“Retirement plans can be useful for lowering taxable income and, hey, they’re not so bad in retirement either.© Ariel Skelley/Blend Images/Corbis
You can be forgiven for not obsessing about taxes year-round. For one, there’s usually no reason to be that terrified of our federal and state responsibilities. Despite lots of whining and jokes at the expense of the IRS, paying taxes has become downright simplified. We can file online and benefit from the guidance of automated software and quick turnarounds on refunds. But that doesn’t mean that you should wander through the world, blissfully unaware of your tax status until mid-April.
They say that only two things in life are certain: taxes and Kate Middleton’s shiny hair (that’s the phrase, right?). But there are still some ways you can reduce your income on your tax return to give you a bit of break when that tax liability bill hits. If you know your taxes are going result in a check to the government this year, taking a few steps throughout the year might help you lessen the burden — and might even get you a refund.
Let’s establish that any time you’re taking a deduction or claiming an exemption on your taxes, you’re in the process of saving on potential tax payments. For that reason, it’s quite important that you practice due diligence and make sure that — if you’re itemizing — you’re taking every tax deduction you can. (And check if taking the standard deduction might save you more, anyway.) But before you even get to deductions, one big tip is to check that you’re getting enough withheld from your paycheck. If you find yourself owing a whopping amount every year, it’s likely that you’re not letting Uncle Sam take his money off the top. While increasing your withholdings will reduce your take-home pay, it may save you a huge tax bill come spring.
Next up is to reduce that income. No, it doesn’t mean taking less hours at work or giving away half your wages to charity. (Although that would do it.) Instead, it’s finding ways to put your income in nontaxable places. Consider contributing to a 401(k) plan, which isn’t included in your taxable income — and it’s not small potatoes. Up to $17,500 can be erased from your income if you’re contributing it to a 401(k), and you can add $5,500 more if you’re over 50 [source: Block]. A traditional IRA is tax deductible, so any contribution up to $5,500 can be written off on your taxes, as well [source: Block].
Now for some nontraditional options: Get married or have a kid. OK, not everyone’s idea of a good time. But the truth is that for a lot of couples, marriage provides a better tax standard deduction if one spouse makes significantly more money than the other. And while no one could argue that a having a baby is a wise financial decision, it does earn you an immediate $3,950 exemption (for 2014 returns), plus a $1,000 child credit in April. Then again, if you’re thinking about having a kid just to get a tax break, you’re probably not ready to usher a child into responsible society.
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Sources
- Block, Sandra. "Ways to save on taxes all year round?" Kiplinger. May 2014. (Oct. 27, 2014) http://www.kiplinger.com/article/taxes/T055-C000-S001-71-ways-to-cut-your-tax-bill.html
- Efile. "How to pay less taxes." 2014. (Oct. 27, 2014) http://www.efile.com/tax-help-guides-tips-for-tax-return-planning-and-tax-return-preparation/
- Internal Revenue Service (IRS). "IRS withholding calculator." Jan. 2, 2014. (Oct. 27, 2014) http://www.irs.gov/Individuals/IRS-Withholding-Calculator
- Martel, Judy. "How to pay no federal income tax." Bankrate. March 19, 2014. (Oct. 27, 2014) http://www.bankrate.com/finance/taxes/how-to-pay-no-federal-income-tax.aspx
