Tax-paying season can be a scary, confusing time. It’s a complicated subject, and without the right know-how, you might find yourself paying more than you need to be. If you’re wondering if there are any tricks to cutting down on your taxes, you’ve come to the right place. Take control of your finances with these tips, and say goodbye to those shocking tax bills you’ve been dreading!
Start contributing to your 401(k)
Retirement plans are a thing of beauty for several reasons. First, they force you to actually take your future seriously and make sure you’re prepared further down the road. You think work is boring now? Think about how much more boring it’ll be in thirty years! You’ll be happy for your 401(k) at that time. Second, retirement plans are a way of putting your money in a place where it won’t be taxed. Any money that goes from your paycheck and into a retirement plan won’t be messed with by the IRS. It might feel like losing money when you put more of your monthly earnings towards retirement, but trust us when we say you’re actually earning more money in the long run. Plus, many employers will match what you put into your 401(k), making it a win-win-win situation.
The main goal here is to put as much money as you can comfortably afford into your retirement plan. In 2020, the max is $19,500 for those under 50, and $26,000 if you’re over. Keep in mind, that’s all money that will be completely tax-exempt! These numbers apply to those who are self-employed as well, so feel free to open up your own 401(k) even if you’re not employed by a company.
Explore other tax-free account options
In addition to retirement plans, there are a few other types of funds that you can funnel money into without it being taxed. A flexible spending account (or FSA) is a prime example of this. Much like a 401(k), it’s a type of account you make with your employer at which point money is taken from your paycheck and placed into the account. The main difference between an FSA and a 401(k) is how you can use it. FSA’s can be used mainly on medical and dental expenses, but some are able to be used on lesser, over-the-counter options. In 2020, you can put up to $2750 into your FSA, but beware: any money not spent doesn’t roll over, and instead goes to your employer.
An HSA is a similar option, though with a few key differences. For one, it can be through your bank, and not just your employer; but, you’ll need a high-deductible health insurance plan to even get started. The amounts you can put into it are higher, as well, though it depends on whether your plan is for an individual or a family.
Make a charitable donation
Donations to charity are tax deductible, making them a great method of cutting down on your year-end expenses. One thing to note, though, is that it requires you to itemize your taxes, a complicated step that may end up costing more than you’ll get in return. While you can deduct a total of 60% of your adjusted gross income via donations, that number can get substantially lower depending on where the donations went. Do some in-depth research if you want to learn more about this step, but just know it isn’t for everyone.
If you do want to itemize, the important thing to remember is to record everything. This includes cash donated, as well as physical items given. Stuff laying around the house that you don’t use anymore can be a huge help at charity organizations, and receipts of those donations can be deducted. One nifty step you can do is to use a program that offers estimates on household items to see if the donation you’re making is worth recording for tax purposes. Even volunteering is deductible if you keep a good enough record of it.
There are a ton of other moves you can make that will help cut down on your taxes, ranging from selling bad stocks to donating the money to tax-loss harvesting. The steps above are just a few of the easier things you should be thinking about throughout the year to help save you when it comes to tax time. The most important thing you can do is to educate yourself on what your options are, so use these tips as a starting point on your tax-saving journey!