No one likes to pay taxes. That’s a fact. However, you know you need to pay them every single year. But the worst happens when an unexpected tax bill shows up.
So, today, we decided to show you different ways on how you can cut your tax bill. While some may require more effort than others, you can be sure they are all worth it.
5 Tips To Cut Your Tax Bill This Year
#1: Tweak Your W-4:
In case you don’t know, the W-4 is a form that you need to give to your employer, instructing it on how much tax to withhold from each paycheck. So, if you are looking to cut your tax bill this year and don’t want another surprise next year, raise your withholding so you owe less when it’s time to file your tax return.
In case you got a huge refund, do the opposite and reduce your withholding.
#2: Stash Money In Your 401(k):
As you probably already know, less taxable income means less tax. 401(k)s are one of the most popular ways to cut your tax bill. The IRS doesn’t tax what you divert directly from your paycheck into a 401(k). For 2020, you can funnel up to $19,500 per year into an account.
Notice that in case you are 50 or older, you can contribute an extra $6,500 in 2020.
#3: Contribute To An IRA:
In what concerns individual retirement accounts, you need to know that there are two main types: Roth IRAs and traditional IRAs.
While you may be able to deduct contributions to a traditional IRA, how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make.
It’s important to acknowledge that for the 2019 tax year, you may not be able to deduct your contributions if you’re covered by a retirement plan at work, you’re married and filing jointly, and your modified adjusted gross income was $123,000 or more. In 2020, that number rises to $124,000.
Besides, there are also limits to how much you can put in an IRA: for 2019 and 2020, the limits are $6,000 per year, or $7,000 for people 50 or older.
#4: Save For College:
As a parent, you are always thinking about saving money for your kid’s tuition. So, you will be glad to know that setting some money aside for this goal may also help cut your tax bill.
A popular option is to make contributions to a 529 plan, a savings account operated by a state or educational institution. You can’t deduct your contributions on your federal income taxes, but you might be able to on your state return if you’re putting money in your state’s 529 plan.
#5: Fund Your FSA:
One of the things that many people don’t know is that the IRS lets you funnel tax-free dollars directly from your paycheck into your FSA every year. So, if your employer offers a flexible spending account, you might want to take advantage of it to lower your tax bill. In 2020 and 2021, the limit is $2,750.
Notice that you will have to use the money during the calendar year for medical and dental expenses, but you might also be able to use it for related everyday items such as bandages, pregnancy test kits, breast pumps, and acupuncture for yourself and your qualified dependents.