How To Reduce Your Taxes On Salary Income
Castro Valley, California, 16th January 2023, ZEXPRWIRE, While you may have heard that nothing is certain but death and taxes, it is possible to reduce your US taxes to nearly zero, even when you’re paid a salary, reduce your taxable income by maximizing the money you invest in retirement and contribute to a healthcare savings account (HSA) or flexible spending account (FSA). These contributions (up to a limit) are non-taxable. Once you have your paycheck down to the minimum you need to cover your expenses, make sure you’re claiming all the tax credits and deductions you qualify for each year.
Method 1: Making a Salary Reduction Contribution
Open a qualified employer-sponsored retirement account. If your employer offers a 401(k) retirement program, you can contribute up to $19,000 of your annual income to the plan before taxes are withheld for the tax year 2019. The maximum amount is adjusted annually to account for the rising cost of living.
· Because this money is taken out of your paycheck before taxes are withheld, you reduce your taxable salary. Depending on your salary amount, this could drop you into a lower tax bracket. Regardless, you won’t owe taxes on that money.
· The tax on your retirement contributions is considered to be deferred. You will pay those taxes when you withdraw from your account after you retire.
Tip: If you are 50 or older, you can contribute an additional “catch-up” amount of up to $6,000.
Add a 457(b) plan if you work for a qualified employer. If you work for the state or local government or a nonprofit organization, you may be able to open a 457(b) plan. Find out from your employer if these plans are offered. If you have access to one, you can contribute up to $20,500 of your annual income to the plan as of 2022.
· As with 401(k) contributions, these contributions are tax-deferred. You don’t pay taxes on the money now, so you reduce your taxes on your salary. You will pay taxes on withdrawals after retirement, but presumably, at that point, you’ll have a lower annual income and fall into a lower tax bracket, so you’ll ultimately still pay less in taxes overall.
· The $20,500 contribution limit is entirely separate from the contribution limit for other plans. If you have a 401(k) and 457(b) plan, you can defer taxes on up to $41,000 a year.
· For example, suppose you are a public school teacher earning $48,000 a year. Your spouse is an attorney who earns $150,000 a year, an amount the two of you can easily live on. You can contribute up to $41,000 a year towards your retirement plans, giving you a taxable income of only $7,000. Your household income would, therefore, be $157,000 a year rather than $198,000.
Use an IRA if you don’t have an employer-sponsored retirement plan. Contributions to a traditional IRA may be tax-deductible. The amount you can deduct depends on your modified adjusted gross income (MAGI), your filing status, and your contributions to other retirement accounts. This amount is also adjusted each year to account for the cost of living increases.
· Even if you have a 401(k), you may still be able to deduct all or part of your contributions to an IRA. Your total retirement savings, however, cannot exceed $20,500 (as of 2022). For example, if you don’t earn enough money to save $20,500 with your 401(k), you could make up the difference with an IRA contribution.
Tip: You may also be eligible for a saver’s credit on your taxes of up to 50 percent of your IRA contribution. This credit maxes out at $1,000, depending on your adjusted gross income and filing status.
Method 2: Opening an HSA or FSA
Find out if your employer offers insurance plans with HSAs. An HSA is a savings account where you can save money to cover out-of-pocket health expenses. HSAs are typically offered in conjunction with a high-deductible insurance plan. Contributions to your HSA are tax-free, up to a certain amount. For 2019, the limit is $3,850 for individuals or $7,750 if you have family insurance coverage.
· You can use the money in your HSA tax-free for medically related expenses, including doctor visits, prescriptions, lab tests, hospital care, and certain over-the-counter medications if prescribed by your physician.
· Your HSA contributions roll over from one year to the next, so you don’t need to worry about losing any of the money you’ve put in your HSA. It will be there when you need it.
Set up an HSA on your own if necessary. If you purchase your own insurance, either because your employer doesn’t offer insurance or because you’re self-employed, you can still get the benefits of an HSA by choosing a high-deductible insurance plan.
· During the open enrollment period, search plans on the marketplace at https://www.healthcare.gov/. Look for plans that include an HSA.
