Tax Saving Strategies You Don't Want to Miss
No one likes to pay taxes. (Well, there may be a few weirdos out there - but not MOST people, at least.) Nevertheless, taxes are a reality of living in civilized society. We all contribute our fair share, and we all benefit from the results.
At least, that’s the theory. The reality could probably use a little tweaking, but that’s a topic for another time.
Tax Saving Strategies
Contributing our fair share doesn’t mean we have to be careless about it, however. It’s perfectly legal and entirely ethical to take reasonable steps to reduce your tax burden within the terms laid out by law. And there’s no reason to wait until April to get started. The best time to implement the best tax saving strategies is right now.
Shall we get started?
Check Your W-4
OK, this one isn’t technically about changing how much you’ll actually pay over the course of the year, but it is about reducing headaches and stress come tax time. If you regularly owe money when you file each spring, you’re probably not withholding enough throughout the year. If you usually receive a substantial refund, you may be withholding too much.
Sure, it’s nice to have a few more dollars each paycheck - but not at the cost of trying to come up with hundreds or thousands you don’t have every April. If you end up borrowing to pay your taxes, or worse, end up owing late fees and penalties to the IRS, you’re losing money completely unnecessarily.
It’s even more fun to get a big refund - but that’s money you could have been using all year to pay down high-interest debt or invest in future needs or retirement. Instead, by having too much deducted from your paycheck, you’ve loaned it to Uncle Sam interest-free for a year. Do your best to set your withholding so that you break even each year, or at least so that you end up with a minimal refund.
If you simply can’t live without that lump sum, it’s easy enough to set up a separate savings account and an automatic deposit every month to emulate leaving it all with the IRS. The only difference is you’ll be earning a tiny bit of interest along the way and you’ll have access to it before April each year if something unexpected comes up.
Contribute To A Retirement Account
If your employer offers a retirement plan to which you can contribute additional funds each pay period, take advantage of the opportunity. Try to give the highest amount allowed under the terms of the program.
This is a winner twice over. Most retirement plans are tax-free or tax-deferred, meaning you’re lowering your tax obligations for the year by giving yourself money to use in the future. You’re also building up retirement for yourself - something most Americans don’t do nearly as well as we should. If you’ve ever wondered when you should start saving for your retirement, the answer is pretty much the same no matter how old you are. You should have started yesterday, so you might as well get started right now.
It can be frustrating the first time you start paying attention to an IRA, 401(k), or other financial vehicles. Be patient with yourself and realize that savings are just like anything else - the language is only hard until you learn it. Starting a retirement account is time well-spent and not as bad as it might seem when you first get started. You can find encouragement and information on the Wealthry blogs to help you get started. I suggest checking them out as soon as you’re done here!
Check Out Flexible Spending Accounts
These are increasingly popular with many employers. Most allow you to deduct money throughout the year pre-tax to use for specific expenses such as medical needs or child care expenses. You may have to make a few estimates and jump through a few hoops, but FSAs can be a powerful tool for covering essential expenses while lowering your tax obligations.
For some of us, any talk of IRAs or FSAs or anything beyond paying next month’s utility bills blurs our thinking and raises our blood pressure to an unhealthy level. Take a breath. It’s not that bad. Honestly - and I say this in love as someone who’s been there - the minimal organization and planning and budgeting you’d need to do to get on board with one of these accounts is something you should be doing anyway. I promise you, getting a grip on your monthly and yearly spending is actually LESS stressful over time than refusing to worry about it.
Faith is doing what you can, then trusting the rest will work out. Denial is turning away from what you could be doing because you don’t want to think about it. Flexible spending accounts are just like anything else in your monthly budget. The more you use them, the more comfortable you’ll get and the more money - and stress - you’ll save yourself.
Keep Track of Expenses and Donations
One of the easiest, but most often overlooked tax saving strategies is something we all know we should do… but somehow manage to forget when it matters most. Keep track of everything as it comes up throughout the year. Don’t wait until April and tell yourself you’ll figure it out then.
It doesn’t help that many of us don’t itemize any more now that the standard deduction has changed. It’s easy to let those receipts end up in the trash and figure it all comes out the same anyway. And maybe it usually does.
That doesn’t mean you shouldn’t hang on to those receipts just the same.
