Now is the time to save on taxes before the end of the year. Owe, just right, or refund. That’s the game for taxes. We would like for it to be just right (own nothing and receive nothing). However, most of us fall into the owe the government or refund from the government groups. With the tax rules for benefits and deductions changing almost every year, it can be hard to keep up and get it just right. Well, there are some common ones that haven’t changed. Yes you have until April to file taxes; however, there are steps you can take now to put more money towards your financial goals and save on taxes.
1) Increase contributions to retirement accounts.
Try to max out your tax-deferred retirement accounts before the end of the year. If you’re employed this will likely be a 401(k) or equivalent account. The maximum contribution is $18,000 or $24,000 if you’re over 50 years old. If you can’t max out you contribution, at least contribute enough to receive your employee match if offered by your company. Not sure if you have an employee match or how much it is? Contact your benefits office or HR.
You can also contribute to your Traditional IRA (individual retirement account). Contributions made to your Traditional IRA are not taxed. However, you will pay taxes on withdrawals. You can get a tax break now and allow the money to grow tax-free. Once it’s time to withdraw hopefully, you’ll be in a lower tax bracket and won’t have to pay as much taxes on the withdrawal of your money.
If you’re self-employed, outside of an IRA you may also have a solo 401(k). You can contribute 20% of your income up to $53,000. You can make tax-deferred contributions up until your business files taxes.
2) Withdraw distributions from a traditional IRA.
According to the IRS, when you’re over 70.5 years old, if you don’t distribute at least the minimum required amount then you’ll be punished with a 50% penalty on the amount you should have withdrawn. Yep, the government can take half of the minimum required distribution (RMD) if you don’t take it out. If you are the beneficiary of an IRA you also have to take out the RMD.
3) Delay the bonus.
If your company provides an end of the year bonus, see if you can delay it until after December 31st. The bonus will then apply to the following year, saving you on taxes this year. If you know you’ll be in the same or a lower tax bracket next year this is a great method to save on taxes.
4) Delay receipt of invoices.
As an entrepreneur, you can change the due date of your invoices to the following year. Income not received this year cannot be included in this year’s taxes. Delaying receipt of payments can save you money for this tax year. Again use this trick if you know you’ll be in the same or a lower tax bracket next year.
5) Donate to charity.
Donating to charity is another great way to decrease your tax burden for the year. If you haven’t made your charitable contributions, get them in by December 31st. Be sure to get a receipt of acknowledgement for the donation that shows the monetary value of the donation. If your donation is greater than $250 then you definitely need that receipt. However, if your donation is less you can also use your bank statement or credit card receipt as proof.
Tip for businesses:
Tax benefits can expire and unless you have your pulse on it you won’t know which benefits are expiring. If you have a business talk to a tax professional so that you make sure you take advantage of all the tax benefits for which you’re eligible.
Photo credit: Elvert Barnes