5 Easy Ways to Lower Your Income Taxes
When you filed your tax return, did you think to yourself, “I’m paying too much,” or “What can I do to lower my taxes?”
Here are a few ideas:
(1) Increase your tax-deductible 401k contribution. If you raise your contribution by 1%, it will add up over time. According to a 2016 Vanguard survey titled “How America Saves,” the average contribution rate is 6.2%, but this varies greatly.
If you are contributing at the average rate of 6.2% and increase your contribution by 1% per year starting at age 30, by age 65, you will have approximately twice as much money in your plan with this simple trick (assuming a 6% return).
You can work with your CFP® professional to decide if your contribution should be designated as pre-tax, Roth, or “Super Roth.” If you have been intending to increase your contribution, let this be your reminder. Stop reading this blog post, log on to your 401k, and make the change now!
During his recent review, Bob (not his real name) told me that he never got around to increasing his 401k, even though we discussed this in detail during our last review with him. Don’t be like Bob. Apologies to anyone who is actually named Bob, including my brother.
(2) Increase your charitable giving.This is beneficial if you are able to itemize your deduction. This is another one of those “when I get around to it” issues. Similar to increasing your 401k contributions, many people intend to give more, but by the end of the year, it simply hasn’t happened. These intentions often lack specifics, such as how much to give and to what charities.
You may have thought to yourself, “I’ll know it when it’s right,” but then another year goes by. We do know that writing out our goals helps us achieve them. Sit down and write out your giving goals, and keep it with your other written goals.
(3) Bunch your charitable contributions.The Tax Cuts and Jobs Act of 2017 doubled the standard deduction, and many people no longer benefit from itemizing. This creates an opportunity to potentially double the deduction on your charitable giving. If you won’t benefit from itemizing but are close, you can bunch your contributions every two or three years and recognize that extra deduction. You will still benefit from the standard deduction in the years that you don’t itemize!
Use a Donor Advised Fund (DAF) to help when you bunch your charitable deductions. A DAF is an account that is set up as a 501(c)3. You qualify for the charitable tax deduction when you deposit money or shares of securities to the account. You then direct grants from your DAF to the charities to which you want to give. This allows you to report the deduction this tax year but also gives you time to decide which charity or charities you want to receive the gift.
(4) Deduct up to $6,850 by switching to a qualified health insurance plan, and funding a Health Savings Account (HSA).Similar to a Flexible Spending Account, a HSA is used to pay health expenses that are not covered by your insurance or as part of your deductible or co-pay. Your insurance policy must qualify as a high deductible health plan (HDHP).
In 2018 you can contribute $3,450 pre-tax as an individual or $6,850 for a family. If you are over age 54, you can add an additional $1,000 catch-up contribution for each covered member over 54.
Here’s the best part, you never pay tax on that money if you spend it on qualified heath expenses. When you spend the money on qualified health expenses, it is withdrawn tax free from the account. In my opinion, this is one of the best tax advantages available.
I’d like to see Congress open this up to everyone who carries some form of health insurance or health cost sharing plan.
For a list of these expenses look at IRS Publication 502.
(5) Stop raiding your IRA.I usually cringe when I get a question about withdrawing money from an IRA before retirement. It’s often to pay off debts, buy a car, or pay property taxes. It is often the result of overspending by the overuse of credit cards. A better strategy is to start a Roth IRA as an additional emergency fund. Give us a call to discuss how to find out how you might fund a Roth IRA, even if you don’t qualify to contribute to a Roth IRA directly.