While taxes may be due April 15th (or October 15th, if you are on extension), planning for taxes is a year-round event. In today’s blog, we examine several techniques that may help you reduce your tax burden when your taxes are filed.
Defer income into a retirement account to reduce your taxable income. Contributions to a retirement account are an essential tax-reduction tool, as they serve two purposes. First, most contributions (except Roth contributions) reduce your taxable income by the amount deferred into your retirement account. Second, the funds grow tax-deferred until retirement. Not only can this reduce your income tax burden during your working years, but if you start early, this strategy may help secure your retirement.
For employer plans (401(k), 403(b) or a 457(b) plan), the basic limit on elective deferrals is $18,000 in 2015, or 100% of the employee’s compensation, whichever is less. An additional $6,000 deferral is permitted for employees 50 or older, as a “catch-up” contribution.
The elective deferral limit for a SIMPLE IRA is 100% of compensation or $12,500 in 2015. An additional $3,000 deferral is permitted for employees 50 or older, as a “catch-up” contribution.
Contributions to an employee’s Self Employed IRA (SEP-IRA) cannot exceed the lesser of:
- 25% of the employee’s compensation, or
- $53,000 for 2015
Consider using a Health Savings Account (HSA) if you have a high-deductible medical insurance plan to help reduce your tax burden. You may receive a 100% income tax deduction on annual contributions. Additionally, you may withdraw HSA funds tax-free to reimburse qualified medical expenses. Finally, you may defer taking such reimbursements indefinitely without penalties, thus the contributions unused for medical expenses can roll over indefinitely and grow tax-free (similar to the assets in a retirement account).
For the calendar year 2015, the annual HSA contribution limits are:
- Individuals (self-only coverage) – $3,350
- Family coverage – $6,650
Minor charitable gifts can add up. Checks, cash and donations of goods or clothing are all deductible. Many of these deductions are often overlooked. Additionally, don’t forget to include charitable deductions made via payroll deduction (such as the United Way), or the $10 you place in the collection plate at church each week.
For larger charitable gifts (those over $1,000) consider using long-term appreciated securities (securities that have been held at least a year).
If you sell a security and gift the proceeds to the charity, you could pay between 15% – 23.8% in tax on the unrealized gains in the security. Instead, consider donating the securities directly to the charity of your choice. Since the securities are donated rather than sold, capital gains taxes from selling the securities are no longer applicable to you, the taxpayer. The more highly appreciated the security, the greater the tax savings will be.