Published on 18/04/2021
The Covid-led pandemic shows no signs of abating yet and there are wave after wave of infection seen across the world. The IRS has been considerate of the difficulties American citizens face and has pushed the deadline to file and pay individual federal income taxes to 17 May from the earlier 15 April. While most of the tax plans would already have been chalked out for 2020, there are steps you can take to minimize your tax burden for the next financial year.
Make more Roth IRA contributions
Get a Roth IRA opened for yourself. The Roth retirement Account is especially recommended for individuals and youngsters who do not have a very high taxable income. Roth IRAs and traditional retirement accounts share most of the rules and features. However, all your money in your Roth IRA account is tax-free when you have had the account for more than 5 years and you have crossed 59.5 years of age.
Your money can grow tax-free in that account, irrespective of what the future tax rate will be. Hence, it is advised that you put as much money as you can in your Roth IRA accounts and you can reap the benefits when you retire.
Reduce taxes to be paid on stocks
There is no point in paying high taxes on stocks. Losses made in stocks can be used to claim a tax rebate and offset profit from some other investments – this is called tax loss harvesting. However, you must wait for at least 1 year before you sell them in order to pay a low capital gains tax. Long term capital gains tax is generally lower than short term capital gains tax. You can also minimize the amount of tax you have to pay on stocks if you gift them to your child or hold on to them and pass it to your children or grandchildren.
Make more non-taxable contribution to your retirement account
If you have a 401(k) or a 403(b) account offered by your employer, you are allowed to make contributions worth $19,500 in 2021. If you are older than 50, you may contribute up to $26,000 this year. All the contribution you make to your retirement account is money you can deduct from your taxable income. This implies, your taxable income will get deducted, further reducing your taxes.
If your employer does not offer a retirement account, you may open a Traditional Ira Account and put in $6,000 in 2021. If you are older than 50, you may contribute $7,000 to the said traditional IRA account. The same rule of taxable income getting reduced applies to traditional IRA accounts too.
For instance, if your income is $50,000 in a year at the age of 40, you may contribute $6,000 to your traditional IRA account. As a result, your taxable income will get reduced to $44,000 per annum. You will pay taxes on $44,000 and not on $50,000.
However, remember that you will have to pay taxes on this money once you withdraw it from your retirement account later in life. The bright side here is that your income in retirement will not be as huge as it is now. Thus, you will not have to pay an exorbitant amount of tax on it- an amount you will have to pay now.
Increase your contribution to Health Savings Account
You can contribute up to $3,600 as an individual and $7,200 as a family to health savings account each year. Like most other contributions, the money you put in a health savings account is also pre-tax and decreases your total taxable income at the end of the year.
What’s more? You can withdraw this money at any point in life when a medical emergency strikes you or your family and pay no taxes on it. Once you turn 65, you can withdraw all of this money for non-medical purposes as well however, you will have to pay taxes on it.
Put more money in tax-free education accounts
You can contribute money to an education account for your child to help pay for their higher education. All the money grows tax-free in education accounts and you can take it out any time for your child’s education expenses.
Make more contributions to Flexible Spending Accounts
You can contribute more pre-tax money to an FSA account and reduce your tax burden further. The money put in a FSA account can be withdrawn for health care purposes or expenses related to the dependent’s care. The only downside to FSAs is the fact that the money does not get accrued over the years; you will lose the money at the end of the year. FSAs are beneficial for people who have high annual medical expenses.
There are several tricks in the book that are straight, legal, and can help you stave off thousands of dollars in taxes- money that you can use for essential purposes. Speak to our tax advisors at [email protected] for more such tips to reduce your tax burden this year!