withdrawals used to cover medical expenditures are tax-free.
If you really want to take advantage of an HSA’s tax-savings potential, fund it with pre-tax money but pay for out-of-pocket health bills with cash rather than drawing down HSA funds. To pull this off, you’ll need serious financial discipline (and good health), but it’ll allow your HSA funds to grow tax-free.
Using a Flexible Savings Account to Maximize Tax Savings
The Flexible Savings Account is similar to the HSA’s younger sibling. An FSA allows you to set aside money pre-tax, up to $2,550 per year, for qualified health expenses such as deductibles, albeit it’s only available through employer-sponsored healthcare plans. That’s $2,550 in taxes you won’t have to pay: no federal income tax, no state income tax, and no FICA. Nothing.
However, unlike an HSA, those funds do not belong to you and may revert to your employer if you do not utilize them before the end of the year. Even so, most businesses will give you a grace period till the next year to pay off your debt. You may be eligible to carry over up to $550 into the following year’s spending period.
There are certain exceptions to the rule that you can’t use an FSA if you have an HSA (and vice versa).
Give Away Money the Tax-Wise Way
Consider giving valued stocks or mutual fund shares that you’ve owned for more than a year instead of cash if you’re planning a large present to charity.
As a result, your generosity’s saving power is amplified. You never have to pay tax on the profit since your charitable contribution deduction is based on the fair market value of the assets on the date of the donation, not the amount you paid for the asset. Don’t, however, gift stocks or mutual fund shares that have lost money. You’d be better off selling the asset, claiming the loss on your taxes, and donating cash to the charity. IRS Tax Return.
Remember, though, that you must itemize your deductions in order to receive a tax benefit. If you want to maximize your giving and tax benefits, you have options.
IRS Tax Return: Take Advantage of a Tax Credit for Your Good Deeds
Calculate your out-of-pocket expenses for doing good. Keep track of everything you spend on charity, from stamps for a fundraiser to the cost of ingredients for the homeless casseroles you make to the amount of kilometers you drive your car for charity (at 14 cents a mile). When calculating your charitable donation deduction, include such expenses with your cash contributions.
To claim these, you’ll need to itemize your taxes once more.
If you know any other tips to save on IRS taxes, please tell us in comments… BuzTak.