Taxes are top of mind this time of year. In a world where we have little control, especially when it comes to stock market returns, it’s important to focus on what you can control. Taxes are one of those areas that you can greatly improve your overall financial health. Small moves each year compound over time and improve the lasting effect of your money. While I am not a tax professional, I would like to give some ideas that could help you save what you owe the government next tax season and beyond.
The Tax Cuts and Jobs Act enacted in 2017 nearly doubled the standard deduction for tax filers for 2018 and beyond. This has made it more difficult to gain a tax advantage from writing off your mortgage interest and charitable giving. However, a couple tricks can put more money to your bottom line.
The first way is to count up your charitable giving and consider consolidating your giving over the next few years. By bunching the total amount of your giving into one year, that may boost the amount you can deduct well above the standard deduction.
The second way applies to those over the age of 70.5. There’s an advantageous way for you to give to charity by using your required minimum distribution (RMD). This is the amount the government requires you to withdrawal from retirement accounts, once you’ve reached this age.
The government wants to start taxing money that you have deferred from taxes in the past. Instead of paying the ordinary tax rates on this withdrawal, you can avoid those taxes by making the check out directly to your qualified charity.
The more traditional method to save on taxes during your working years is to take advantage of your company’s 401(k) plan to defer income today, allow it to grow tax-deferred and hopefully be in a lower tax bracket once you retire.
The Roth IRA remains a favorite way to go ahead and pay your taxes today. It allows the account to grow tax-deferred and you never have to pay taxes on the principal or growth amount if you can wait until age 59.5.
My favorite way to reduce taxes is to take advantage of a health savings account if you are eligible. You receive a tax deduction, tax-deferred growth, and can withdrawal it tax-free for qualified medical expenses. It’s a triple threat, and we all know with the increased medical costs that we could benefit from a growing balance in our HSA account.
Studies have shown that health-care costs can average in the triple digits during a couple’s entire retirement above what Medicare covers. Here’s a way to keep up with inflating medical costs and get a major discount from the tax savings.
For those who plan to help pay for your kids’ education, there are 529 plans and Coverdell accounts. These again allow you to grow your money tax-deferred and withdrawal it tax-free, if used for qualified educational accounts.
Another way we help reduce tax liability is to make use of tax-loss harvesting in taxable investment accounts. This is where you sell positions that are losing money to reduce your liability, and then buy them back at a later date.
I hope one or more of these ideas are helpful to you. Stewardship Capital is happy to coordinate with your tax professional. We will even attend a meeting with you to see if we can find ways to save you more money over the longer term.
(Advice is general in nature and not intended for specific situations. Past performance is no guarantee of future results.)