Tax season is already underway, but it is never too early to start planning for next year’s tax filings. Here are five tax planning ideas to consider for this year.
Contribute (more) to Retirement Accounts
One of the most effective ways to reduce your taxable income is to contribute to a retirement account, such as a 401(k) or traditional IRA. These contributions are deducted from your taxable income, so you’ll pay less in taxes. In addition to lowering your tax bill, contributing to a retirement account is an excellent way to save for your future.
If you’re self-employed or have a side business, you may also be eligible to contribute to a Simplified Employee Pension (SEP) or a solo 401(k), which allows you to save even more on taxes.
Take Advantage of Tax Deductions
Another way to reduce your taxable income is to take advantage of tax deductions. Some common deductions for individuals include mortgage interest, charitable donations, and state and local taxes. Make sure to keep records of your expenses throughout the year, so you can claim any applicable deductions when you file your tax return. Due to current limitations on deductions on state and local taxes, taking the standard deduction might be more beneficial. Consult your tax advisor regarding the benefits of itemizing your deductions vs. the standard deduction.
If you’re a business owner, there are also many deductions available for things like home office expenses, travel, and equipment. Consult with a tax professional to ensure you’re claiming all the deductions you’re entitled to.
Consider Tax-Loss Harvesting
If you have investments, you may be able to reduce your tax bill by using a strategy called tax-loss harvesting. This involves selling investments that have lost value, which can offset gains in other investments and reduce your overall tax liability.
Be careful when using this strategy, as there are rules around “wash sales” that prevent you from buying the same investment within 30 days of selling it. Additionally, you should only sell investments that are no longer meeting your long-term investment goals.
Plan Charitable Giving
Charitable giving is not only a great way to support causes you care about, but it can also provide tax benefits. If you donate to a qualified charity, you can deduct the amount of your donation from your taxable income. However, be sure to keep records of your donations and use proper documentation to claim the deduction.
You can also consider donating appreciated assets, such as stocks or real estate, instead of cash. This allows you to avoid paying capital gains taxes on the appreciated value and still receive a tax deduction for the full value of the donation.
Utilize Tax-Advantaged Accounts
In addition to retirement accounts, there are other types of tax-advantaged accounts that can help you save on taxes. Health Savings Accounts (HSAs) are available to individuals who have a high-deductible health plan and allow you to contribute pre-tax dollars to pay for medical expenses.
Flexible Spending Accounts (FSAs) are another type of tax-advantaged account that allows you to set aside pre-tax dollars for eligible expenses, such as healthcare and dependent care. However, be aware that any funds not used by the end of the year are forfeited.
529 Plans are another type of tax-advantaged account that can help you save for education expenses. Contributions to these plans are not tax-deductible, but the earnings grow tax-free and can be withdrawn tax-free for qualifying education expenses. Check with your tax advisor regarding the deductibility of 529 contributions on your state taxes.
Tax and financial planning are like fashion, you can do it without advice, but it’s not recommended. Ensure you are taking advantage of these ideas and others by scheduling a complimentary consultation with a financial planner at bmt.com or call us at 610-263-4581.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
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