While some taxpayers play the game of questionable tax deductions, many more hesitate to take perfectly legitimate tax breaks because they don’t understand the tax code and are afraid it will trigger an audit. As long as you’ve kept good records and followed IRS guidelines, the possibility of an audit doesn’t need to keep you from using tax saving strategies. The IRS tax code allows for many ways to reduce your tax burden and you should be taking full advantage of them.
One major impact of the Tax Cuts and Jobs Act was to increase the standard deduction by almost double. That means fewer taxpayers will be itemizing deductions as many itemized deductions would have no positive impact on your taxes, anyway. Here are three deductions that you could be using (depending on your situation) to decrease your taxes even if you take the standard deduction. They are excluded from your income “above the line” and used to arrive at your adjusted gross income before that standard deduction is deducted.
There is a wide range of options for retirement savings, but the 401(k) and a traditional IRA are still very powerful tax-saving tools. Your employer 401(k) contribution is pre-tax money used for your future retirement needs. The funds you contribute are not considered as taxable income. Many employers also match your contributions to a certain level. It’s always a good idea to maximize this match by contributing at least up to the matching limit.
Contributions to a traditional IRA are typically considered above the line deductions and can be taken even if you do not itemize your deductions. Both 401(k) and traditional IRA contributions will impact your Adjusted Gross Income (AGI), and these contributions can also help you qualify for certain other deductions, many of which are now limited by and based on AGI.
HSA or Childcare Reimbursement Accounts
Maybe you have out of pocket medical expenses or plan to in your later years (as many of us likely will). Or maybe you pay for care for a child, or an elderly or disabled relative. Many employers offer Health Savings Accounts or Childcare Reimbursement Accounts to which you can contribute.
These plans have pros and cons. The major con is that you have to use the funds for a specific purpose and in some cases, you lose the remaining balance after a certain time if you have not used it all. Make sure to read and understand the details of your plan. The pro (and it’s a big one) is that these contributions are triple tax-advantaged. The contributions you make to these accounts are tax-deductible, the earnings grow tax-free, and you are not taxed on the funds when you take them out, as long as they are used for the intended purpose.
Make Charitable Gifts Wisely
Charitable giving is a long-standing tool for tax savings. Hopefully, you can give to a cause you love, and not just for the tax savings, but it’s a nice bonus. The limit on deducting charitable cash donations has been increased from 50 percent of your adjusted gross income to 60 percent, but it is still an itemized deduction.
One strategy that may be helpful is to lump together your giving from two years into one. The holidays are a season when many charities need donations, so why not donate a lump sum for the prior year and the year to come? The idea is to create one donation that helps your itemized deduction exceed the standard deduction, so you get the full tax benefit. On the off year, in this case, you’ll likely take the standard deduction.
Check with your accountant or CPA to discuss if these strategies can help to reduce your tax bill. If you have questions, contact me. I’m an Illinois licensed, Registered Certified Public Accountant with over 25 years of experience. I’m dedicated to providing outstanding tax and accounting services to individuals and small businesses.
Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.