19 Ways To Save On Your Taxes – Part One
After writing this title I was reminded of the seven-minute ab bit from There’s Something About Mary. Admittedly I chuckled and had an internal argument about not being able to get a good tax break with only 18 ways to save, and nobody has time for 20. And speaking of time, since this is a longer article, we’re going to split this into two parts. So following are the first 9 and 19 ways to save on taxes, though believe it or not, there really are a lot more.
- Adjust your W4 Make sure your tax withholdings are like the little bear’s porridge, chair, and bed, just right. Too much withholding and you’re giving an interest-free loan to the government. Too little, and you’ll face a bill on April 15, and possibly a penalty.
- Save to your 401k Contributions to your 401k reduce your taxable income so every dollar going in means an immediate tax savings. But be careful. The IRS and government know what they are doing. Just as much as we like compound interest and compound growth, the IRS likes it when your “delayed income” compounds, because that means your taxes increase when you retire.
- Open an IRA Reduced your taxable income like the 401k above, but with money that comes out of your bank account, after you’ve already paid tax on it. You claim a deduction on your tax return for the amount you contributed, which then reduces your income. Ultimately though, it’s the same net effect as your 401k contribution in future years. The IRS really likes it when you save here too.
- Max out your HSA Why would I save to pay for medical expenses? Because you will get sick. You will pay for medical expenses. You will pay for medical insurance, even if it’s Medicare. And because the HSA has a triple tax benefit, it is the single greatest retirement savings vehicle out there. Pre-tax goes in, just the like the 401k and IRA. Tax-deferred growth just like 401k and IRA. Tax-free coming out for qualified medical expenses just like Roth. No other savings vehicle has these benefits. But don’t use it until you retire, if you’re able! Make this part of your retirement plan.
- Take advantage of your employer’s FSA If your employer has one, use it. You put pre-tax money away for current medical expenses like copays, deductibles, some drugs, and other costs. Similar to the little bear though, not too much. Unlike the HSA, this doesn’t carryover and any unused funds will be lost for good.
- Dependent Care FSA If you have kids and a Dependent Care FSA, use it. Just like the FSA above, but only for dependent care like day care, after school programs, etc. Again, don’t contributed too much, because you don’t want to lose it. (Although, with the cost of day care these days, and the contribution limits that apply, you likely can’t put enough away to cover all of it.)
- Sell investments that are losing money Didn’t Buffet say not to lose money? When you sell investments that have lost money, you can use the losses to offset the gains you realize by selling investments that made money, thus reducing tax on those gains.
- Don’t sell that investment Wait a minute, didn’t I just say sell? If you are going to sell investments with taxable gains, if possible, wait until you have held those investments “long-term,” meaning for one year and a day or more. When you do, these gains are taxed at a lower rate than “short-term” gains which are taxed at your ordinary income tax rate.
- Track your medical expenses With the standard deduction as high as it is, it takes A LOT of medical expenses to be able to itemize. Track them anyway, because you never know what type of other deduction may become available and allow you to itemize.
And that concludes part one of 19 Ways to Save on Your Taxes. Check back soon for the remaining 10, and until then, if you have questions or want to talk deductions, connect with us here.
Will Ellis CFP, Tax Advisor
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