How Can I Minimize My Tax Bill?
Updated: Dec 4, 2020
As the decade comes to an end, tax season draws near. If you are looking for ways to reduce your taxable income, you may be surprised at just how easy it can be to lower your tax bill. Follow these suggestions to help you save this tax season.
Adjust your withholding.
If your last tax bill was larger than expected, you can avoid another unpleasant surprise next tax season by adjusting your withholding amount. You can change your withholding amount at any time by filing a new W-4 form with your employer. Conversely, you may want to consider a withholding reduction if you received an unexpectedly large refund with your last return; reducing your withholding will leave more money for you to live on each month.
Contribute to your 401(k) or Traditional IRA.
Contributions to 401(k) retirement plans are tax-deferred, as are contributions to traditional IRAs. You can reduce your taxable income by diverting more money from your paycheck into your 401(k), and you may be able to deduct contributions to a traditional IRA (barring some limitations). Traditional IRA contributions for the previous tax year can be made up until the April tax-filing deadline. However, there are limits to how much you can contribute to each type of retirement account.
Charitable contributions are tax deductible, including noncash donations of food, clothes, and other items. Document all contributions beforehand, and always save receipts for donations to qualifying tax-exempt organizations. If you deduct $500 or more for noncash donations, you will need to include Form 8283 with your tax return. Note that you can only deduct charitable contributions if you choose to itemize your deductions.
If you receive distributions from an IRA, you may want to consider making qualified charitable distributions (QCDs). In certain cases, IRA funds may be transferred directly to a qualified charity. Taxpayers must be at least 70 ½ years old to make QCDs, and only qualified 501(c)3 organizations are eligible to receive them. QCDs that meet certain IRS requirements can count toward your required minimum distributions (RMDs) for the tax year; taxpayers can donate up to $100,000 in the form of QCDs annually. Unlike regular withdrawals from an IRA, QCDs are tax-deductible (subject to limitations).
Whereas other types of donations qualify as itemized deductions, charitable contributions made with IRA funds cannot be claimed as such. In fact, you can lower your taxable income via QCDs even if you choose to take the standard deduction.
Contribute to your FSA or HSA.
If your employer offers a flexible spending account (FSA) or health savings account (HSA), you may be able to lower your tax bill; contributions to both FSAs and HSAs reduce taxable income. Because FSAs are funded with pretax dollars via payroll deductions, FSA contributions reduce one’s taxable wages. If your employer offers an HSA, you may be able to set up payroll deductions. Alternatively, you may opt to make direct contributions to your HSA. Eligible contributions made directly to your HSA may be tax-deductible, even if you choose to take the standard deduction in lieu of itemizing deductions on your tax return.
Keep in mind that contributions to FSAs and HSAs are subject to certain limitations. FSA funds must go toward qualified medical and dental expenses during the calendar year; any funds that remain at the end of the year are forfeited (though some employers allow up to a $500 rollover to the next year). HSA funds, however, are not subject to withdrawal deadlines and can even be invested and allowed to grow, tax-deferred. Both FSA and HSA withdrawals are tax-exempt, but only if they are used to pay for qualified medical expenses.
When using your FSA or HSA funds, be sure to save every receipt. Account administrators often require account holders to provide itemized receipts for every charge as proof that the funds have only been used for qualifying expenses. As with traditional IRA contributions, you can make FSA and HSA contributions for the prior tax year until the April tax-filing deadline.
Keep track of your medical expenses.
If you’ve had to pay for costly medical or dental care, you may be able to deduct some of those expenses on your tax return. Taxpayers are generally eligible to deduct qualified medical expenses above 10% of their adjusted gross income (AGI) for the tax year. If you are frequently billed for expensive medical or dental care, make sure to keep track of your receipts throughout the year. Note that you can only deduct medical expenses if you itemize deductions rather than choosing the standard deduction.
Hire a CPA.
It’s a good idea to consult with a certified public accountant each tax season, especially if you have questions about the tax filing process or need help with a complex return. Whether it’s your first time filing a return or you are a tax season veteran, a qualified CPA can save you a lot of time, stress, and money.
We hope you've found this post helpful. For additional guidance from our highly qualified accountants and consultants, give Seymour & Perry, LLC a call at 706-549-8197.
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