Looking to lower your tax bill? In that case, you’ll be glad to know that there are several methods of doing that without resorting to tax evasion. The one thing that’s common to all of them is it helps if you start early. Here are 3 of the most effective ways to reduce your state and federal tax bills.
1. HSA Investing
If you have a high deductible health plan, there’s a chance you’re able to invest in a health savings account (HSA). With self-only coverage, you’d need a deductible of $1,350 or more. With family coverage, your deductible would need to be at least $2,700. If you’re eligible to contribute, you should strongly consider it.
Why is this such a good opportunity? Simple: an HSA is a pre-tax savings account. If you max out your contributions, you’d reduce your taxable income by a hefty amount ($3,500 for individual policies, $7,000 for family coverage). You can then use this money to cover your healthcare costs, which allows you to get a huge tax benefit.
2. Retirement Account Contributions
Contributing to retirement accounts such as IRA and 401(k) is a great way to cut your tax bill and prepare for the future at the same time. The main reason for that is that these accounts allow you to take deductions in the same year you make your contributions.
How much can you contribute to these accounts? In 2019, the magic number for IRA accounts was $6,000, with 401(k) accounts allowing for up to $19,000. If you’re older than 50, you can make catch-up contributions as well: $1,000 for IRA and $6,000 for 401(k). Maxing out both of these accounts will reduce your taxable income by $25,000 (or $32,000 if you’re 50 or older).
3. Bundling Deductions
As you may know, tax deductions for medical expenses, mortgage interest, and charitable contributions are only available if you itemize them. Since the standard deduction is so large, this doesn’t always make sense.
One potential alternative would be to bundle these deductions by making two years worth of payments in a single taxable year. For instance, let’s say you donate $10,000 to charity on an annual basis. In this situation, you can try donating $10,000 for 2019 throughout the entire year, and then make your entire 2020 $10,000 donation in December. That would get you up to $20,000 in donations for the year — enough to itemize the deduction.
To discuss more ways you can lower your tax liability this year, get in touch today!