It only takes a few small changes in your budget to start saving for the future. By taking advantage of the appropriate programs and savings accounts, you can even prepare for the future and reduce your taxable income at the same time. Check out a few simple ways you save for a rainy day while you lower your income tax obligation.
1. Utilize a Tax-Advantaged Retirement Account
A tax-advantaged retirement account, such as a 401(k) plan or traditional individual retirement account (IRA), are excellent options to start saving for your retirement. When you contribute to a tax-advantaged account, you reduce your taxable income.
For example, if you contribute $10,000 to a 401(k) and have a taxable income of $60,000, this reduces your taxable income to $50,000. Instead of having to pay taxes on $60,000 of income, you only have to pay taxes on $50,000 of income.
Remember that in most cases, you cannot access money in a tax-advantaged retirement account until you are almost 60-years-old. If you take money out before you are the specified age, you have to pay a 10 percent penalty on the withdrawal. Regardless of when you take the money out, you have to pay income taxes on the withdrawal.
As of the 2017 tax year, you can contribute $18,000 to most employer-sponsored retirement plans regardless of age and once you’re over 50 you have the option to put in an extra $6,000.
For traditional IRAs, present rules limit your yearly contribution to $5,500, with a $1,000 catch up contribution for those 50 or older. There are income restrictions that can affect your contribution limits.
If your income meets certain guidelines, you may have the option to claim a saver's credit on your taxes. Income limits vary based on your filing status. If you qualify, the tax credit reduces your income tax obligation. Assume that you owe $2,000 in federal taxes and qualify for a $600 saver's credit; this credit reduces your tax obligation to $1,400.
2. Open a Health Savings Account
A health savings account (HSA) is another type of tax-advantaged account that you can use to save for future expenses. It is a benefit offered by some employers to their employees, and employees usually use it in conjunction with a high deductible health plan. An HSA is specifically designed to help you save for future medical expenses.
For the 2018 tax year, you may contribute $3,450 if you are single or $6,900 if your whole family has insurance through your employer. If you are single, contribute the max, and make $50,000, this means that you now pay taxes on $46,550. One of the benefits of an HSA is that you do not have to use the money in the year that you make your contributions; instead, the money will roll over to the next year and continue to grow.
Within your HSA, you have the ability to invest your contributions for greater possible long-term growth.
3. Change Your Approach to Paying Down Your Debt
When it comes to paying down debt, there are numerous ideas about which method is best. Some prefer to start with the debt that has the highest interest rate, while others elect to pay off the debt with the lowest balance first. As you decide how you want to tackle your debt payoff, remember that the IRS treats certain forms of debt differently.
For example, if you have a mortgage, mortgage interest qualifies as an itemized deduction. This means that you can deduct qualifying expenses and reduce your overall tax obligation. If you have a home equity line of credit, this interest also counts as a possible itemized deduction.
Ready to get more help with your tax situation? Contact the Bell Financial Services, LTD office closest to you today so that we can help you create a plan that works for your needs.