Taxes are unavoidable, but there are a few ways to lower your tax bill and minimize the impact they have on your bank account.
- Use a Flexible Spending Plan
Flexible spending plans, or flexible spending account (FSA), are pre-tax plans that allow you to pay certain expenses with tax-exempt dollars. These certain expenses include dependent care, medical expenses and health insurance. This account is typically managed by an employer who will set aside a portion of your earnings in a separate account. According to the use-or-lose provision, participating employees must incur eligible expenses by the end of the plan year or forfeit all unspent amounts.
- Give Back
Charitable contributions are a guaranteed way to reduce your tax bill. There are many ways to give back beyond writing a check. Shelters and other organizations are always happy to accept toys, books, clothing and any other household items. Your time is not a deductible, but if you travel to an event where you represent a charity, those expenses can be a deductible. If you buy an item such as a computer and donate it to a charity for its own use, that can be a write-off.
- Save Toward Retirement
The easiest way to reduce your taxable income is to maximize your retirement savings. A 401(k) is an employer-sponsored plan that employees can make contributions to. In some cases, the employer might even match contributions from the employee. There are two basic types of 401(k)s- traditional and Roth. While they are similar in most respects, they differ in how they are taxed. Taxpayers who have an employer-sponsored retirement plan may be able to deduct some or all their traditional IRA contributions from taxable income.
- Buy Things That You Need
The deduction for items is usually only a fraction of its true cost. This means that you should not buy something, like a new computer for a home-based business, at the end of year just for the sake of a quick and easy deduction. When purchasing work-related items at the end of the year, make sure it is something that you needed to buy regardless of the tax write-off.
These four tips can help to ensure that you have a lower tax bill when tax season rolls around.