There’s not a single person on Earth who wants to pay more than their share in taxes. Unfortunately, seeing you have an expected tax bill can be enough to ruin your day.
However, there are specific steps you can take to avoid this issue. We’ll share a few of our favorites so you can keep more of your hard-earned cash in your bank account.
Change Your W4
The W4 is a form you fill out for an employer that tells them how much money should be withheld from every paycheck. For example, if you noticed you had a lot of taxes this year, raise your withholding so you owe less this time. On the other hand, if you received a significant refund, reduce the withholding to get larger paychecks.
The great thing about this step is that you can change your W4 whenever you want. If you aren’t sure how, speak with HR or a manager at your job.
Add More Money to Your Retirement Plan
When you put money into a retirement fund, it isn’t taxable, which makes it a great way to cut down on the taxes you owe. For instance, in 2020 and 2021, you can put up to $19,500 each year into the account.
Employers will often contribute some amount to the account, while self-employed people can open a retirement account for themselves.
Don’t Withdraw from Your 401(K)
If you choose to withdraw money from your 401(K) and are not at least 59 ½ years old, it can cause issues. You will end up being charged 10% above your income tax. In addition, when you take out loans against any retirement funds, it can lead to penalties and charges.
If you’re serious about keeping your tax bill low, leave your 401(K) alone until you are retirement age.
Use the Gift Tax Exemption
Some people aren’t aware that giving up to $15,000 in gifts to everyone you want is possible. In addition, any money given as a gift is not taxable, which is another way you can lower your bill.
Remember that the Lifetime Gift Tax Exemption will allow you to give $11.7 million in gifts over a lifetime before you need to worry about taxes.
Save for University
If you have a child, saving for their college expenses can also be helpful for your taxes. Many people choose to add contributions to a 529 plan, which is a savings account for a specific educational institution or state. While you can’t deduct the amounts on your federal taxes, you may be able to on your state taxes.
However, be aware that gift tax consequences could come into play if you contribute more than $15,000 annually to a single person, including money to one of these plans.
Add to Your Flexible Spending Account
The IRS lets you move tax-free money from your check into an FSA each year. If you have an employer who offers a flexible spending account, this could be an option for paying fewer taxes. As of 2021, the limit is $2,750, and the money must be used for medical and dental expenses.
However, you also may be able to purchase items like breast pumps, bandages, pregnancy tests, and more for you and your dependents. Some employees also allow the money to carry over.
There are many ways to cut down on the taxes you pay, whether you do so through saving for retirement, leaving your money in a 401(K), or providing gifts to people you care about.
If you need additional information about taxes or are dealing with the IRS
, the attorneys at Guardian Tax Law
are here to help. We’ll walk you through all the options and help you choose the best solution for your needs.