Plan Ahead to Save Money on Next Year’s Taxes
If you want to save money on your tax bill next year, consider using one or more of these tax-saving strategies that reduce your income, lower your tax bracket and minimize your tax bill.
Max out your 401(k) or contribute to an IRA
You’ve heard this before, but it’s worth repeating, because it’s one of the easiest and most cost-effective ways of saving money for retirement. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account.
For most companies, these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available. Check with your employer about the availability of such a plan and contribute as much as possible to defer income and accumulate retirement assets.
If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional (pre-tax contributions) or a Roth IRA (after-tax contributions). You may also be able to contribute to a spousal IRA even when your spouse has little or no earned income.
Take Advantage of Employer Benefit Plans
Medical and dental expenses are generally only deductibles to the extent that they exceed 7.5 percent of your adjusted gross income (AGI) in 2018. (This number is rising to 10 percent in 2019.) For many individuals, particularly those with high income, this could eliminate the possibility for a deduction.
However, you can effectively get a deduction for these items if your employer offers a Flexible Spending Account, or FSA (sometimes called a cafeteria plan). These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars. Another such arrangement is a Health Savings Account, or HSA. Ask your employer if the company provides either of these plans.
Bunch your Itemized Deductions
Certain itemized deductions, such as medical or employment-related expenses, are only deductible if they exceed a certain amount. It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year. This way, you stand a better chance of getting a deduction.
Keep Good Records
Unfortunately, many taxpayers forgo worthwhile tax credits and deductions because they have neglected to keep proper receipts or records. Keeping adequate records is required by the IRS for employee business expenses, deductible travel and entertainment expenses, charitable gifts and more.
But don’t do it just because the IRS says so. Neglecting to track these deductions can lead to overlooking them as well. You also need to maintain records regarding your income. If you receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income.
If you’re ready to save money on your taxes this year but aren’t sure which tax-saving strategies apply to your financial situation, be sure to contact your tax advisor.