You never know when you might be hit with medical bills far beyond what’s normal for you in a year. While this is never a good thing, it does mean you might end up qualifying for deductions you wouldn’t normally come close to considering. It’s also possible you could find yourself donating or giving away far more than you think possible at the moment. Life changes quickly, and the few extra minutes it takes to track charitable giving might unexpectedly become a very big deal.
Goalry Mall
For years, my tax records were pretty much a half-dozen manilla folders and a few oversized envelopes stuffed in the lower left drawer of my desk. It took some organizing come tax time, but at least I had everything in one place. I’ve recently joined the 21st century and finally decided to take advantage of the amazing technological assistance available to me. My Goalry app helps me track potential tax deductions as they occur throughout the year, so that come come April 15th all I have to do is run a few easy reports and I’m good to go.
It doesn’t hurt that the same app manages my various accounts, tracks my debt and makes suggestions about where to focus my spending, and reminds me of upcoming due dates. (I’ve never been known for my impressive organizational skills.)
Take Your Freelancing Seriously
If you do a little writing on the side for extra cash, or sell more than a handful of items online each year, or teach music lessons, or make crafts, you may qualify as self-employed for purposes of your taxes. Obviously, you don’t want to fabricate or exaggerate, but if you’re putting in time and money on something other than your regular day job, it might be perfectly appropriate for you to deduct home office expenses, mileage, materials, and more.
Yes, this is extra paperwork, but I’ve been doing this for years and I assure you, it’s not so bad. (If I can figure out Schedule C, ANYONE can. The important thing is to think about your spending and tax implications throughout the year instead of waiting until April 15th. A meal here, some office supplies there - maybe by themselves they’re not going to cut your taxes in half. You’d be surprised how quickly they add up, however.
IF you keep track of them.
Keep in mind that if you have income from anything the government considers “self-employed,” you’ll be expected to pay self-employment taxes as well. This is traditionally done quarterly, which makes April much less burdensome than it would be otherwise. If you’re new to the freelancing thing (and many people are since the pandemic changed how so many of us think about work), consider taking advantage of that quarterly thing. You’ll be glad you did.
Start Saving For Your Kids’ College
You’ve been meaning to do this anyway, haven’t you? You know, as soon as you can “afford” it? Look into a 529 plan TODAY and stop putting it off. 529 saving plans for college are pre-tax, which means the more you contribute, the lower your tax burden for the year.
There are a number of misconceptions about 529 plans which might be holding you back. Check out this recent piece in Forbes clarifying some of the most common. Here’s one that I personally took advantage of recently.
Concern #3: If my child doesn’t go to college or I use the money for something else, I’ll get hit with a tax penalty on everything I’ve saved.
One change that occurred several years back is that the definition has expanded to include certain elementary and secondary school expenses up to $10,000. If there is no chance the original beneficiary will use the funds, see if you can rename the beneficiary to someone that will likely use the funds for qualified expenses. You can change the beneficiary to a relative of the original beneficiary including a sibling, the child of a beneficiary or even a parent.
Don’t Be Afraid To Seek Help
The IRS has actually gotten a bit better in recent years about making instructions clear and answering commonly asked questions. Several online tax preparation software companies offer free electronic returns, allowing you to mostly just enter your information and answer questions in order to file. (Some have come under fire recently for not revealing that many taxpayers don’t qualify for free filing until they’ve already entered all of their information and are ready to finalize everything, so check out the small print ahead of time.)
There’s also nothing wrong with going to a professional tax preparation service. Obviously, you should do a little research ahead of time, but most of these folks are quite capable and genuinely want to do a good job for you. If they catch even a few deductions you’ve overlooked, or prevent even one major error, they’ve already paid for themselves.
No matter how you choose to handle your filing, the Taxry blogs are live and regularly updated throughout the year. We’ll continue offering easy tax saving strategies as well as diving a bit deeper on relevant tax topics from time to time.
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Conclusion
Taxes are just one more facet of economic life in America. Managing your taxes is not so different from planning for retirement, paying down debt, choosing the right credit card, or financing a home or vehicle. Goalry doesn’t loan money or make fancy promises about miracle fixes. What we do is bring practical guidance and education to users just like you through our blogs, our connections to financial services, and the Goalry financial management app.
Taking more effective control of your finances may not always be easy, but it doesn’t have to be as difficult as it sometimes seems. And you don’t have to do it alone. Let us know how we can help!