How To Save On Taxes

Top Ways To Save On Taxes

1.Strategic Tax Savings Planning versus Tax Accounting

There is a big difference between hiring someone to tell you how much you owe versus hiring someone to teach you how much less you legally need to pay. The number one Tax Savings solution is to be sure you work with someone that specializes in helping people save tax.

2.Put Money in Your 401(k)

The IRS does not tax what you put directly from your paycheck into your 401(k) retirement plan. Due to this, you would have less taxable income and therefore a smaller tax bill if you consistently deposit into your 401(k). In 2019, you can deposit up to $19,000 per year into an account, and if you are 50 or older you can contribute an extra $6,000. Make sure to research your employers 401(k) plans because sometimes employers have matching programs where they will contribute certain dollar amounts or percentages for every dollar you put into the account. Keep in mind withdrawals from your 401(k) are taxed as regular income, and if you withdraw from your 401(k) before age 59.5 you will pay taxes and a 10% penalty. PLEASE NOTE: You defer your taxes in a 401k and are not technically Saving Taxes. Certain clients may be better served to look at alternative options to tax deferred accounts that provide more tax benefits for higher income earners. Keep in mind with the new Secure Act, there will be changes to 401(k)s in 2020.

3.Take Advantage of a Flexible Spending Account

If your employer offers a flexible spending account (FSA) you should take advantage of it as the money in this account is tax-free. The FSA can be used to pay for certain medical and dental expenses for you, your spouse, and your dependent. Plus, the FSA covers some out-of-pocket health care costs such as copayments, deductibles, and certain medications. In 2019, the limit amount a person could put into a FSA was $2,700 per year. Some employers will allow a “grace period” of up to 2 ½ months to use the money in your FSA or they will allow you to carry over up to $500 per year. However, not all employers offer either of these options so be aware at the end of the year or grace period you could lose any money left over in your FSA. Because of this, it is important to plan carefully and budget how much money you need in the FSA.

4.Contribute to an IRA Account

There are two main types of IRAs: traditional IRA and Roth IRA. Unlike the traditional IRA, a Roth IRA has income-eligibility requirements. Even though both types of IRAs offer tax savings, the main difference between the two accounts is how and when you get a tax break. For a traditional IRA, your contributions are tax-deductible in the year they are made. On the other hand, for a Roth IRA your withdrawals in retirement are tax free. You should consider whether you think your tax rate will be higher or lower in the future. If you expect your tax rate to be higher in retirement you should choose a Roth IRA to receive the delayed tax benefit. However, if you expect a lower tax rate in retirement then you should choose a traditional IRA with its upfront tax advantage. An important tip is that for a traditional IRA there are deduction rules which are income limits and if you or your spouse has a retirement plan at work. These determine how much and if you can have deductions. Keep in mind there are limits to how much you can put into an IRA account. Currently it is $6,000 per year or $7,000 for people 50 and older. PLEASE NOTE: You defer your taxes in an IRA and are not technically Saving Taxes. Certain clients may be better served to look at alternative options to tax deferred accounts that provide more tax benefits for higher income earners. Keep in mind with the new SECURE Act, there will be changes to IRAs in 2020. One of the major changes is no longer allowing a stretch IRA. The elimination of the “stretch IRA” means any non-spouse beneficiary will be forced o liquidate the inherited IRA in 5 or 10 years depending on the final outcome of the newly passing SECURE Act.

5.Save for College with a 529 Plan

If you are planning to save for college for yourself or somebody you know then you should consider a 529 plan. This plan is a specialized education savings account sponsored by a state or state agency. These savings can be used to pay for tuition, textbooks, and other education-related expenses at most two- and four- year universities, trade schools, and eligible foreign schools. Any US resident who is 18 years or older can open a 529 plan as there is no income restrictions. The beneficiary can be a future college student of any age, or even the person who opens the 529 plan. Most importantly, 529 plans have great tax advantages. Some 529 tax benefits are the money in a 529 plan grows federal tax-free and withdrawals will not be taxed when the money is used to pay for college. In additional to federal tax savings, over 30 states officer full or partial tax deductions for 529 plan contributions You can usually claim state tax benefits each year you contribute to the 529 plan so it is a good idea to continue making deposits until college expenses are completely paid for. Keep in mind with the new SECURE Act, there will be changes to 529 Plans in 2020.

