Did you feel queasy after filing your tax return? Don’t put off planning for next year’s tax filing. There are many things you can do starting today to lower your tax obligation. Wondering where to start? We’ve got some ideas to help make tax filing a little easier to swallow.
Consider a Flexible Spending Account
If your health plan has a high deductible or you have a lot of expenses related to child or dependent care, ask your employer if you can enroll in a Flexible Saving Account (FSA).
When you enroll in an FSA, you determine how much you want to put in the account for the year, and your employer deducts an amount from your check every pay period to fund the account. And since it’s a pre-tax deduction, you reduce the amount of your taxable income for the year. For example, if your taxable income for the year is $50,000 and you decide to contribute $2,500 to your FSA, the amount of your taxable income is reduced to $47,500.
There are three kinds of FSAs:
- A Healthcare FSA can help cover healthcare costs that your insurance plan doesn’t. It’s great for dental and vision care (which are not included in many employer plans) and can cover your deductible costs and co-pays for doctor visits and prescriptions.
- A Limited Healthcare FSA only covers dental and vision care costs.
- A Dependent Care FSA covers things such as daycare, nursery school, or day camps for young children (under age 13). You can also use the funds in your Dependent Care FSA to cover services for any adult dependents you are responsible for who are unable to take care of themselves.
Top Off That Retirement Account
Does your employer offer a 401(k)? If you have room in your budget, it’s worth thinking about maxing out your contribution. Like the FSA, your contributions are pre-tax deferrals of your income into your 401(k) account. The amount you are allowed to defer is subject to IRS regulations and any limits your employer puts on contributions. But if you can defer even 5% of your income, not only can it help you out at tax-filing time, but if your employer matches contributions, your account will grow twice as fast.
Individual Retirement Arrangement (IRA) rules are different from 401(k) in that the amount that you can contribute annually is lower. But the advantage to maxing out your IRA is that you have until April 15 of the following year to make your previous-year contribution. Keep in mind, though, that the tax savings applies to Traditional IRAs. Contributions made to a ROTH IRA are subject to taxation the year that you make the contribution; however, you won’t have to pay taxes when you withdraw the money at retirement.
Gather Those Receipts
With COVID closing down office buildings, many of us have had to turn a corner of our home into an office. If you’ve had to set up a home office and you weren’t reimbursed by your employer, make sure you hang onto those receipts so you can itemize these expenses when you file your taxes.
Many people who saw their neighbors suffering in the pandemic increased their charitable giving. If you gave to non-profit organizations, your donations might be tax deductible. This also includes tax-deductible car donations to a non-profit such as Newgate School.
Getting the Most for Your Tax-Deductible Car Donation
When you donate your vehicle to a non-profit organization, the amount of your tax deduction can be determined in two ways:
- The car’s Fair Market Value
- The amount the charity received on the sale of your vehicle
Since Newgate School provides vocational training to students looking for a career in the automotive industry, they’re better positioned to assess the value of your gift. This means you’re more likely to get the maximum out of your tax-deductible car donations when you file your taxes.
Tax Savings are as Close as Your Driveway
There are many ways you can lower your income tax obligation for next year. If your budget is already spread a little thin, it may be difficult to set aside more money for your retirement or health care savings accounts. Take a look in your driveway: tax-deductible car donations are a great way to lower your obligation without lowering your monthly take-home pay. And if you’re no longer using the car, you’ll save even more money since you won’t have the burden of paying for registration, insurance, and upkeep.
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