With the new tax year right around the corner, it’s time to start thinking about what the best ways are to save money on taxes. By making a few simple changes to your tax strategy, you can lower your taxable income and keep more of your hard-earned money in your pocket.
Get Organized
Getting organized before tax season is one of the best ways to save money on taxes. It can help you stay on top of paperwork, find receipts and keep track of deductible expenses throughout the year.
The best way to get organized is by establishing habits that will make the process easier for you. This will reduce stress and save you time in the long run, so start making these organizing habits a part of your routine now!
Reduce Your Withholding
While your tax withholding might not seem like a big deal, it can have a serious impact on how much you pay. Too little can lead to a tax bill in April or even a penalty, while too much will give Uncle Sam an interest-free loan and leave you with a smaller refund next year.
You can tweak your withholding at any time if there are life events that could change your tax liability, like getting married, having a baby or starting a new job. Keeping track of these changes will help you avoid overpaying or owing money to the IRS.
Donate to Charity
Donating to charity can be one of the most effective ways to save money on taxes. Not only can it benefit you by cutting your taxable income, but it also allows you to show your support for organizations or causes that matter to you.
It’s important to note, however, that the amount you can deduct from your taxes depends on the type of donation and the organization you donate to. For example, cash donations up to $300 are tax deductible for most taxpayers in 2020 and 2021, even if you don’t itemize deductions.
Contribute to a 401(k)
One of the easiest ways to save on taxes is by contributing to a 401(k) plan. This is because 401(k) plans are tax-deferred, which means you don’t pay income tax on your contributions until you withdraw the money in retirement.
Many employers offer a match, which means that they will contribute a percentage of your savings to the account. This could be a huge boost to your retirement account, and is something to look for when choosing a 401(k) plan.
Double Up on Charitable Expenses
One of the best ways to save money on taxes is to double up on your charitable expenses. This can be done in a number of ways, including donating appreciated securities and other assets or establishing a donor-advised fund that lets you donate a lump sum to charity in one year, then split up your contribution into smaller donations over the next few years.
This strategy can help you exceed the standard deduction thresholds in some years, which can lead to significant savings on your tax bill. As with other tax-saving strategies, consult your CPA or financial advisor for more details on how to implement this strategy for maximum results.
Qualify for Tax Credits
One of the best ways to save money on taxes is to qualify for tax credits. They’re a great way to reduce your income tax bill, and many are refundable.
Unlike deductions, which subtract from your adjusted gross income and lower your taxable income, credits directly reduce your total tax liability. For example, if you have a $1,000 credit and your taxable income is $50,000, the credit saves you $2,500 in taxes.
Don’t Forget About Your Health Care Coverage
One of the best ways to save money on taxes is to make sure you have health insurance. It can help you avoid large medical bills, like a hospital stay or surgery, and limit your risk for costly illnesses and injuries.
There are a lot of things to consider when choosing a health insurance plan. The most important is whether it fits your budget and your lifestyle.
Set Up a Flexible Spending Account
If you’re struggling to meet your healthcare and dependent care expenses, consider setting up a flexible spending account (FSA). FSAs allow employees to set aside pre-tax dollars to pay for qualified out-of-pocket medical and dependent care costs.
FSAs can save you about 30% on eligible medical and dependent care expenses, meaning a $100 expense could cost you $70. However, you should avoid overestimating your expenses when deciding how much to contribute.
