Taxes take a bite out of income and investments, there’s no question. But that bite doesn’t have to be enormous.
As a financial advisor in Brentwood, TN, planning ahead is the key. There are several tax-planning strategies that you can incorporate into your financial plan to help minimize taxes as much as possible. Let’s take a look at 4 of them.
Saving for retirement is a win-win – not only are you setting aside money that you can rely on when you’re no longer working, but doing so comes with tax advantages!
The maximum amount you can contribute to a Traditional 401(k) or similar plan in 2021 is $19,500, or $26,000 if you’re age 50 and older, and those contributions are made pre-tax, a strategy that can put you in a lower tax bracket, and therefore, reduce the amount you owe come April 15.
If you don’t have access to a 401(k), contributions to a Traditional IRA are also tax-deductible, but the annual maximum is much lower at $6,000, plus an extra $1,000 if you’re age 50 or older.
A Roth retirement account offers other benefits.
Working in the opposite way of a Traditional account, contributions to a Roth account are made with after-tax funds, so you don’t receive any tax cuts the year of contribution, but withdrawals made in retirement are tax-free! This can be a big boost to your retirement income. While money held in both Roth and Traditional accounts grows tax-free, because contributions to a Traditional account are made with pre-tax money, withdrawals in retirement are taxed at your ordinary rate.
Another perk to having a Roth account is, generally speaking, Traditional tax-advantaged retirement accounts are assessed a 10 percent tax penalty if you withdraw funds before you turn age 59-½. But that’s not true of a Roth account, as long as you’ve held the account for five years.
There are income limits to Roth accounts. If you’re not eligible to open a Roth account, talk to a financial advisor about a Roth conversion. There are pros and cons you should be aware of before making a decision.
If your company offers a tax-advantaged savings plan for healthcare, this can also be a great way to cut your taxes.
A Flexible Spending Account (FSA) allows you to save up to $2,750 in pre-tax income in 2021. The money can be used for qualified medical expenses (such as deductibles and copays) and childcare.
Make sure to calculate the amount of out-of-pocket expenses you’re likely to use the FSA for in any given year, because if you don’t use the funds in a specific period (usually a year plus a grace period), you lose them. That can negate any tax savings.
If you have access to a Health Savings Account (HSA), you can reap even more advantages. To have an HSA, you need to be enrolled in a high-deductible health plan with at least $1,400 in deductible expense for one person, or $2,800 for a family.
Unlike FSAs, the money you contribute to an HSA doesn’t have to be used in a certain period of time. You can roll it over year to year, up to and including your retirement. An HSA is also portable, meaning you can take it with you from employer to employer, while an FSA is not.
Finally, funds in an HSA can be invested in assets such as stocks, bonds and cash, and grows tax-free until withdrawals. Talk to a financial advisor about early withdrawals and how best to maximize these accounts based on your specific situation.
You can deduct charitable giving to qualified 501(c)(3) nonprofits and foundations, of as much as 60 percent of your adjusted gross income in some cases.
You can also donate assets, such as stocks, bonds and real estate, to qualified nonprofits and foundations. If you do, you can deduct their fair market value from your taxes. You also won’t have to pay capital gains taxes on these contributions, as long as you’ve held the asset for at least one year.
For more about tax efficient charitable giving, read our recent blog post: How to Maintain Charitable Giving with Maximum Impact, Minimum Tax.
The fewer assets you have, the fewer assets the IRS can take a tax bite of, and what better way to essentially unload an asset than to give it to your heirs?
Despite popular belief, giving your assets to beneficiaries can occur during your lifetime and minimize your taxes. You can give up to $15,000 to any individual in a given year and avoid gift taxes on the funds. (Your spouse can also give up to $15,000 to any individual annually and avoid gift tax.)
For other tax efficient estate planning strategies, read our recent blog post: Estate Planning in Tennessee: Could You Benefit from a Community Property Trust?
No one likes thinking about what they could have done to head taxes off at the pass. Instead, work with a financial advisor to cut your taxes ahead of time!
At TrustCore, tax planning, including tax efficient charitable giving, is something we help clients with every year. If you have questions about your financial future, let’s talk. A no-obligation conversation can be a game changer.
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