While tax season feels like it just ended, it is never too early to start prepping for the next one. Planning is the key to tax success. The earlier you begin planning, the more you can save. Since your tax liability is based on your taxable income and not your gross income, there are steps you can take to lower your taxable income, thus lowering your tax liability. Keep reading to learn what to do now to minimize taxes next year.
Contribute to your IRA
Contributing to an IRA is one of the best ways to reduce your tax bill because most contributions are tax write-offs that do not require itemization. By contributing to a traditional IRA, it is a pre-tax contribution so it lowers your taxable income. It is important to remember that traditional IRAs are tax-deferred so you will have to pay taxes on the money when you begin to withdraw from the account.
Flexible spending plans
Flexible spending plans are pre-tax plans that allow specific expenses, including child care and medical expenses, to be paid with tax-exempt money. Employers deduct pre-determined, tax-free amounts from your paycheck and have them in an account that releases the funds when the expenses occur. These flexible spending accounts lower your gross income and your taxable income.
Donate to charity
Donating to charity is an easy and simple way to lower your tax bill. Instead of only writing a check or donating cash, you can also donate clothes, toys, and furniture that count for a tax deduction. If you complete volunteer work, you cannot deduct your hours of volunteer work. You can deduct expenses for travel for the charity or volunteering organization. Keep in mind, your total tax deductions must exceed the standard deduction before these deductions can be applied.
Avoid capital gains tax by donating stock
You can use stocks as charitable gifts. If you have a stock that made extreme gains, you can move them into a donor-advised fund. In this fund, the stock is exempt from capital gains tax and can be deducted from your taxes if you itemize your return.
Claim a home office deduction
If you work for yourself or have a side business that you run, take a home office deduction. To qualify, the space must be used regularly and exclusively for business purposes. If you have an extra bedroom that is only used as a home office, you can deduct a portion of your rent or mortgage and utilities.
Open a Health Savings Account
If you have a high-deductible medical plan, you should contribute to a health savings account. Your contributions to an HSA provide an immediate tax deduction, are tax-deferred, and can be withdrawn tax-free for medical expenses. If you have any money left in your account at the end of the year, the balance automatically rolls over.
It is never too early to start planning for the next tax season. The earlier you get started, the more money you can save on your taxes. Here at Mooney Lyons, we want to help you lower your tax burden. Give us a call today to get started