Wouldn’t it be a perfect world if there were no taxes? You would have more disposable income and you could spend more on yourself. For instance, you could get a luxury bag or go on a vacation or simply pamper your children.
The reality is different as we all know it. Depending upon your income, taxes can considerably reduce your take-home salary. The good news is that there are ways to reduce your federal and state tax bills. Of course, you can’t avoid them completely but you can certainly make a difference. The key is to start early to save more.
Let’s look at some of the ways to pocket more income.
Contribute to retirement funds
Did you know retirement planning funds can help you in reducing your taxable income? If you haven’t already started, it may be the right time to start investing in 401(k) and IRA. You can consider maxing out your contributions in employer-sponsored retirement plans such as 401(k) and 403(b) for maximum advantage. If you are above 50, you can even make catch-up contributions of up to $6000 beyond the permissible limit. You can reduce your taxable income by $19000 through such retirement plans. This amount can extend to $25,000 if you are above 50. If your employer does not provide a retirement fund, you can opt for an individual retirement account (IRA). This way, you can contribute $6,000 for your retirement planning and an additional $1,000 if you are above 50.
Opt for flexible spending plans
Several employers allow the employees to save pretax for certain expenses like medical costs and dependent care. If you opt for this program, your employer will allocate a part of your earnings in a different account. If you are unable to use this amount by the end of the year it will be considered as a part of your taxable income. Some employers also allow you to extend this period. This way, you can save $2,700 through flexible spending plans.
Consider health saving plan
Similar to the flexible saving plan, you can contribute to healthcare costs. This can again reduce your taxable income. However, HSA is not available to all the employees. It is made available to only those who have high deductible health insurance plans. You can contribute $3450 as part of this plan. If you do not use it in your current year, it can be rolled over to the next year.
Use business deductions
There are a whole lot of exemptions that you can enjoy if you are self-employed either full-time or part-time. If you work out from your home and use at least one-fifth of your home as an office, you are eligible for home office deductions. You can even deduct a part of your phone bills and internet bills from your taxable income. Several other deductions can help you in reducing your taxable income.
Opt for 529
If you have a child there is a high chance that you have heard of the 529 plan. This plan allows you to save for your child’s college education and also provide certain tax benefits. The biggest advantage is that you can open a 529 account for other kids in your life such as grandchildren, nieces, nephews, and your friends. While your contributions to 529 are not tax-deductible under the federal laws but certain states offer tax exemptions in this case. As a matter of fact, 30 States allow for this provision.
Buy a house
This may appear drastic to some of you but if you have been planning to buy a house you may as well do it earlier. This will allow you to deduct your mortgage interest as well as property taxes from your taxable income. In 2019 you can save up to $75,000 of mortgage interest from being taxed.
Get your home revalued
At times your property taxes may be way off than what they should be. If you feel your property has been overvalued, you may appeal against your property tax. To do so, you can either opt for an appraisal or show a similar sale in your area.