As another year winds down, I always like to advise clients on the value of lowering their tax liabilities for the year that just passed. There are a number of tactics you can employ to keep your money out of the IRS’ hands.
The best reasons for taxpayers to minimize their tax burdens are so they can pocket more money and prepare for the future. And one of the best ways is to contribute more to tax-deferred retirement accounts, like a 401(k) or traditional IRA. You avoid taxes until the future and build your nest egg – the best of both worlds!
Earners in higher tax brackets should reduce taxable income by deferring earnings until next year as much as possible. For instance, if you’re getting a bonus, hold it until January. Or wait to sell assets that would produce capital gains. And contribute more to your retirement account(s).
Other tax-minimizing strategies involve your health care and home. The tax man fights on many fronts, not just your paycheck!
For example, review your FSA and spend any remaining balance. If you don’t use it, you lose it. These accounts are nice because tax-free funds can be used for qualified expenses, as outlined by the IRS. Some FSAs provide a grace period to spend remaining balances or allow a small balance carryover, but for most, you lose any money left at the end of the year.
For your home, maximize your mortgage interest deduction by making the January 2015 payment in December 2014. That allows you to deduct an additional payment’s worth of interest. And do the same with property taxes – pay all 2014 taxes in 2014, making them tax deductible.
Stay tuned for Part 2, where we’ll discuss more strategies to lessen your tax burden.