Tax season is upon us, and if you haven’t filed yet, you’ll need to soon. Whether you are already retired or working towards it, your yearly tax goal should be to lower your taxable income as much as possible so you can maximize your returns. If you can accomplish this, you’ll have extra money in your pocket to use on lifestyle expenses like vacations, home upgrades and more.
As financial advisors, we help clients use taxes to their advantage each year. Here are five easy steps to help you reduce your tax burden and free up more cash for fun.
1. Shelter your income: Your adjusted gross income (AGI) is used on your taxes to place you into the correct tax bracket and identify how much you owe the government. The more money you make, the more taxes you will owe. This is why it’s important to try to shelter your income against tax in as many ways as possible. If you are still preparing for retirement, placing income into a 401(k), IRA or other tax-deferred retirement plan is one of the best ways to do this. This money does not count toward your income because it is a pre-tax contribution. Additionally, consider utilizing flexible spending plans through your employer. By placing pre-tax funds into these types of accounts, you can use money you were going to spend anyway on health insurance or similar costs while lowering your AGI.
2. Utilize deductions strategically: When you file your taxes, you have the ability to claim deductions that lower your taxable income. Starting with the 2018 tax year, more people will likely be taking the standard deduction, since it has been nearly doubled from what is was in 2017. Retirees over the age of 65 will also benefit from a higher standard deduction this year. However, if you think you can claim more deductions by itemizing, you’ll want to identify as many itemized deductions as possible. These range widely, from home mortgage interest paid to healthcare costs to charitable donations. If you didn’t plan for this last year, make sure you’re keeping track of all receipts and invoices so you can more easily calculate and show proof of deductions when filing next year.
3. Take advantage of tax credits: There are even more ways to shelter your income against tax after utilizing adjustments and deductions, and these are possible through tax credits. Tax credits reduce your tax burden dollar for dollar and can be instrumental in lowering the amount you owe the government. They might even create a refund for you! There are many tax credits available, such as credits for caring for children or adopting, going back to school or using green energy technology.
4. Understand your filing status: Your tax filing status can make or break your tax burden, as well. If you’re married, you’ll want to carefully decide whether you’re filing jointly or separately. Your tax bracket may change depending on which one you choose.
5. Speak with a financial advisor: One of the best decisions you can make, not only for your taxes but also your general finances, is to meet with a financial advisor and discuss tax strategies and financial planning. Your financial advisor will have the expertise necessary to identify additional ways you can cut your taxes down and exit tax season with more money in your pocket.
If you’re not sure how you can maximize deductions and credits to lower your tax burden, contact a financial advisor and see where you can save even more money this year.