So many people I speak with want to know practical ways that they can pay less in taxes. Taxes are the number one place that people can save more of the money they earn by implementing just a few simple tax strategies. I want to outline 4 tips that could save you thousands in taxes now and in the future too.
1. Contribute to a Retirement Plan
Did you know that only 32% of people take advantage of the retirement plan that is available to them? Whether it is a workplace retirement savings plan like a 401k or an Individual Retirement Account (IRA), contributing to one of those types of plans can reduce your taxable income now or put you in a much better tax position in the future.
2. Utilize “Bunching Deductions”
The strategy known as “Bunching Deductions” is a fantastic way to reduce your tax liability. Many people year after year do not qualify to itemize deductions and instead use the standard deduction. By bunching deductions, you can defer your deductions in the current tax year, and then in the next tax year combine the current and previous year’s deductions, which gives you the ability to itemize.
Let’s look at an example:
Imagine you’re a family who owns a home and pays property taxes. Property taxes are a deduction you can take every year, however, one year of property taxes may not qualify you to itemize. Therefore, if you defer the current year’s property taxes until the following year, you would be able to deduct the current and previous years’ property taxes in the same year. In this case, doing so would save you a lot in taxes!
3. Donate Appreciated Securities
Donating to charitable organizations is a fantastic way to steward your money. However, many people are unaware that you can give securities or don’t understand the benefits.
You can and should give securities to the organizations that you support. By doing so, you can eliminate capital gains from your portfolio. Instead of donating cash from your income or selling securities, you can transfer shares of a security, or multiple securities, to an account owned by the charitable organization.
Once you’ve donated the securities of your choice, you can then replenish your investment account with cash from your income and rebalance your portfolio with “buys” instead of “sells”. Another incredible aspect of implementing this strategy is the charity you give to won’t have to pay capital gains either!
4. Take More Income Today
Given expectations of increasing income tax rates in the future, it may make sense to intentionally take more income now. Sounds crazy, right?
Let’s break it down:
If income tax rates increase in the future, you can choose to take more income now. You can do this through strategies like Roth conversions. This could save you a lot in taxes by intentionally paying taxes at the lower current rates instead of higher future rates. A Roth conversion is a strategy by which you take your pre-tax retirement accounts and convert them to Roth accounts. When you convert those pre-tax funds, you pay income taxes in that tax year. Therefore, converting now would allow you to potentially pay a lot less in taxes.
With each of these tax tips, it is critically important to implement these strategies on a case-by-case basis.
[Jeremy Sharp, financial planner and owner of Redeem Wealth, a faith-driven wealth management firm, is passionate about the colliding worlds of faith and finance. His family of five are active in their neighborhood church, where he also leads the worship team. Jeremy and his wife Grace are passionate about the foster care crisis and support organizations that bring awareness to how people can love and support underserved adults and kids in their local community. Contact: Jeremy@Redeemwealth.com]
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