If there is one thing we could all use a lot less of — it’s definitely taxes. And while there are certainly some perks (like well-maintained roads and hometown libraries) it’s fair to say that most of us are looking for ways to pay fewer taxes each year.
Here are a few tips to help you keep more of your hard-earned dollars in your pocket and out of Uncle Sam’s!
1. Reduce Taxable Income
Reducing your taxable income is the key to paying less in income taxes. The best way to do this is to participate in a tax-deferred retirement savings account such as a 401(k) plan at work. Any payments made to a 401(k) account is not considered taxable income for the year in which the deposit is made, offering a tax break now that will be assessed when withdrawals are made in the future.
2. Fund a Health Savings Account
A great investment account to consider when looking to reduce taxes is a Health Savings Account (HSA). This tax-exempt account is the perfect solution when your health insurance has a high deductible. The contributions nor the withdrawals are taxed if the money is used to pay for qualified medical expenses. The yearly contribution limit is $3,500 for an individual and $7,000 for a family.
3. Open an Individual Retirement Account (IRA)
There are two main types of individual retirement accounts. The traditional IRA is a great tax deferred way to save while the Roth IRA taxes contributions now with tax-free growth over the years. Contributions up to $6,000 can be made each year and for those over the age of 50, the limit is raised to $7,000.
4. Save Tax Free for College
The best tax deferred way to save for college is a 529 plan. This type of account was created especially for saving for college and can be used to pay for tuition and other college expenses for anyone in your family. Tax benefits vary by state with most states offering the program’s benefits. Funds grow tax-free and aren’t even taxed on withdrawal if they are used for qualified educational expenses.
5. Be Tax Savvy
Knowing exactly which tax breaks you are entitled to is important to making the most of your tax savings. Be sure to take advantage of reduced taxes for major medical bills, mortgage interest, property taxes, interest from student loans, donations to charity, business expenses, and more.
Use these savvy tax tips to help reduce your taxable income each and every year to save big. You just may be surprised how much making a few of these smart investments can help reduce your tax liability and increase your net worth.