The year is already halfway over, but it’s never too early to start thinking about ways to reduce your tax bill. Early planning can help make a significant difference in what you will owe come tax time. Here are some options to consider when preparing to reduce your taxes.
Review your tax withholding
If you work for an employer, you will have completed a W-4 form. This advises your company on how much in taxes to withhold from each paycheck. If your family or financial situation has changed or your tax bill was not what you expected, updating your tax withholding can help you to avoid surprises come tax time.
Maximize your retirement account contributions
If you are eligible to contribute to a retirement plan at work, consider increasing your contributions as much as possible. Contributions to your retirement account, such as a 401(k) or 403(b), directly reduce your taxable income — helping to reduce your tax burden.
Related: How Do Wealthy People Get Away With Not Paying Their ‘Fair Share’ of Taxes?
Contribute to an IRA
Consider contributing to an IRA to help supplement your retirement savings. There are two types of IRA retirement plans that you can contribute to: a Traditional IRA and a Roth IRA.
For taxpayers who earn below the IRS mandated threshold in 2021 ($140,000 for single taxpayers and $208,000 for married couples filing a joint return), you may contribute up to $6,000 to a Roth IRA every year (the limit is $7,000 for taxpayers over 50 years old). While these funds are after-tax dollars, the contributions are allowed to grow tax-free.
Anyone with earned income may contribute to a traditional IRA. The amount of eligible tax deduction depends on your income and whether you are eligible for an employer-sponsored retirement plan. Similar to Roth IRAs, taxpayers may contribute up to $6,000 per year ($7,000 for taxpayers over age 50).
Save for higher education
Many states offer a tax deduction for those who contribute to a college savings 529 plan. While several states offer a deduction for contributions to their own state-run 529 plan, there are a few states (Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania) that allow a deduction for contributions to any state’s 529 plan. Review the regulations for your particular state to determine contribution limits and the amount of deduction for which you would be eligible.
Related: You’ve Gotten Your College-Bound Student’s First Tuition Bill. Have You Made the Right Tax Moves?
Flexible spending accounts
If you know that you will have expenses related to child care and certain medical care expenses, contributing to a flexible spending account through your employer can help you save ahead of time for these costs — while also saving on taxes.
In 2021, you can contribute up to $2,750 for an individual plan or $5,000 for dependent care. Plan carefully when deciding how much to contribute to your plan each year as contributions do not carry forward from year to year and you could lose what you have saved.
Planning for taxes can be complicated. Starting as early as possible can help you to find opportunities to reduce your tax liability. Working with a tax advisor can help you to implement a successful strategy.