Despite the different financial goals and realities each of us faces, there is one thing we share as income earners in America. Taxes.
Anyone who has paid them can likely agree that regardless of income or net worth, it feels like there’s a better use for the money whether to pay down debt, build retirement savings, or start a business. Because legally opting out of taxes isn’t an option, aim for the next best thing: Optimize every opportunity you’re given to legally reduce your taxable income.
Here are 6 ways that will help you maximize your money:
#1. Max out your employer-sponsored retirement plan contribution (as much as you can)
Workers can contribute up to $17,500 into an employer sponsored 401(k) or 403(b)—and that limit does not include contributions your employer may make via a “match” offered through your benefits package. If you’re not currently dedicating anywhere near your max contribution (which equates to about $1,400 a month) you’re missing out.
Not only does contributing to your 401(k) with pretax dollars reduce your taxable income, your money grows tax free over time. Based on the other strategies you put to use in tandem, being aggressive with your retirement contributions could put you into a lower tax bracket, and ideally, deem you eligible for even more credits otherwise restricted to lower income earners.
If you’re self employed, ensure that you’re leveraging accounts like Simplified Employee Pensions (SEP) IRAs, SIMPLE IRAs, Keogh plans, and cash-balance plans, all of which help to reduce your adjusted gross income (AGI).
Related Article: How to Diversify Your Retirement Plan With Gold
#2. Love your losses
If you lost money on some investments, selling them off can potentially lower your tax liability–especially if you made money from some winners , too.
Though the IRS uses a “like-like” approach as to where losses are applied first (short-term losses will first apply to short term gains and long term losses apply to long term gains before they can be co-mingled), this strategy can take the sting out of disappointing investments.
If your portfolio really took a beating, unused loss deductions can be carried over into future tax years.
#3. Donate with your eyes wide open
If you’re giving to charity for tax reasons alone, confirm that the organization has the appropriate status that allows you to claim your charitable contribution using the IRS’ Exempt Organization Select Check.
Pay close attention to the item’s stated “value” before you bid on a charitable item at an auction and fundraiser, if the tax benefit is part of your strategy. Per IRS tax laws, an item is only considered a charitable contribution if the amount you bid and pay exceeds the stated fair market value.
Even then, the difference is all that’s deductible. If you bid $600 on a spa package valued at $300, for example, you can claim the $300 difference—but not the total amount you spent.
#4. Negotiate your raise strategically
Getting a raise is good news; getting it in the form of non-taxable income is even better. If you’re going to bat for more money this year, ask for the benefits that will give you the most bang for more bucks.
If you plan to continue your education, for example, negotiate your “bonus” in the form of direct tuition assistance from your employer. Provided the amount doesn’t exceed $5,250, it’s not considered taxable income.
#5. Consider the future
Do you plan to leave your job to pursue a new career, further your education, or raise a family? Accelerate all the deductions you can when your income is higher than it presumably will be next year.
If you won’t immediately resume employment, don’t forget to invest in, and deduct, your $5,500 annual contribution (or $6,500 if you’re 50 or older) to an IRA.
#6. Change your perspective on tax refunds
Check in with your human resources department to ensure that you’re not paying withholding more taxes from your paycheck than necessary, especially if you changed your 401(k) contribution, and/or got a tax refund last year. (The IRS provides a free calculator that can help you estimate optimal withholding).
If you did get a refund, submit a new W-4 and increase your allowances. Despite the “windfall” tax refunds can feel like, it’s your money. Whether you use it to pay down debt, to build emergency savings, or to invest, you worked hard for it. Put it to good use, so it can keep working for you.
Whatever direction you chose, make sure that you seek financial advice first before diving into an area that you might not be that knowledgable about. Your finances are an important aspect of your life, so make sure that you do whatever it takes to secure and protect the hard earn money that you have worked for.
What are some other ways that help reduce taxes?