6.Adjust your W-4

The W-4 is a form you fill out that informs your employer of how much tax to withhold each paycheck. A general rule is that more allowances you claim, the less tax that will be taken out each paycheck. For example, if you received a high tax bill last April and do not want another, you would want to increase your withholding on your W-4. On the other hand, if you got a large tax return, you are giving the government a big chunk of your paycheck and could see more of your money each paycheck if you reduced your withholdings. The exact amount your employer withholds depends on your income and three things on your W-4 which are your marital status, how many withholding allowances you claimed, and if you want any extra money withheld. Consider your personal situation and what would be the best way for you to fill out a W-4. Keep in mind you can change your W-4 anytime during the year.

7.Contribute to a Health Savings Account

If you have a high-deductible health care plan, consider adding a Health Savings Account (HSA). According to HealthCare.gov, “The IRS defines a high deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,650 for an individual or $13,300 for a family.” An HSA is a tax-exempt account you can use to pay for medical expenses. The money you put into an HSA has no federal income tax, no state or local taxes, and no FICA taxes. Plus, your money grows tax free and withdrawals used to pay for medical expenses are tax-free. With these benefits, if you qualify, you should highly consider an HSA.

8.Start your own business! Register Your Business as a LLC

If you are a small business owner then making your business a LLC could offer serious tax benefits. First, there is flexibility in how you are taxed because you can choose whether you want to file taxes as a disregarded entity or as a corporation. With a disregarded entity, your LLC’s income will be treated like personal income and you will be taxed based on that. On the other hand, for corporation tax, your business will be taxed a lower corporate rate for the first $75,000 of income. Both options have advantages, you must analyze which is the best fit for you depending on how much income you want and how much you want to reinvest into the business. Next, your LLC allows you to set up both retirement accounts and life insurance policies with greater contribution limits. Lastly, your LLC lets you write off business expenses from your business income. Some business tax deductions are start-up costs, travel expenses, equipment costs, and advertising costs.

9.Set Up a Home Office

If you are self-employed and work from home then this tip is for you. The home office deduction allows you to save money on taxes by deducting home office expenses. To qualify, you must meet two requirements. First, you must have a space in your home that is used solely for business purpose. The area cannot serve another purpose; for example, a home office cannot be the living room. Also, the space you claim as your home office must be the main place of business. All business activities do not have to take place here, but this needs to be the centralized location where the majority of activities take place. There are two options to claim the home office deduction- the simplified method and the standard method. With the simplified method, you get to claim $5 per square foot of office space, up to maximum of 300 square feet or $1,500. With the standard method, you must calculate your direct and indirect expenses for the year to determine a tax deduction. Direct expenses are those needed to continue a job or to maintain the office such as repairs solely in the home office. Indirect expenses are home expenses such as utilities and property taxes. The standard method tends to be more difficult and time-consuming, but also more lucrative. If you plan to use the standard method, make sure you keep a detailed record of all the business expenses you think you will deduct in case the IRS ever tax audits you.

10.Make Donations

Charitable contributions are tax-deductible expenses so these reduce your taxable income, which lowers your tax bill. However, the IRS has several rules in place for claiming these tax deductions. First, you must donate cash or property such as clothes or furniture; you cannot just make a pledge or promise to donate. Next, you must donate to a qualified tax-exempt organization some examples include Goodwill, Red Cross, Boy & Girls Clubs of America, churches, veteran groups, and many more. Finally, there are several documentation requirements which includes the following: save canceled checks, have acknowledgment letters from the charity, and have appraisals that determine the value of donated property. Also, you can usually deduct contributions up to 30 to 50 percent of your adjusted gross income depending on the tax-exempt status of the charity; however, be aware that your deduction could be effected if your adjusted gross income is too high. If your donations exceed these thresholds, you can carry over the excess contributions to the following tax years for up to 5 years. To claim your tax deduction for charitable donations you would fill out a Schedule A of Form 1040.