Let’s admit it: everyone wants a lower tax bill.
Well, everyone wants the combo of mo’ money AND a lower tax bill.
Doesn’t that sound like a “have your cake and eat it, too” scenario?
Maybe. But then again….maybe not.
Too many people pay WAY too much money on their tax bill. Sometimes they pay more because of poor decisions, but often it’s just because they don’t understand how taxes work and where to look for awesome opportunities.
Here are seven of our favorites:
Do you work for the man? Try these:
Open a retirement plan and use it. The #1 way to grow your net worth and help your tax return is to stuff money into your retirement plan at work. If you’re eligible for a 401k, 403b or 457 plan, jump on that opportunity.
I’ve heard many “reasons” people don’t invest in their workplace plan. Here are a few:
Take advantage of workplace pretax plans: Besides the retirement plan, there are other opportunities, such as HSA accounts. Some companies allow you to pay for everything from childcare to optical with a health spending account. Use as much of this as possible to score huge savings on these services. (If you’re in the 25% tax bracket and have a 5% state tax, you’ll save 30% on your childcare!)
Use bonuses and incentives wisely:
Stock options or stock purchase plan: You’ll pay taxes on these plans when you sell. Having a tough year tax-wise? Don’t sell today. There’s also a HUGE difference between short term and long term capital gains rates. Wait until you’re paying the (significantly lower) long term rate before selling.
Bonus money: If you’re eligible for a big bonus but this isn’t a good year to sell, ask your boss if you can defer your bonus until the new year. Or, if you feel that your income will stay consistent, ask if you can break up a big bonus into two even halves to lower the tax impact. This strategy is best used if you’re getting a bonus at year-end (I hate deferring money in my pocket for several months….).
Have a budget? Try these:
Give to charities. Not only are you helping your community, but you’re putting money back in your pocket if you itemize. Cash gifts will obviously lower the amount of money you have overall, but gifts in kind, such as clothing, old automobiles, and items to 501c thrift stores can both lower your tax bill and remove clutter.
An increasing number of people are now donating larger items and receiving sizable tax deductions as a result. For example, if you have an old boat that you no longer use, making a sponsored boat donation could help you to save a significant amount on your taxes.
Donating a boat is a great thing to do on a number of levels, since the boat is then sold at auction with the proceeds going to charity. Then, for your donation, you receive a tax deduction that is equal to the value of the boat or the boat’s true value.
Claim ALL of your refinance costs. If you’re FINALLY taking advantage of low interest rates to refinance, remember that any points or closing costs you pay might be deductible also. Ask your tax preparer or read this IRS notice to see if you qualify.
Investments? Here are some:
Think about your dividends. I love dividends as much as the next guy, but a portfolio full of dividend-paying stocks in a non-qualified account can be a huge tax speed bump on your investment returns. If you aren’t spending the dividends today, purchase dividend-heavy investments inside of your IRA and use your non-IRA account to house more tax efficient investments.
Buy/sell creatively. If you’re finally selling your big winning stock, look for that stock in your closet that’s been horrible and has no prospects of coming back. You can cover up all of your capital gains with losses from losing stocks…and $3,000 more.
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