Though the official tax filing deadline has been pushed back to May 17, 2021 April still has the honorable distinction of being considered “tax month” in the hearts and minds of most Americans. It is at this time of year when we review our W2s and our 1099s and we prepare our 1040s, that we often ask ourselves if it is possible to lower our taxes through some minor life alterations. While it is not typically possible to remove our income tax burdens entirely, there are a few steps we can follow that may help take the sting out a little bit.
The following is a simple, non-comprehensive list of ways some people may be able to lower their federal income tax burden:
- Contribute to Retirement Plans. Saving for retirement through a qualified account is one of the best ways to offset current taxes. Many people have access to an employer sponsored plan at work—such as a 401(k) or 403(b)—and should endeavor to maximize their contributions. Individuals without access to an employer sponsored plan may be able to make tax-exempt contributions to an Individual Retirement Account (IRA). And those who are self-employed should strongly consider establishing their own retirement account, like a SIMPLE IRA, SEP IRA, or Solo 401(k). All of these savings tools generally allow present income tax deductions.
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- Fund a Health Savings Account. Health Savings Accounts (HSAs) are only available to individuals who are covered by a high deductible health insurance plan. But for those who have access, HSAs are an excellent device for tax reduction. An individual may contribute to an HSA and take a present deduction, the assets in the HSA grow tax free, and distributions from the HSA are tax free if applied to qualified medical expenses. After reaching age 65 and enrolling in Medicare, the HSA can be treated like a retirement plan with distributions being taxable but penalty-free, and with no required minimum distributions.
- Seek Out Business Deductions. Individuals who own and run their own businesses have a wide array of deductions available to them. Many expenses incurred in the course of business will be deductible in one form or another. Even if the business is just a side job, it may still yield substantial tax deductions that may offset earned income. The home office deduction for business owners is one of the most valuable business deductions and is likely to be very popular this year as so many people have been forced to work from home by the Covid-19 pandemic.
- Contribute Appreciated Securities to Charity. Charitable giving not only meets the needs of our communities and provides us with a philanthropic outlet, but it may also allow for a substantial tax deduction as well. Smart giving strategies may help us to maximize the value of this tax benefit. Rather than just send a check to a favorite charity, individuals should consider giving appreciated assets, like stocks and bonds, to their favorite charities. This move will not only allow an individual to take advantage of a charitable deduction, but will also allow them to avoid realizing the taxable gains built up in the appreciated assets. This amounts to a double tax benefit for the donor and substantial value for the receiving charity.
- Sell Depreciated Assets for a Loss. No one likes to take a loss if they can help it. But sometimes taking a loss is the best thing a person can do to rebalance their portfolio, put themselves back on the track for growth, and take a tax deduction in the meanwhile. Losses from the sales of capital assets can offset up to $3,000 of ordinary income and can fully offset other capital gains. Individuals interested in reducing taxes from their portfolios should always consider harvesting their capital losses.
Taxes are a part of life and they are unlikely to go away any time soon. With some thoughtful planning, however, they can be substantially reduced in the years to come. If you would like more information on reducing your taxes in the coming years, please schedule an appointment with a local First Bank Financial Advisor for more information.
 By: Charles Claver |
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