Paying taxes may be part of your financial obligation, but the satisfaction of knowing that you might save a bit of money this year could make it a more enjoyable experience. We’ve created a list of strategies to reduce the amount of income tax owed, but in order to make it a reality, it requires some extra time and planning.
Set aside money for retirement
A highly recommended method for reducing owed income tax is by setting money aside in a retirement account. Most retirement plans including 401(k)s, traditional IRAs and simplified employee pensions receive pre-tax contributions. Not only are you deducting from your taxable income so you can fall into a lower tax bracket, but you are also putting that money toward saving for retirement. This method can be a great tax reduction tactic that also grows your retirement fund and ultimately, helps secure your future.
Open a health savings account
Open up a health savings account by either combining it with an insurance plan offered by your employer or through purchasing your own coverage. A health savings account allows you to put money in, pre-tax, for a variety of medical bills. It can be utilized to put funds aside for copays and medical expenses that may not be covered by insurance. The money deposited into this account avoids federal income tax and withdrawals are tax-free.
Donate to charity
Donating to charity for causes that you care about can benefit those who need it most and can be a positive step towards making a difference in the world. While it is already a rewarding experience to help others, another bonus comes with this act of kindness. Donating to charity helps reduce the amount of taxes you owe. To claim this tax deduction for a charitable contribution, you will need to itemize your deductions.
In this case, your total deductions need to be greater than the standard deduction. It is also important to remember that you need to donate to a qualified charitable organization, in other words, it must be a tax-exempt 501c3 non-profit organization (such as ones that are considered public charities). Your donation is deductible the same year in which it is paid, so give before December 31 of the year in which you plan to claim the deduction.
A tax credit is a reduction of your income tax on a dollar-to-dollar basis. These credits can be thought of as incentives for beneficial behavior that aids the economy or government. As a means to encourage people to help benefit the country overall, the government offers credit for acts that they deem to be a positive change. Whether this is something helpful for the environment or community, the government rewards you with credits to alleviate the cost and encourage you to continue that behavior.
Tax credits can be considered more profitable than deductions because of the manner in which these tax credits reduce your owed income tax. So, if you have $1,000 in tax credits, you will reduce your owed income taxes by $1,000, rather than a percentage of that.
Take advantage of an FSA
If your employer offers a Flexible Spending Account as part of your benefits package, take advantage of it. An FSA is an account created for out of pocket medical expenses, but what makes it so rewarding is that you do not need to pay taxes on the money that goes into this account. This money, while it is reserved for health care costs, can be used for a multitude of out of pocket expenses that you would pay regardless. It can be used for copays, prescription or over the counter medication, tools that can be used for improving your health, medical supplies and equipment and much more. When you participate in this, your employer removes a certain amount from your paycheck to fund the FSA. The main thing to remember is that the FSA is a way to alleviate medical burdens and finance some of those costs while receiving a slight tax break as well.
If you need assistance filing income tax forms, Hylen CPA, Inc. is here to help! Set up an appointment online here or call (781) 436-5810.