Earlier this month I released the 2014 federal income tax rates, and talked about how your marginal tax rates can change quite a bit depending on how much of your income is taxable.
For many people making a few small changes in their finances can lead to much less of their income being taxable. The less of your income that is taxable in a given year, the less you’ll pay in taxes!
Some of the changes are things you should be doing anyway, like saving for retirement, so let’s take a look.
What are some changes that you can make that can reduce your taxable income and save you money?
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5 Ways To Reduce Your Taxable Income
When looking at ways to reduce your taxable income, there are quite a few ways to make it happen, and some of them you’re likely already doing.
Contribute To Your Pre-Tax Retirement Account
If you have a pre-tax retirement account like a 401(k) through your employer, you can make additional contributions to your retirement and reduce your taxable income.
You can contribute up to the maximum of $17,500, and reduce your taxable income by that amount. Don’t forget that you can also contribute for the previous tax year right up until tax day in April!
Pay yourself first, and save on your taxes!
Contribute To Your Pre-Tax Health Savings Account (HSA)
If you have a health savings account along with a high deductible health plan, you can contribute pre-tax to your HSA all the way up until tax day.
So for the 2014 tax year for example, you could contribute up to $3,300 for an individual or $6,550 for a family right up until April 15th 2014.
The great thing about the HSA is, like a 401(k) you’re essentially saving money that you should be saving anyway, and in the end you’ll save on taxes! The money you save for health expenses will also roll over from year to year, making it a good alternate way to save for retirement.
Contribute To Your Pre-Tax Flexible Spending Account (FSA)
If you have a flexible spending account that you’re contributing to, you can also make sure to set the contribution amount for the year higher at plan election time. At the current time the maximum you can contribute to a FSA account is $2,500 per plan. So if you and your spouse have a FSA available you’d each be able to contribute $2,500.
Keep in mind that the FSA (unlike the HSA) is a use it or lose it type plan, so if you don’t use the amount that you’ve elected for that year, you’ll lose that money. So be careful when you decide how much to contribute to your FSA.
Give To A Qualified Charity
If you give to a qualified local charity, veterans organization or to your church, your donations can be used to reduce the amount of your income that is taxable.
If you’re giving 10% of your income to your church alone, that can be quite a bit of money that won’t be taxed. If you’re finding that you’re well over a certain tax bracket and want to drop down, make an extra donation before the end of the year!
Be sure to know the rules before donating as you may need to have a receipt, and only certain organizations are qualified.
Prepay Your Property Taxes
If you have real estate taxes that are due in the following year, pay them early in the current year, and you’ll be able to deduct those payments from taxable income in the current tax year.
Prepay Your Mortgage
If you have a mortgage on your home, consider prepaying your mortgage payments in order to have the interest paid counted against the current year.
Keep in mind, prepaying the mortgage payment or property taxes in the current year will mean you pay less the following year. So this should be done if you’re trying to get your income below a certain level for the current year.
Other Benefits Of Reduced Taxable Income
Paying less in taxes is not the only benefit of reducing your taxable income.
Another benefit is that by reducing your taxable income you might become eligible for certain income based tax credits and tax deductions, like the health insurance premium tax credit that went into effect in 2014 with Obamacare.
What other ways have you found to reduce your taxable income? Just how much have you been able to reduce your income by this year?
We’ve found that we’ve had to do a lot more of this since starting our business and working for ways to lower our taxable liability as much as we can. For us, it’s usually one of the first three options we look at. If there is some kind of equipment we need and can swing we might also do that as well, but only if we really need it.
Great info. We particularly like the recommendation to pre-pay mortgage interest. It’s a great way most of us can save twice.
A couple of other ways (if you qualify due to state and income limitations) are IRAs (if you earn below a threshold) and 529 plans (if you happen to live in a state that allows you to deduct).