This might not seem like tax time — April is, after all, a few months behind us. But if you want to be smart about taxes and pay as little as possible to Uncle Sam, you should be making smart tax moves throughout the year.
Here are five things to know and actions to take that can help you pay less in taxes.
Continue Reading Below
1. Make the most of retirement accounts
Why wait until the end of the year to contribute to your Roth or traditional IRA(s) when the earlier you do so, the more time your money will have to grow? Contribution limits for both kinds of IRAs for the 2018 tax year are $5,500 generally and $6,500 for those 50 and older. (Limits are occasionally increased to keep up with inflation.) If your workplace offers you a traditional or Roth 401(k), consider contributing heavily to that, as well — which is easiest to do throughout the year via regular deductions from your paychecks.
These accounts can be much more powerful wealth builders than you might think. Here’s how much you might amass over time if you can sock away $5,000, $10,000, or $15,000 each year:
|
Growing at 8% for |
$5,000 Invested Annually |
$10,000 Invested Annually |
$15,000 Invested Annually |
|---|---|---|---|
|
10 years |
$78,227 |
$156,455 |
$234,682 |
|
15 years |
$146,621 |
$293,243 |
$439,864 |
|
20 years |
$247,115 |
$494,229 |
$741,344 |
|
25 years |
$394,772 |
$789,544 |
$1.2 million |
|
30 years |
$611,729 |
$1.2 million |
$1.8 million |
2. Make the most of tax deductions and tax credits available to you
Advertisement
Thanks to the 2018 tax law changes that included roughly doubling the standard deduction, fewer people will find that it’s worthwhile to itemize deductions. Still, you may be among those who will save more by itemizing. It’s smart to review available deductions each year to see which ones you can take advantage of. For example, if you make $5,000 worth of qualifying charitable contributions and you’re in the 24% tax bracket, that can be worth $1,200 to you.
If you find that you don’t have enough in itemized deductions to make itemizing deductions worthwhile, but you’re close, it can make sense to “bundle” some expenses. For example, you might front-load some of the donations you’d make to charities in 2019 by making them in late 2018. That way, there will be a bigger sum to claim as a deduction when they’re bundled with your regular 2018 donations.
You might also pay a property tax bill due in January of 2019 in December of 2018, in order for it to count this year. This strategy may help you be able to itemize deductions at least every other year.
Finally, be sure to grab any tax credits you can because credits are even more valuable than deductions. Tax credits shrink your taxable income on a dollar-for-dollar basis and they’re available for all kinds of things, such as education expenses, energy-efficient home improvements, the adoption of children, the care of children and dependents, foreign taxes paid, and much more. For example, the Child Tax Credit offers $2,000 per qualifying child.
3. Use a Health Savings Account (HSA) or a Flexible Spending Account (FSA)
If you have a qualifying high-deductible health insurance plan, you may be able to take advantage of HSAs. You fund an HSA with pre-tax money, thereby lowering your tax bill. That money can be used tax-free for qualifying healthcare expenses, such as doctor visits, lab work, and eye exams.
The money in the account can accumulate over many years, too, invested and growing. Once you turn 65, you can withdraw money from your HSA for any purpose, paying ordinary income tax rates on withdrawals. The HSA contribution limit is $3,450 for individuals and $6,900 for families for 2018. Those 55 or older can chip in an additional $1,000.
A Flexible Savings Account, meanwhile, is another account that accepts pre-tax dollars and lets you spend them tax-free on healthcare expenses. It’s not quite as wonderful as an HSA, though, because you need to use most of your contribution each year — or you’ll lose it. Still, if you plan well, this can save you a lot in taxes.
For example, if you’re expecting to pay $2,000 on braces for your child this year, be sure to contribute at least that much to your FSA and you’ll avoid paying taxes on it. The contribution limit for Health FSAs is $2,650 for 2018.
4. Contribute to a 529 plan
Meanwhile, if you have a college student in your household — or better yet, a child who has many years before they will start college — look into 529 plans. A 529 plan lets you save a lot for college expenses. Money in these accounts grow tax-free, and distributions taken to pay for qualified education expenses are not taxed, either.
Better still, many states offer additional tax breaks for their residents who contribute to the state 529 plan — and some states even offer tax breaks for money saved in another state’s plan. Note that you don’t have to use your state’s 529 plan. You can read up on plans from many states and choose the one(s) you like most.
529 plans sport generous contribution limits of up to several hundred thousand dollars per beneficiary. Read up on these plans and consider which ones are best for your individual situation.
5. Hire a tax pro
Finally, remember that not only are taxes complicated, they’re also more complicated than you think they are. It can be smart to use tax-prep software to prepare your tax return, as that can avoid many math errors and help you identify available tax breaks by asking you questions. Better still, consider paying a skilled tax pro to help with your tax strategizing and tax-return preparation.
Yes, it might cost you several hundred dollars. But a good tax pro may be able to save you much more than that — especially if your tax situation is not simple. A good tax pro will know far more about the tax code than you do and can suggest effective strategies.
But don’t just hire anyone. Ask around for recommendations and consider hiring an “Enrolled Agent” — a tax pro licensed by the IRS who’s authorized to represent you before the IRS, if need be. You might find one through the National Association of Enrolled Agents website.
Don’t just leave your tax bill up to chance. Take some steps to shrink it.
The $16,728 Social Security bonus most retirees completely overlook If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.
