Tax season is over but it’s never too soon to begin looking ahead to next year’s return. In fact, waiting until the last minute to try and carve out some savings could mean missing out on key tax breaks. There are plenty of things you can do to minimize your taxable income throughout the year, and the more proactive you are the bigger the payoff.
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1. Fatten Up Your 401(k)
Contributing to your employer’s 401(k) makes good financial sense if you’re trying to build your nest egg but it also comes in handy at tax time. These accounts are funded with pre-tax dollars, which means any money you put in isn’t counted towards your taxable income for the year. If you’re not on track to max out your plan this year, it’s worth it to take a second look to see if you can up your contributions.
For 2015, you can defer up to $18,000 of your salary into your 401(k), along with an extra $6,000 if you’re age 50 or older. If you’re right on the border between two different tax brackets, dumping as much money as possible into your 401(k) could push you down to a lower tax rate.
2. Fund a Traditional IRA
Once you’ve reached the limit on 401(k) contributions, you can continue earning some tax benefits by opening a traditional IRA. With this type of IRA, you’re able to take a deduction on the money you put in and you don’t pay any taxes on your earnings until you begin taking distributions. The total contribution limit for 2015 is $5,500 or $6,500 if you’re at least 50.
If you’re considering a traditional IRA, keep in mind that your ability to deduct contributions depends on your income and filing status. If you have access to an employer’s retirement plan, the deduction is phased out for single filers making between $60,000 and $71,000 and married couples who earn between $98,000 and $118,000 and file a joint return. There’s no income limit for single filers who aren’t covered by an employer’s plan. If your spouse isn’t covered by his employer but wants to contribute to an IRA, you can only take the full deduction if your joint income is less than $183,000.
3. Open a Health Savings Account
Unless you’re living under a rock these days, you probably know that health insurance is mandatory and choosing a plan with a health savings account option can yield some additional tax savings. These accounts are offered with high deductible plans and 100 percent of what you put in can be deducted from your taxable income. As of 2015, you can contribute $3,350 for the year if you have individual coverage and $6,650 if you’re on a family plan. If you’re 55 or older, you’re allowed to put an extra $1,000 into your account.
4. Defer Some of Your Income If You’re Self-Employed
Employers are responsible for withholding taxes from their employees’ pay but when you’re self-employed, you have to handle it yourself. Not only are you responsible for paying income tax on your earnings, but you also have to pay self-employment tax, which is currently set at 15.3 percent of your net business income.
If you’re expecting to see a big jump in your earnings for the year, pushing some of that income into next year is a strategy that cuts down on the amount you have to pay taxes on. For example, if you’ve got a large project to complete in December, waiting until January to send out the invoice means you can put off paying taxes on it. You can even use this trick when you’re not self-employed if you’re expecting a big year-end bonus from your employer.
Lowering your tax bill isn’t rocket science; most of the time it just means using some common sense to dig up the biggest savings. Making use of tax-advantaged accounts and plotting out your earnings strategy ensures that you don’t give Uncle Sam any more money than you need to.
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