Max Out Your Tax-Deferred Savings
One of the best ways to cut your taxes is to set money aside in a tax-deferred retirement account. Not only are you doing the wise thing by saving for a winning retirement – you could trim your income enough to fall into a lower tax bracket.
So if your employer offers a tax-deferred program like a 401(k), make sure that you are:
- Participating, so that you don’t miss out on any match your employer provides.
- Putting in as much money as you can.
If you have your own business, you have several choices of tax-favored retirement accounts, including Simplified Employee Pensions (SEPs) and individual 401(k)s. Contributions cut your tax bill now while earnings grow tax-deferred for your retirement.
Tap Into the Good Old IRA
Individual Retirement Accounts are a straightforward, easily accessible way to cut your taxes the same way the 401(k) does. But they do have strict rules.
If neither you nor your spouse participate in a workplace retirement plan, then you can contribute $5,500 ($6,500 if you’re 50 or older) to an IRA and wham, take that off your taxable income – even if you don’t itemize deductions.
If you or your spouse do have a plan at work, your deduction might be limited. It depends on your income. This IRS document has more details.
Take Advantage of a Health Savings Account
See if your workplace offers an insurance plan that you could combine with a Health Savings Account, or consider opening one yourself if you buy your own coverage. A health savings account lets you put money pre-tax for a wide range of medical bills, including deductibles, co-pays and other medical expenses that aren’t covered by insurance, such as vision and dental care.
An HSA offers a triple tax break: The money you put in escapes all tax–no federal income tax, no state or local taxes, and no FICA taxes), the balance grows tax-deferred (and can be invested in mutual funds), and withdrawals used to pay medical expenses are tax-free.
If you really want to swing for the fences with the tax-savings potential of an HSA, go ahead and fund it with pre-tax money, but pay for your out of pocket health costs with cash in your pocket rather than drawing down HSA funds. It takes real financial discipline (and good health) to pull this off, but it will let your HSA money continue to grow tax-deferred.
Give Away Money the Tax-Wise Way
If you plan to make a significant gift to charity, consider giving appreciated stocks or mutual fund shares that you’ve owned for more than one year instead of cash.
Doing so supercharges the saving power of your generosity. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset, and you never have to pay tax on the profit. However, don’t donate stocks or fund shares that lost money. You’d be better off selling the asset, claiming the loss on your taxes, and donating cash to the charity.
Start Up that Business
Tax reform created a powerful incentive for people to hang out their own shingle and participate in the gig economy. Under the new tax law, sole proprietors who use Schedule C, as well as pass-through entities—such as S corporations, partnerships and LLCs—which pass their income to their owners for tax purposes, get to deduct 20% of their qualifying income before figuring their tax bill.
For a sole proprietor in the 24% bracket, for example, excluding 20% of income from taxation has the same effect of lowering the tax rate to 19.2%.
There are limitations, though: For many pass-through businesses, for example, the 20% deduction phases out for taxpayers with incomes in excess of $157,500 on an individual return and $315,000 on a joint return.