Plan ahead to save on taxes
It pays to think about ways to save on taxes when it's not tax season.
August 14, 2018 8 min read
Thinking about an overall tax saving plan can be overwhelming. What can I deduct? How much could I save on taxes? Where do I even begin? Let’s break down the different ways of how to save money on taxes. Thinking about every aspect of your taxes all at once isn’t easy because things can get complicated quickly. However, if you think about different tax saving options throughout the year, you can come up with a money-saving tax plan that’s easy to implement.
Use the 4 seasons as a guide and consider these tax saving tips and tricks throughout the year. You’ll not only be able to approach your tax plan with a big-picture mindset, but you can make the most of your money with the best ways to save tax.
The sun is shining, the birds are chirping and the flowers are bursting with color. Spring is in the air. Chances are you just filed your taxes for the year, and saving some money is top of mind.
Double-check your taxes
First things first. Take a look at your tax return. Did you receive a refund? If so, congratulations! What do you plan to do with your extra money this year? While you may want to take a vacation or get a new TV, maybe you ought to think of the long term and open a savings account. Then, in a couple of years, your refund will be worth even more.
A refund typically means you gave the federal government more money than you needed to. So while earning a tax refund each year is nice, you could probably have fewer taxes taken from each paycheck. It could be a good idea to file a new W-4 and change how much your company withholds for the IRS. If you’re sending less of your hard-earned money to the government, it’ll feel like you’ve given yourself a bonus because your take-home pay will increase.
Go green to save green
Did you know helping the planet and reducing your energy bills are also great ways to save on taxes? Mother Nature’s warm spring embrace can serve as a reminder to give back to the environment and get some tax savings in return. There are some enticing tax benefits to going green, but if you want the tax benefits, you need to act before the incentives expire.
Renewable Energy Tax Credits are available until 2021 for the costs of major energy installations. So, installing fuel cells, small wind turbines and geothermal heat pumps could bring you tax savings while also helping the environment and lowering your monthly energy bills. The tax credits will decrease until they expire on December 31, 2021.
- 30% for systems placed in service by 12/31/2019
- 26% for systems placed in service after 12/31/2019 and before 01/01/2021
- 22% for systems placed in service after 12/31/2020 and before 01/01/20221
Swimming, vacations, fireworks and fun make the summer. In fact, these summertime leisure activities can be a sneak peek at what retired life can be like with the right planning. Let the summer months be your reminder to do some regularly scheduled savings maintenance for your retirement.
Start your summer checkup with your 401(k). With a 401(k), you’re contributing to an account for your retirement. Money is deducted from your paycheck each pay period and is invested on your behalf. So how does putting money into a 401(k) rather than other investments help you save on taxes? When you put money in your 401(k), the IRS lets you deduct this amount from your income. Lower income equals lower taxes.
The IRS doesn’t tax 401(k) contributions. They’re paid out of your paycheck before taxes are applied, and that can significantly change the amount of income that gets taxed. You can put up to $18,500 into your account. If you’re 50 or older, that number rises to $24,500.2
Best of all, many employers match some or all of your contribution. For example, if your employer matches up to 2% of your salary, you could put 2% of your paycheck into your 401(k) and see twice as much (4%) being saved. It’s like getting free money toward your retirement. So you enjoy tax savings and get even more in return.
IRA all the way
While we’re enjoying summer’s taste of retirement, one of your income tax saving options is funding your IRA.
Not everyone has a 401(k) through work, and that’s okay. For people without a retirement plan at work, an IRA (individual retirement account) may be best. An IRA is an alternative savings account that helps you save for retirement. Even if you have a 401(k), you can still use an IRA in addition to this to set even more money aside for retirement.
Whether you have a 401(k) or not, you could save on taxes by getting an IRA.
You can contribute up to $5,500 ($6,500 if you’re 50 or older by the end of the year). You could even deduct some or all of your IRA contribution from your taxes depending on if you have a retirement plan at work.1
There’s a slight chill in the air, the leaves are starting their dazzling color display and school is back in session. Use this as inspiration to save some money on education and childcare.
College saving 101
You can help your children while you save money on taxes by making contributions to a 529 plan, a college savings account operated by a state or educational institution. While this won’t help you with your federal taxes, you might be able to deduct contributions on your state tax return.
Toddlers to the tax rescue
Aside from college, you may also be worrying about the cost of childcare. The worry isn’t surprising when it can feel like the cost of college tuition. Since when did day care become the new Harvard? If you don’t want to pay Ivy League prices, check with your employer—you might be able to take advantage of your workplace’s childcare reimbursement account, often called a Dependent Care FSA. Just like your FSA for medical costs, with a Dependent Care FSA, you’ll be contributing from your income before it’s taxed. That could save you a third or more of your childcare costs.2
Hot cocoa by a warm fire, time spent with family and friends—’tis the winter season. It’s also the end of one tax year and the start of another.
Give your FSA a checkup
Chances are the cold weather has given you an actual cold. Use this as a reminder to check your tax-saving medical expenses.
Medical reimbursement accounts or Flexible Spending Accounts (FSAs) let you divert part of your salary to a tax-free account that you can then tap to pay medical bills, pay for prescriptions or buy your kids’ favorite superhero bandages. Everything from co-pays to eyeglasses are typically covered.
That means you’ll have tax savings on both Social Security and income taxes because, just like your 401(k), the IRS won’t tax the money you put into your FSA (up to $2,650 for 2018). Just remember to use the money during the calendar year for medical and dental expenses.2
Take a look at your receipts from the year
If you’ve had major medical or dental expenses, or had a hospital stay, be sure to keep all your receipts in a handy place because they can help you save money on taxes. (If you want to be extra organized, you can scan them to a digital filing system with an app like Expensify or Shoeboxed.) In general, you can deduct qualified medical expenses that are more than 7.5% of your adjusted gross income for that tax year.
And if you’re one of the millions of Americans looking for work, keep track of your job-hunting expenses, too. These miscellaneous expenses could be deductible when they exceed 2% of your adjusted gross income.3
Give to your favorite causes
Aside from stuffy noses, the winter is also the season to give back. Use goodwill as a tax saving method.
Charitable donations can be tax deductible, even when the donations are not in cash. Donating clothes, food or household items can lower your tax bill if they are given to a recognized charity and you get a receipt. (Just don’t put it in your pocket and send it through the wash. We’ve all been there.) You could also deduct out-of-pocket and mileage expenses for charitable work you perform as a volunteer.4
Ask a pro
And finally, as the year draws to a close, you may start thinking about new goals and resolutions. If you want to take the next big step in your tax savings plans, you might want to meet with a tax professional.
A tax professional will understand the most recent changes to the tax code, catch any mistakes you might have made and could help you find even more ways to save.
With reminders in every season, these income tax saving tips will have you well on your way to making it easy to prioritize your taxes all year long. When you spread out your tax to-do list into bite-size pieces, it’s easier to accomplish your savings goals and feel like your taxes are under control.