I was at a family reunion recently when the conversation turned to taxes. Many of my relatives and in-laws expressed concern about their tax burden; could it be reduced? What, if anything, could be done to lower their tax bills?
Though at Premier, we always suggest retaining the services of a trusted tax professional for any specific questions, our wealth advisors also thought it would be helpful to provide 8 secrets to keep in mind year-round for cutting your tax bill.
1. Add Retirement Account Deductions to Your Financial Strategies
Retirement accounts, like IRAs and 401(k)s, serve two purposes:
- Saving and growing money so you can have the lifestyle you want in retirement; and
- Reducing your total taxable income
In most cases -- Roth IRAs being a notable exception -- you can deduct contributions made to retirement accounts from your taxable income. These funds will accumulate tax-free until you're ready to retire, reducing your overall tax burden.
2. Wealth Planning: Set up a Health Savings Account
Health savings accounts or HSAs allow you to withhold income each month and contribute it to an account where it will grow tax-free until you use it for medical or healthcare-related purposes. This is an especially smart option if you've got a high deductible. Bonus: If you don't use all of your contributions, they'll just roll over -- and keep on growing.
3. Deduct, Deduct, Deduct -- Then Deduct Some More
Educate yourself as the the allowable deductions you can clam. Got a home office that you use for a side business or self-employment? Figure the square footage and deduct the appropriate house payment and utilities. Speaking of self-employment, don't forget deductions such as:
- Office supplies
- Dues and memberships
- Trade publications
- Social Security; if you pay all of your SS taxes at a 15.3% rate, you can deduct 50% at tax time
4. Mileage: Get Some Money Back
Though deducting mileage for normal commuting is verboten, you can deduct miles traveled if you're required to drive to another location for work and aren't reimbursed by your employer. Of course, this only applies if you're driving your own car.
5. Make Learning Part of Your Financial Strategies
If you take classes or training to enhance your job skills or your overall educational attainment, you can deduct up to $2,000 of the costs per year by claiming the Lifetime Learning Credit. In order to qualify, the student must be yourself, your spouse or your dependent.
6. Your Comprehensive Financial Plan Should Include Reinvested Dividends
When you sell investments and then reinvest the dividends, be sure to add the reinvestments into your cost basis. This will raise your cost basis and lower your capital gains.
7. Charitable Deductions and Strategic Wealth Management
Charitable donations help offset your tax burden. Deductible donations may include:
- Payroll deductions through your work's charitable giving program or for organizations such as for United Way
- Cash, check and credit card donations
- Clothing, goods and other items
8. Looking for a Job? Deduct the Costs
If you're in the midst of a job hunt, you can deduct related expenses, as long as you're seeking work in the same field. In order to qualify, expenses must be itemized as "miscellaneous" and pass a 2% threshold. Possible deductions include:
- Mileage accrued while job searching
- Printing and posting applications and resumes
- Placement agency fees
While not everyone will qualify for all of these tax breaks, they can help whittle that bill down. Speak to your wealth advisor or tax professional for individualized suggestions.