5 ways to reduce next year's tax bill right now
There's still time to gather all the tax deductions you can before 2013 is over. Bonus: You'll get more organized in the process.
This post comes from Marilyn Lewis at partner site Money Talks News.
This is also a great way to organize your life. The energy you put into it pays you back in two ways:
- Each deduction you can claim helps you pay less in federal income taxes.
- Because one of the steps involves de-cluttering your house, you're organizing your household and putting yourself in great shape for the new year.
Here are the steps you can take right now to reduce your 2013 income tax liability.
1. Donate to charities
Do well for yourself while giving others a helping hand. Get your kids to help you go through closets, garage, cupboards and storage areas looking for little-used toys, clothes, tools and household items that others can use. Donate them to a charity that will resell them. Collect a receipt for the value so you can include it if you itemize your deductions.
Remember the difference between a charity and the dump, though. Nonprofits like Goodwill and the Salvation Army can't use antiquated electronics any more than you can. Follow these tips to correctly value and record tax-deductible donations.
Christmas, Hanukkah and Kwanzaa are another great opportunity to give and get: When you give the gift of a charitable donation, you also can use it as a tax deduction. Contact the charity of your choice to make sure it's registered as a federal 501(c)(3) -- or check with Charity Navigator -- so the IRS will recognize your donation. (Here are the IRS rules.)
2. Max out your 401k contributions
Every dollar you put into a tax-deferred retirement plan like a 401k is money subtracted from your taxable income. If you're younger than 50, the IRS lets you contribute up to $17,500 to a 401k. If you're older, the limit is $23,000.
Time is your friend. "All else being equal, you’re far better off investing $10,000 at age 25 than investing $50,000 at age 55," U.S. News & World Report writes, explaining why younger people shouldn't wait to contribute as much as possible to their retirement plans. Otherwise you might not have the money to retire that previous generations had access to.
3. Snag an energy tax credit or two
The federal government rewards certain behavior with tax credits. There are rewards for home improvements and other purchases that help cut energy use. And there’s still time to make purchases that let you earn a tax credit this year. Install a heat pump, add more insulation or install energy-efficient windows in your home, for example. Or buy a plug-in electric vehicle. Find these and more at the Tax Incentives Assistance Project.
The Neighborhood Energy Connection explains which improvements done in 2013 will earn you a federal tax credit:
If you plan to make several energy improvements at once, get up to $1,200 in rebates by participating in the Home Performance with Energy Star program. Call the NEC at (651) 221-4462, extension 136, for more information.
Check the Database of State Incentives for Renewables and Efficiency for incentives -- many of them tax-deductible -- for weatherizing, green building and installing energy-saving construction and features in your home. DSIRE also lists federal incentives.
4. Open a health savings account
Another good way to keep some of your earnings is to put money into a health savings account if you have a high-deductible health plan. You can contribute up to $3,250 a year per person or $6,450 per family to pay for out-of-pocket medical expenses.
People with high-deductible health plans often use HSAs to help to pay their medical bills before insurance coverage kicks in.
If you open an HSA through your employer, the money goes in tax-free. If you open one independently, deduct the money you put into it when you file income taxes.
The funds you don't use this year can be rolled over for use next year.
Caution: You’ll owe tax on any money withdrawn from an HSA and spent on nonmedical expenses.
An HSA gives you a triple tax break: Your contributions are sheltered from income taxes, the money grows tax-deferred, and the funds can be withdrawn tax-free for medical expenses. … it can even serve as an extra retirement savings fund. Most employers also add a few hundred dollars to the accounts each year as a bonus.
5. Adjust your withholding
Here's a fun game: Play with the amount you withhold from your paycheck for taxes to see what it does to your paycheck and your tax liability.
If you regularly receive a refund from the IRS at tax time, you're having too much money withheld from your paycheck. Yes, it's fun to get a refund check. But it's more fun to keep that money for yourself rather than giving it to Uncle Sam to hold for you.
On the other hand, if you're regularly cutting a check for the IRS in addition to your withholding, you should have more withheld from your paycheck.
Use tax software to experiment. Or ask your accountant to help you figure out the correct amount to withhold from your paycheck. If a change makes sense, adjust your tax withholding by filling out a new W-4 form.
More on Money Talks News:
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