If you had an unexpected tax bill this year, or aren’t sure what will happen next year, take the time now to make changes that will help avoid a tax bill next year. Year-round tax planning is important, and it can help, regardless of your income level.
Tools For Reducing Tax Liability
Employer Sponsored Retirement Plan
The easiest tools most of us have are retirement plans provided through our employers. Many are unaware of this benefit. Others mistakenly assume they’re enrolled, simply because it’s offered. If you’re unsure, talk to your human resources department and learn details about your employee benefits. It’s quite possible you’re also missing out on the company match – free money! The amount of money you contribute to your retirement plan is tax deductible, which means it lowers your adjusted gross income. Your tax liability is based on your adjusted gross income, so the lower that amount, the less tax you owe. This means you can save for retirement all year long and lower the amount of tax you owe at the end of the year. If you’re living paycheck to paycheck and think you can’t afford to do this, do the math and find out for sure! You may be able to adjust your withholdings to make it work. If you owe the IRS, you’ll have to find a way to pay that money, so find a way to pay yourself, instead!
If your employer doesn’t offer a retirement plan, open your own IRA. In most cases, it’s free to open an account and the contribution minimums are low.
Another way to reduce your taxable income, is to contribute to an HSA. You’re only eligible for the HSA if you have a high deductible health plan, which means you might have some expensive medical bills, before your insurance benefit kicks in. Saving money in an HSA is the perfect opportunity to safeguard against major medical bills. It lowers your taxable income now and you can use the money whenever you need it – today or 50 years from now. Many people are not aware that they have an HSA option attached to their medical insurance, through their employer, so check with your human resources department and find out. If it’s not available through your employer, but you have a high deductible health plan, you can open an HSA on your own. It doesn’t take a lot of time or money to open, but it can be a huge benefit!
Student Loan Interest
If you’re making student loan payments, part of the interest is tax deductible, which lowers your taxable income. That means you may be able to change your withholdings to get a little more from each paycheck, making each payment easier, while avoiding a tax bill.
Find Your Balance
Anything that reduces your taxable income means paying money out on the front end but owing less to the IRS. So, if you feel like this will create a hardship, because you can’t afford any additional payments, use the IRS Tax Withholding Estimator to help change your withholdings to balance it out. It worked for me – find out if it can work for you!
Beware The Tax Bill!
Here are some other things that could benefit you today, but cause a big tax bill later, if you’re not careful.
They are taxable!
Make sure taxes are taken out of each payment you receive! Or, save money from each payment, so you can pay the tax at the end of the year. Or contribute to an IRA to lower the amount that is taxable. Use the IRS Tax Withholding Estimator to make sure you’re getting the right balance!
Health Insurance Subsidies
If you’re receiving health insurance from healthcare.gov, chances are you’re receiving subsidies due to a low income. If your income changes throughout the year, update your information. You may no longer be eligible for the subsidies, which will cause your monthly payment to increase. If you don’t make this change, you’ll have to repay all subsidies you were not eligible for, when you file taxes. To help offset the difference, try contributing to your retirement plan or HSA, or find other ways to reduce your taxable income. Use the Tax Withholding Estimator to learn how these options will impact your tax bill.
Start Planning Now!
This is the time to think about your situation and do some tax planning! Put it off until next April and your options are slim to none. Even if you got a big tax refund this year, it’s still worth looking at your options! If you find it hard to make ends meet all year long, use the Tax Withholding Estimator to see how much more you can get from each paycheck, without having a tax bill at the end of the year. This will reduce next year’s refund, but it will also reduce your stress from paycheck to paycheck, because you’ll have more money available from each paycheck to paycheck to make those ends meet. Just make sure you’re using that extra money wisely. Make ends meet and save the rest for a rainy day! This is your money! Keep more of it to benefit you and your family! If you need help with tax planning, book a free call with me! Email: email@example.com