As the end of the year approaches, it is a good time to start thinking about your taxes and getting ready for the new year. This isn’t just a tip to start getting material ready for when you pay taxes such as tax return envelopes. It’s a good time to think about it now because you can find ways to reduce your tax payments and save some money next year. There are almost always ways that you can find to lower your taxes without much effort.
Since it takes a little bit of planning, the earlier you start preparing the better. Some things take time while others will give you a tax break immediately. In this article, we will go over several ways that you can reduce your tax payments.
1 – Max out your retirement account
Before the end of the year, you will want to put the maximum amount possible into your retirement account. The more money you are able to save isn’t just going to benefit you because you’ll have more money for your retirement. You will also be able to lower your tax payment since you aren’t taxed on the money that goes into most retirement accounts.
For example, a Roth IRA allows you to put up to $20,000 into the account per year. This is all tax-free for that tax year. It will be taxed once the funds are withdrawn at the time of your retirement but your tax bracket will be different then and the taxes less than what you would pay for the amount today.
2 – Get some tax credits
A tax credit is a bit confusing and is often mixed up with a tax deduction. In general, it is much better to have a tax credit than a deduction since it is more straightforward. For example, if you have a tax deduction of $10,000 then that is income that is not taxed. This will save you whatever your tax burden is on that money depending on your personal situation. A tax credit is an actual dollar amount that you do not owe to the IRS. If you have a $10,000 tax credit then that is the exact amount you no longer need to pay which is significantly higher than what would be saved by a tax deduction.
3 – Create a Health Savings Account (HSA)
Medical bills can wipe out any savings that you have practically overnight. You can make sure that you have the money to pay for a medical emergency and also lower your tax payments at the same time. Setting up a HSA account allows you to protect your savings from taxes.
You are allowed to put in $3,600 per year that will not get taxed. This will save you hundreds of dollars per year on taxes and give you a safety net in case you or somebody in your family gets sick. Since medical bills are one of the most common causes of bankruptcy it makes sense to take advantage of this tax benefit.