Whether you’re hoping for a refund or expecting to pay extra, Tax Day is a big day on everyone’s financial calendar. Knowing it will be here before we know it, our team is sharing several ways you can improve your tax situation before the tax filing deadline arrives.
From timely retirement contributions to advantageous deductions and credits to other potential tax-saving moves, savvy filers can work on their tax outlook months in advance to minimize their overall tax obligations—and maximize any reward that might be coming their way. Here are six tax planning tips to keep more money in your wallet.
1. Know your tax bracket.
As you prepare to file your taxes, it can help to know which tax bracket your income falls into. Your tax bracket determines the percentage of tax you will be charged for the next dollar of income you earn—and it can help you figure out how to move yourself into a lower tax bracket.
Once you know where you stand in your tax bracket, you can consider tax planning actions that move you out of a higher tax bracket and keep more money in your wallet.
2. Figure out if itemizing is better than the standard deduction.
For many people, the standard deduction is the simplest—and best—option for deducting eligible costs from your total taxable income. This flat deduction amount is available to any taxpayer, and it offers easier accounting in addition to, in some cases, a higher deduction amount than you would enjoy if you itemized your costs.
This standard deduction in 2021 is $12,550 for individuals and $25,100 for married couples filing jointly. Keep in mind that in some cases, your tax-eligible deductions may significantly exceed this amount—home mortgage interest, medical expenses, educational costs, and charitable contributions are just some common examples of deductions that can cause your itemized deductions to exceed the standardized amount.
3. See if you qualify for any big deductions or tax credits.
The IRS offers a number of deductions and tax credits, large and small, that can help you lower your annual tax obligations. These can range from tax credits for fuel-efficient car purchases to education tax credits to deductions for interest paid on certain types of debt.
Before filing, see if you qualify for any deductions so you can claim them on your tax returns. Keep in mind that these deductions and other tax laws are subject to change. In some cases, deductions and credits may be released during the tax prep season, creating new savings that can reduce your tax payment—or increase your return.
4. Make sure health savings accounts and other pre-tax accounts are properly funded.
Health savings accounts, dependent care accounts, and flexible spending accounts offer pre-tax contributions that provide you with funds to cover eligible expenses, all while reducing your tax obligations.
Choosing not to fund these accounts every year can lead to unnecessary taxation on spending that would otherwise be covered by these accounts. Stay on top of these accounts and make sure you fund them to maximize your potential benefit.
5. Reduce your taxes through retirement contributions.
One great way to dramatically reduce your tax obligations in any given tax year is by making retirement contributions to an eligible tax-deferred account. When you make contributions to these accounts, you reduce your overall taxable income, and thus end up paying fewer taxes for that fiscal year.
One benefit of this strategy is that you can make contributions up until Tax Day while still applying those contributions to the prior tax season. This allows you to prepare your taxes, find out how much you owe the IRS, and make a strategic, one-time retirement contribution to lower this obligation.
6. If you owe more than expected, make adjustments for next year.
Has your tax bill ever caught you by surprise? If you run out of options to lower your tax obligations for the current tax year, save yourself this headache in the future by increasing the amount of tax withholding applied to each paycheck.
By adjusting withholding, you can minimize what you owe come Tax Day—or set yourself up with a nice tax return.
Be proactive about tax planning.
The best tax planning is done weeks and months ahead of Tax Day, giving you as much time as possible to get your finances in order, chase down deductions and credits, and shave your tax obligations down to the smallest number possible.
Maximizing tax savings is just one way to keep more money in your checking account. Visit our Financial Resource Center today for guides to help you budget smarter, save up to buy a home, or achieve other financial goals in your life.