Did you have to write a check for taxes that you owed once you filed your return? Posts with tips for lowering your taxable income are typically written at the end of the year because people wait until they realize how much tax they’re going to have to pay to try and reduce their tax bill and take advantage of any way to keep some money from Uncle Sam. Don’t be that person. Here are some things that you can do to help save some money on taxes this year, starting now.
Save To Tax-Advantaged Accounts
There are many options for you when it comes to saving that will help you to decrease your taxable income. Contributing money to an employer provided retirement account such as a 401(k) or 403(b), saving to an IRA, or contributing to a Health Savings Account (HSA) are all ways to decrease your taxable income, which in turn will decrease the amount of taxes that you’ll have to pay. An even bigger benefit to saving to these accounts is that you’ll be helping your future self prepare for retirement and/or large medical expenses.
Another option is to save to a 529 College Savings Plan. Indiana residents who file taxes in Indiana receive a 20% tax credit on up to $5,000 in contributions to Indiana CollegeChoice 529 Savings Plans. That’s up to a credit of $1,000 taken directly off your tax bill ($5,000 contribution x 20% credit). Tax credits are better than tax deductions because they reduce your tax bill dollar-for-dollar whereas deductions only marginally reduce the amount of taxes that you pay.
Maximize Your Employee Benefits
Besides making contributions to your employer retirement account, there are often other employee benefits that employers provide that you can take advantage of to reduce your taxable income. Some of the best, but often overlooked, benefits that you may have available to you are the dependent care FSA and the HSA, which I mentioned above.
An HSA will not only allow you to save on Federal taxes, but you also do not pay FICA (Social Security & Medicare) taxes on money that you contribute to the account, if the contributions are setup through your employer’s payroll system. (if you make contributions directly, then you’ll still have to pay FICA taxes on that money).
If you’re paying for daycare or before/after school care for your kids, then contributing to a dependent care FSA is a no-brainer. You’re already paying for the care for your child and using the dependent care FSA allows you to do so in a tax-free manner, up to a limit. You should be taking advantage of this benefit if it’s available to you and you’re currently paying for dependent care expenses.
File A New W-4
A W-4 is a the Employee’s Withholding Allowance Certificate that you file with your employer (you probably did this when you first began working there). This document tells your employer (or more likely your employer’s payroll company) how much to withhold from your paycheck for taxes.
If you owed a significant amount in taxes this year, or even if you’re getting a hefty refund, you may want to consider filing a new W-4 with your employer to have a more appropriate amount withheld from your paycheck. This can help to make sure that you don’t end up in the same situation come tax time next year. While updating your withholdings through filing a new W-4 doesn’t decrease your taxes, it can help to make things easier when it comes time to file next year – making sure that there’s not a large balance due when you file or making sure that you keep more money in your pocket throughout the year and receive a smaller refund.
Start Saving On Taxes Now
Articles about how to save money on taxes are usually written towards the end of the year when people begin to think about how much they will owe and start trying to figure out if there are any last minute things they can do to decrease their taxes. Being proactive and starting to implement some of these strategies now will help you make sure that you’re able to relax while everyone else is searching for end-of-year tax savings tips.
