If you’re filing your 2014 taxes and thinking, “why am I paying so much in taxes?” – Here are FIVE TIPS to help you take advantage of potential tax-saving opportunities that are out there. After all, “it’s not what you make but what you keep that counts” – so it’s important to take advantage of every tax break you’re entitled to!
1. Maximize Your Retirement Account Contributions. Are you contributing to a 401k, 403b, or an IRA? If so, good job! Do you know what the contribution limits are, and are you working towards “maxing” them? These limits often increase each year. This is a good thing, if you are aware and adjust your contributions upwards, especially in “milestone” years like the year you turn 50. See the chart below.
Source: IRS. *Note: limitations apply. For additional information, please visit the IRS website: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits
2. Review your W4 withholdings. If you want to change your tax situation for next year, consider: Do you want more in your monthly take-home pay, or do you want a bigger refund next year? If you like the big refund – or if you think you may owe taxes – you may consider adjusting your W4 withholding DOWN. That’s because the lower your withholding, the more that your employer sends to the IRS. When the amount sent exceeds what you actually owe in taxes, that’s when you get a refund.On the other hand, if you’d prefer getting more take-home pay (and a smaller, or even zero, refund at tax time), then you may consider adjusting your withholding UP. Your employer will send less to the IRS, meaning you will take home more. (Just be careful not to overdo it and end up with a nasty surprise next April.)Also, if you have a spouse who will also file a W4 with an employer, your withholding will usually be most accurate when all allowances are claimed on the highest paying job and zero allowances are claimed on all others. Changing your withholdings will not change the amount you pay in taxes; rather, it will adjust how you pay them. The IRS website has a withholding calculator if you want to drill down further: http://www.irs.gov/Individuals/IRS-Withholding-Calculator
3. Consider a Health Savings Account. If an HSA is available through your employer, it’s worth a look. Every dollar contributed to the account is tax deductible, and money used for qualified medical expenses can be withdrawn tax-free. Think of it as a Medical Roth IRA. Funds in an HSA are not subject to forfeiture (whereas funds in an FSA are). That means that the HSA can be a useful tool in saving for both current and future medical expenses. Eligibility qualifications apply; contact your Human Resources office or IRS Publication 969 for more information.
4. Pay less in capital gains. For investments not held in a retirement account, you’ll generally pay less in capital gains the longer you hold the investment. This has to do with the difference between long term vs short term capital gains tax rates. One strategy, called “tax loss harvesting,” is to review the timeframes of your holdings and plan on selling the “losers” before they have been held for one year. The idea is to take advantage of claiming short term losses. Holding onto the “winners” (investments that have increased in value) more than one year takes advantage of long term capital gains rates. If you’re considering whether or not to sell an investment in a taxable account, this concept could help lead you towards a decision.
5. Give to a Worthy Cause. Charitable giving not only makes you feel good by putting your money to work on a cause you are passionate about; it can also increase your tax savings. An interesting estimation of how much you can save in federal taxes can be calculated here: http://dinkytown.com/java/CharitableTaxSavings.html
We usually recommend that you consult with a tax professional about your personal situation, as each case is different. Hopefully these tips give you a good starting point for the conversation, and some things to consider as you make your way into 2015. Taxes are an inevitable part of life, but with a little planning, they don’t have to be a sour experience!
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