How to Reduce Next Year’s Income Taxes
By taking steps now to reorganize your financial life, you can reduce your tax liability for next year. Many people don’t care about tax documentation for most of the year, but it is important to prepare throughout the year and do what you can to reduce the amount you owe the Internal Revenue Service.
While you cannot avoid paying income tax, there are some things to consider and to prepare so you can pay the least amount of money, leaving more cash in your bank account.
Here are some steps to review for your own tax purposes for the coming year:
Fix Your W-2
You should review the information on your employee W-2 to ensure you have the correct tax amount withheld from your taxes. Also, when filling out your tax forms, make sure you have selected the right filing status, which can affect the tax bracket you are categorized in.
Save Your Receipts
Find out in advance from your tax preparation professional which deductions are IRS-approved for personal expenses. Make sure to keep accurate records and receipts of these expenses. Don’t assume you will remember it all come tax time if you are not logging the information when the expense is paid out. Itemized deductions can also help you save money on your income taxes each year so make a point of tracking these deductions.
Feed Your Retirement
Tax write-offs for your income can be significant if you keep stashing cash into your certain investment accounts. Put some extra cash into your 401(k) plan. If a 401(k) is not an option, a traditional IRA account accepts tax-deductible contributions. When you reach retirement age, there will be taxes due on withdrawals but while you continue to plan for that time, you can reap the benefits of lowered taxes by maxing out your contributions.
Get Your Donations In
Non-profit organizations accepting donations can help reduce your tax bills but you have to plan out your donations. You can donate money to your favorite causes and organizations but make sure they are tax-deductible and that you retain the paperwork and receipts from the donation. Keep a file folder to add the documentation to as soon as the donation is made or you risk losing the write-off at the end of the year. You can also donate used items including clothing, household goods, children’s items, and books to organizations, like the Salvation Army, which can give you a monetary estimate of your donations on a receipt.
Employees that have the ability to contribute to flexible spending accounts (FSAs) can help reduce taxes at years-end. This kind of account is funded from payroll deductions set at a fixed amount. Medical expenses not covered by your health insurance can be paid with tax-free funds reimbursed to you. Health savings accounts (HSAs) work basically the same way. You will need to have high-deductible insurance coverage. The money will be in an account for use in paying medical expenses until the deductible is met.
If you have any stocks or investments — in a taxable account — that have dropped in value, you can write off the capital loss.
For investments that are gaining value, think twice before locking in your returns. Investments that have been held for less that one year are subject to higher capital-gains taxes — you might consider holding onto the investment to dodge that higher tax rate.
Defer that Work Bonus
If you get a bonus from your employer, find out if you can postpone it to the next year. You will still be responsible for paying income taxes on the money but if you are looking to reduce your income for your upcoming taxes, you may want to consider this option.
Your personal financial situation may also allow for other tax deductions that are not as common for other taxpayers. Speak with your tax professional about what else can be used for reducing your amount of tax responsibility every year.
Simon Zhen is the senior research analyst for MyBankTracker. He is an expert on consumer banking products, bank innovations, and financial technology.
Simon has contributed and/or been quoted in major publications and outlets including Consumer Reports, American Banker, Yahoo Finance, U.S. News – World Report, The Huffington Post, Business Insider, Lifehacker, and AOL.com.