To significantly reduce taxes now and in the future, you need to plan ahead. There are several strategies you can adopt to reduce your bill. When I was studying for the Certified Financial Planner ™ certificate, I was amazed at the amount of strategies we were allowed to take to reduce the bill. Most of them involved the establishment of trusts, but unfortunately, they only make sense for those for whom several million dollars have been hidden. We middle-class people need to take advantage of what is available to us, so we too can be good American citizens and pay taxes, but no more than is necessary.
Here are 6 strategies to help you reduce your tax:
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1. If possible, maximize your 401 (k)
If you are in the 32% tax bracket and make a maximum contribution for 2020 ($ 19,500 or $ 26,000 for taxpayers 50 and older) under pre-tax 401 (k), your federal taxes may be reduced by about $ 6,000. Read also : Money Monday: What is an IRA?. If this is not possible, you should at least contribute to the maximum amount that will match you if your employer offers a matching program.
Reduce taxes for small business owners by saving through the SEP IRA, SIMPLE IRA or individual 401 (k). If you are a consultant earning $ 100,000 per year, you may be able to save up to $ 19,500 in the SEP IRA, $ 20,000 in the SIMPLE IRA, and $ 58,000 in the individual 401 (k); this will reduce your income tax bill.
You can create your own retirement plan for small business owners who generate significantly high income. We have clients who are dentists and they set aside $ 70,000 to $ 100,000 a year for a retirement plan – reducing the tax bill to $ 40,000 a year! They couldn’t believe it when they first heard about it, but it’s true.
2. Consider switching future contributions to Roth 401 (k)
Depending on what tax group you are in and whether you can absorb a slight pay cut at home, consider switching all your future tax contributions from Roth 401 (k), if an option is available. This way you will be able to pay taxes while your tax rate is low and thus avoid paying higher taxes when tax rates are refunded. It is important to address a Authorized financial planner™ to know if this is convenient for you.
3. Maximize Roth IRA contributions
Roth IRAs are taxed in advance. If you are right, the tax savings can be huge. While your contributions to the Roth IRA today do not reduce your tax bill, the money you withdraw when you withdraw, including earnings, will not be tax. You can contribute up to $ 6,000 per tax to the IRA for 2021 (or $ 7,000 for people over the age of 50).
Roth IRAs also give us flexibility. Read also : ViacomCBS Acquiring Latin American Broadcaster Chilevision From AT&T – Nasdaq. We can withdraw our contributions without penalty in case we decide to use it elsewhere (like bail to help at home, help pay your child’s tuition).
If you are no longer eligible for a Roth IRA, you can consider Roth’s contributions in the background. Thanks to Congress for opening this hole. This can be a key strategy in retirement planning.
4. Health Savings Account (HSA) Contribution
Health savings accounts (HSAs) are perhaps the most untapped tax way to grow our money. It’s even better than the Roth IRA. Like Roth, earnings are tax-free, but HSAs are also deducted. This may interest you : 3 Social Security Strategies to Bankroll Your Retirement | Personal-finance. So you save on taxes now and in the future. If you don’t touch your contribution, you’ll make the most of your health savings account and just let it grow by investing in stocks and bond funds. Your HSA earnings are tax-free if you use it in the future for qualified medical expenses.
HSA may be appropriate if you are:
- In a position to have a highly recognized health insurance plan (no children, healthy, no adequate cash savings);
- Looking for the most efficient way to grow money.
Not all high-deductible health plans are acceptable for HSA. It must have HSA in its name. The IRS allows you to make HSA contributions up to the tax deadline and apply them as deductions for the current tax year.
5. Take advantage of tax breaks
Many tax breaks are available. Each year, the IRS exempts tax breaks and deductions available to applicants. It is important that you take advantage of every tax credit you are entitled to. Tax credits reduce the amount of tax you owe, not just your taxable income. Americans use tax breaks to save billions of dollars in taxes each year.
Some of the popular tax breaks are:
- Income Tax Credit (EITC): you can look for between 538 and 6660 US dollars in 2020. It ranges from 543 to 6728 US dollars for 2021.
- Tax relief for children: Up to $ 2,000 per child aged 16 and under and $ 500 for those not supporting children in 2020 and up to $ 3,600 per child in 2021
- Child and dependent care loan: you can claim up to $ 3,000 for kindergartens and similar expenses for a child under the age of 13 and up to $ 6,000 for two or more dependent family members. In 2021, this amounts to up to 50% of the $ 8,000 cost for one dependent member or $ 16,000 for two or more dependent members.
- U.S. Opportunity Tax Credit (AOTC): In the first four years of higher education, you can look for the first $ 2,000 you spent on things like tuition, books, equipment, and tuition. Plus up to 25% off the next $ 2,000 for a total loan of $ 2,500. This does not include the cost of living or transportation.
6. Donate to charity
You can take advantage of a charitable tax deduction through a standard donation or share. A provision of the CARES Act allows everyone to benefit from a charitable donation this year. For a standard deduction, you can request up to $ 300 in donations. These donations had to be in cash to charities 501 (c) (3). Cash donations include those made by credit card, check, or debit card.
Instead, you can choose to sort your donations by item. For this option, you can deduct cash contributions and the fair value of donated assets, as well as expenses paid for volunteer work. If you want to see how you can calculate the fair market value of a donated property, take a look IRS Publication 561. Donations can only be rejected if they are given to approved charities. For example, if you donated money through the GoFundMe site, you probably can’t refuse that donation. Online Tax NetworkSearch for tax-exempt organizationsThe tool will tell you if the organization you want to donate to is approved for charitable donations.
About Alvin Carlos, CFA, CFP®
