So, you’ve got your W-2s and you are ready to file your taxes. You fill out all of your info, import your documents, and check out your refund. This is where the disappointment usually sets in. Refunds are never what we hope them to be, but to maximize them is simple math. Your refund is calculated by the taxes you were withheld and your personal tax liability. Tax liability is largely determined by your taxable income, and there are more ways to minimize than just your standard deductions. Aside from making less money, which nobody hopes for, here are some easy ways to lower your taxable income.
One very easy (and responsible) way to both prepare for your future and reduce taxable income is to tell your employer to withhold money for your 401k. Most employers will match a certain dollar amount each year that you contribute, giving you a “free money” bonus. The best part is, this money is untaxed so long as you don’t touch it until you retire. These withholdings will be taken out of your taxable income, and you get a great return on it later on.
Health Savings Accounts (HSAs)
HSAs are great supplements to health insurance, and are basically tax-free money you put away to be used exclusively on medical expenses. If you have a high-deductible health plan, you are probably eligible to contribute funds to this account. Just like the 401k, money that you send to this account will not be added to your taxable income. In contrast to the retirement option, you have immediate access to these funds as long as the use case is medical-related. Make sure you clear these purchases with your provider to ensure you don’t incur a penalty for an ineligible expense. Look out for Flexible Spending Accounts (FSAs) as well, as they work in a similar way.
Equipment Write Offs (Business Owners/Independent Contractors)
If you are self-employed, even on the side, you may be able to write off business expenses. These can include equipment, vehicles, supplies, etc. and so on. Make sure to clear these with a CPA first, as this can be much more complicated than other options. You’ll want to ensure that you can write off the expenses you want to, and that you know how to correctly. This one is especially great because money you were going to spend anyway becomes tax-advantaged. This means that business owners or contractors should evaluate what their taxable income will be before year-end, and buy eligible equipment if possible.
When documenting all of these, get help from a certified tax professional. There are many resources out there, and you don’t want to burn the IRS. If you navigate these strategies legally and responsibly, you can make sure you are maximizing your income as much as possible. Don’t get robbed by Uncle Sam, and prepare for the future by keeping your money safe!