The following ideas could really pay off in the months ahead.
You should pat yourself on the back, if you’ve successfully taken advantage of all the tax breaks you’re entitled to. But, you can let the windfall stop there. It’s certain you’ve made some of smartest tax moves of the town, but you could increase your odds of saving more money by creating a tax plan that serves you well throughout the year.
Following tax manoeuvres will have you covered in the upcoming months.
By reducing your taxable income, you can reduce your total tax bill. In a 401(k) or other retirement savings plan, you could contribute not more than $17,500 and $23,000 if you’re aged 50 years or more. All contributions made toward this plan aren’t considered under taxable income.
If paying excessive taxes is a concern for you or if you’re planning to diversify your taxable income during retirement, then you could consider relocating all or a part of your contribution towards a Roth 401(k). However, your employer should offer you with such a plan. You’ll not get any tax break for contributions you make in a Roth account. But, you’ll enjoy tax-free returns from your Roth 401(k) during retirement which isn’t possible in a regular 401(k). Still, you’ll have to pay a tax on the amount you convert your regular 401(k) to a Roth one.
You can contribute towards an Individual Retirement Account (IRA), if there’s no retirement plan in place or if you want raise a savings fund. In an IRA, not more than $5,500 contributions are allowed. If you’re 50 year-old or more, then you can contribute not more than $6,500 in a year. You could deduct a portion or all of your IRA contributions on the basis of your income and whether or not you’re included in your employer’s retirement plan. If all else fails, you can turn to Roth IRA to withdraw funds tax free after retirement.
Make sure you take advantage of the medical reimbursement account (known as flex plan) offered by your employer. You can pay for your medical bills, contributing a part of your paycheck, toward the account. This way you could avoid both Social Security as well as income taxes and end up saving around 20% - 35% or more than spending your after-tax money. There’s a maximum catch-up contribution limit of not more than $3,000 per annum.
To pay for childcare, you may have to spend almost $7,500 or higher to cover a cost of $5,000 after having filed your tax return. However, if you take advantage of child-care reimbursement account offered by your employer, then you can pay for the medical bills using the pre-tax dollars. It’d save you almost 1/3 rd or more of the child-care costs. This is because you’re saved from paying both the income and Social Security taxes.
You can get as much as $5,250 in terms of educational assistance from your employer that is tax free, every year. In other words, your W-2 form won’t show your employer’s contributions as part of your income. The best part is that your course doesn’t have to be related to your job and it need not be of graduate level to qualify for the tax breaks.
Finally, it’s important that you pay off your 401(k) loan before leaving your job. If you don’t, then the loan amount will be regarded as an income distribution by the Internal Revenue Service (IRS) and so, you’ll be taxed on the same. Moreover, if you’re below 55 years of age, then you’ll be slapped with a 10% penalty on top of the tax.
Storks also provide tax savings. If you adopt a child or a baby is born in your family, then you could expect good fortune with respect to your tax return. You can slash $3,950 off your taxable income on grounds of added dependency exemption. Apart from that, you’ll be able to claim another $1000 as child credit from your taxes.
The sweetest part is that you won’t have to file your tax returns to take advantage of this tax benefit. Include one extra withholding allowance to your W-4 form and file it with your employer to deduct tax withholdings from your salary. Doing so will immediately increase your take-home pay.