It’s tax time again, and tis the season to be thinking of ways to save money on your taxes. In addition to maxing out on your 401K at work or making an extra mortgage payment before the end of the year, there are other ways to save on your taxes, and by not taking advantage of some (or all) of the following things, you could very well be leaving money on the table, in particular, IRS’s table.
You may be participating in your employer’s 401K or 403B plan (or have your own retirement plan for your biz), but did you know that you can make an IRA contribution for Mr. Mom or Ms. Dad, your non-working spouse, and potentially get a tax deduction? The deductibility of spousal IRA contributions phases out above certain income limits, but if you’re below the limit, you could save a chunk of dough by making that contribution. Regardless of current deductibility, the earnings on that spousal IRA will be tax deferred, which will save tax every year, compared to those same earnings in a non-retirement account.
Does your employer offer qualified commuter benefits? If they don’t, tell them that they’re leaving money on the table, too! If you take mass transit to get to work, by taking advantage of employer provided commuter benefits, not only will you be reducing your income for income tax purposes, but you’ll also be reducing your income for FICA purposes (currently 7.65%). Because your employer kicks in a FICA match out of their own pocket, having employees use the commuter benefit will save them 7.65% too, a slam dunk for all!
Flexible Spending Accounts
If you pay any qualified medical expenses (co-pays, deductibles, dental or vision not covered by insurance, etc.) this is a must do, if your employer offers it. With the medical expense itemized deduction becoming more and more unattainable (with the former 7.5% adjusted gross income hurdle raised to 10% for many taxpayers), using the flex spending account is a way of getting at least some amount of deductible medical expense. Whatever amount you put into the account reduces your taxable W-2 income, so if you put $1,000 into an FSA and you’re in the 25% federal tax bracket, you’ll save $250 in federal tax, even if you don’t itemize deductions! Similarly, contributions to a dependent care flex spending account will reduce your taxable income. Using the same tax bracket, if you have one child and put $3K into a dependent care FSA, it’ll save $750 in federal tax. If you didn’t do the FSA, you could still get a child care credit, but that credit can drop to 20% of the expenses (depending on income levels), in which case the credit would only save you $600 in tax, for that same $3K of expenses. So if FSAs are offered, use them.
Charitable Gifts of Securities
If you’re the charitable type, and you have stocks, mutual funds, or other securities that have appreciated in value, think about donating them to a charity. Consider the alternative, which is selling that appreciated security to generate the cash to make the contribution. If you do that, you’ll have to pay tax on the capital gain, which automatically leaves you less to donate. If you donate the security rather than sell it, not only do you not have a taxable gain to pay tax on, but you’ll get a deduction equal to the fair market value of the security, so in essence you’ll be getting a deduction on the amount of gain that you would’ve paid tax on, had you sold the security. I don’t know about you, but to me that’s a no brainer!
I can’t think of more fun ways to save money, than saving it on taxes. So have a few laughs while you take that money off IRS’s table!