As the saying goes, the only certain things in this world are death and taxes. Even though taxes are unavoidable, there are steps you can take to reduce your bill.
Before the year is over, consider these six strategies to help reduce your tax burden.
Benjamin Franklin once wrote that the only certain things in this world are death and taxes. Even though taxes are unavoidable, there are steps you can take to reduce your bill.
If, come fall, it looks as if you might owe Uncle Sam, these ideas may help you reduce your bill. Some of these strategies require you to spend money, which may seem counterintuitive. But these suggestions allow you to put the money toward your priorities, such as your retirement or a favorite charity, instead of taxes.
If you’re worried about your ability to pay, skip down to tip six.
1. Increase Your Retirement Contributions
If you have a retirement plan — for example, a traditional IRA, 401(k), or 403(b) — consider boosting your contributions. Contributions to traditional retirement plans are done with pre-tax dollars, so putting more money into them can reduce your overall taxable income, and therefore your tax bill, until you take a distribution. The IRS caps how much you can contribute in each tax year, so it’s a good idea to check the IRS site to see the current annual limit. This can decrease your adjusted gross income, which might positively affect your eligibility for credits and deductions.
Apply this same strategy to your health savings account (HSA) if you have one. As with retirement accounts, the IRS limits how much you can contribute pre-tax to your HSA each year.
Depending on your age, you may be eligible for “catch up” contributions, which would raise the IRS cap on how much you can contribute to these accounts pre-tax.
In addition, for lower income taxpayers, you may be able to deduct a portion of your retirement contributions, even if you used pre-tax or deductible money. The Savers’ Credit allows a credit of up to half of the contribution, based on your income level and filing status.
Tip: You can contribute to a traditional IRA or HSA up until the tax filing deadline (usually April 15) and have it count toward the previous tax year.
2. Give, Give, Give
You may have heard that generosity pays. And it can be true when it comes to your tax return. To deduct charitable contributions, you need to itemize your tax return. The IRS allows you to itemize charitable deductions up to a certain amount. This limit can vary each year, so check the IRS website to see that you have the most up-to-date information.
Make sure to look at this deduction in concert with any other deductions you qualify for, and then compare the total to the standard deduction. Generally, you would take whichever deduction is greater. (Because the standard deduction increased significantly in 2018, many people are likely to choose this.)
3. Factor in Education
Consider investing in a 529 savings plan for education. While this isn’t deductible on your federal tax return, it might qualify you for a credit or partial deduction on your state return, depending on your location and the type of 529 plan you contributed to.
Or, if you (or a dependent) are currently enrolled in higher education, evaluate the tax credits potentially available to you. These include the American Opportunity Credit and the Lifetime Learning Credit.
If you’re already repaying student loans, you could also qualify for a student loan interest deduction. This deduction is available to all filers, not just those who itemize.
Keep in mind that these tax benefits have yearly dollar limits, and you must meet certain eligibility requirements.
4. Cut Your Losses
If you’ve lost money investing or gambling, you may be able to deduct some of your losses on your tax return.
If you sold stocks that were losing money during the year, you can record a capital loss up to a certain amount. This can be used to help offset any capital gains, or money you made from your investments. (Keep in mind that the rules around capital gains are different if your investments are made through a tax-advantaged account, like an IRA.) Your losses are limited each year, but if you have a larger loss, you can carry it to the next year.
A similar rule applies to any gambling losses. Gambling winnings are considered income, but if you lost money gambling, this can be deducted to offset any winnings. If you lost more than you won, your gambling income would net to zero. In 2018, the deduction for gambling losses is expanded to include some expenses incurred while gambling.
5. Make Extra Payments
Generally, interest paid on student loans and mortgages is tax deductible. Squeezing in an extra payment can increase your interest tab — which can in turn potentially increase the associated tax deduction. Just make sure you’re paying ahead of schedule and not solely making principal payments.
Tip: Consider next year’s taxes when deciding to make extra interest payments. Paying extra this year means you’ll likely have less interest to pay in the coming year, so your deduction next year may be smaller.
6. Work with the IRS
If you anticipate problems filing your tax return or paying any taxes you owe, the IRS offers payment plans for those who need them. If you end up with a large tax liability, you may be able to pay in installments.
Implementing these and other year-end tax savings strategies will help you finish the year on a good financial note. For more information on filing your taxes, visit the Regions Tax Center today.