· High-deductible plans with HSAs typically have a much lower premium. This plan may be a good option for you if you are young, in good health, and seldom go to the doctor.
Contribute the maximum amount to any employer-provided FSA. FSAs are similar to HSAs but are not offered in conjunction with any health insurance plan and are solely provided by employers to their employees. FSAs are typically for health-related expenses, but you can also set up an FSA for dependent care, including child care.
· FSA contributions are pre-tax and reduce your taxable income. Contributions are typically limited to around $2,850 a year, although this amount may vary depending on your income.
· If you have expenses that fall under an allowed category for an FSA, it makes sense to deduct the money from your paycheck before taxes and put in the FSA. Then you can pay for that expense with tax-free dollars. For example, if you pay $500 a month for childcare, you could put $500 a month in an FSA, then pay for the childcare directly from the FSA account.
Warning: With FSAs, you typically lose any amount you’ve contributed if you haven’t spent it by the end of the year. While contributing up to the maximum can reduce your taxable salary, this won’t help you much if you lose that money.
Method 3: Taking Applicable Credits and Deductions
Compare the standard deduction to itemized deductions. The Tax Cuts and Jobs Act of 2018 increased the standard deduction while eliminating a number of itemized deductions. Even if you’ve always itemized in the past, you might be able to reduce your taxes by taking the standard deduction.
· For 2022, the standard deduction is $12,950 for individuals, $19,400 for the head of household, and $25,900 for married couples filing jointly.
· Generally, you may benefit from itemizing your deductions if you had significant uninsured medical expenses, paid interest or taxes on a home you owned, or had significant losses following a federally declared disaster.
Tip: If you use tax preparation software like TurboTax, the software will determine whether you would benefit the most from itemizing your deductions or taking the standard deduction based on your answers to a few simple questions.
Deduct your student loan interest if you are paying back student loans. Student loan interest is deductible regardless of whether you itemize your deductions or take the standard deduction. This deduction reduces the amount of your income that is taxable.
· As of 2022, you may deduct the interest you paid over the year on your student loans up to a maximum of $2,500.
Tip: You can deduct student loan interest even if someone else, such as a parent or relative, is paying your student loans on your behalf.
Determine if you qualify for the Earned Income Tax Credit (EITC). The EITC provides a tax break for working individuals and couples with low to moderate incomes. Generally, you must earn income either from working for someone else or through self-employment, as well as meet other rules. Most taxpayers who qualify for the EITC have at least one child.
· You can use the IRS’s EITC Assistant, available online at https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/use-the-eitc-assistant, to determine if you qualify for the EITC.
Take the child tax credit if you have children. The child tax credit is a refundable tax credit of $2,000 for each child you have who is under the age of 17. You qualify for this credit if you make less than $200,000 as an individual or $400,000 if you are married and filing jointly.
· Because this tax credit is refundable, you can get up to $1400 back per child, even if your tax bill was already zero.
Tip: Each child you claim the child tax credit must have a valid Social Security number.
Get an additional credit for any other dependents. If you have a child over the age of 17 for whom you cover at least half of their living expenses, you can still claim a $500 tax credit for them, even if they’re too old to qualify for the child tax credit.
· You can also get this credit for others who live with you and depend on you for care, such as an older relative or a disabled person.
· You cannot claim the dependent or child tax credit if someone else claims that person as a dependent.
Claim a credit for installing renewable energy equipment in your home. If you own your home and want to convert some or all of your utilities to renewable energy, you may qualify for a tax credit worth a percentage of the system you install. Products include fuel cells, small wind turbines, geothermal heat pumps, and solar energy systems. While rental homes do not qualify, primary and secondary homes do, as well as new builds. The tax credit is gradually reduced each year until they were phased out in 2021:
· 30% for systems placed in service by December 31, 2019;
· 26% for systems placed in service after December 31, 2019, but before January 1, 2021; and
· 26% for systems placed in service after December 31, 2020, but before January 1, 2022.
Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No News Postbox journalist was involved in the writing and production of this article.