The year is already halfway over, but it’s never too early
to start thinking about ways to reduce your tax bill. Early planning can help
make a significant difference in what you will owe come tax time. Here are some
options to consider when preparing to reduce your taxes.
Review your tax withholding
If you work for an employer, you will have completed a W-4
form. This advises your company on how much in taxes to withhold from each
paycheck. If your family or financial situation has changed or your tax bill
was not what you expected, updating your tax withholding can help you to avoid
surprises come tax time.
Maximize your retirement account contributions
If you are eligible to contribute to a retirement plan at
work, consider increasing your contributions as much as possible. Contributions
to your retirement account, such as a 401(k) or 403(b), directly reduce your
taxable income — helping to reduce your tax burden.
Contribute to an IRA
Consider contributing to an IRA to help supplement your
retirement savings. There are two types of IRA retirement plans that you can
contribute to: a Traditional IRA and a Roth IRA.
For taxpayers who earn below the IRS mandated threshold in
2021 ($140,000 for single taxpayers and $208,000 for married couples filing a
joint return), you may contribute up to $6,000 to a Roth IRA every year (the
limit is $7,000 for taxpayers over 50 years old). While these funds are
after-tax dollars, the contributions are allowed to grow tax-free.
Anyone with earned income may contribute to a traditional
IRA. The amount of eligible tax deduction depends on your income and whether
you are eligible for an employer-sponsored retirement plan. Similar to Roth
IRAs, taxpayers may contribute up to $6,000 per year ($7,000 for taxpayers over
age 50).
Save for higher education
Many states offer a tax deduction for those who contribute
to a college savings 529 plan. While several states offer a deduction for
contributions to their own state-run 529 plan, there are a few states (Arizona,
Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania) that allow a
deduction for contributions to any state’s 529 plan. Review the regulations for
your particular state to determine contribution limits and the amount of
deduction for which you would be eligible.
Flexible spending accounts
If you know that you will have expenses related to child
care and certain medical care expenses, contributing to a flexible spending
account through your employer can help you save ahead of time for these costs —
while also saving on taxes.
In 2021, you can contribute up to $2,750 for an individual
plan or $5,000 for dependent care. Plan carefully when deciding how much to
contribute to your plan each year as contributions do not carry forward from
year to year and you could lose what you have saved.
Planning for taxes can be complicated. Starting as early as
possible can help you to find opportunities to reduce your tax liability.
Working with a tax advisor can help you to implement a successful strategy.
Click here for the
original article.