Posted by Income Taxes and Bookkeeping LLC

Tax Savings For Young Families

Tax Savings For Young Families

Young families should make these changes throughout the year to keep their taxes low. Here are the areas you should be looking to save:


Give yourself a raise.

If you received a huge tax refund this year, that means a lot of taxes will be deducted from your paycheck on each payday. Filling out a new W-4 form with your employer will ensure you get more money when you do.

 

Opt for health tax exemption.

Be proactive if your employer offers a medical reimbursement account, sometimes referred to as a flexible plan. These plans allow you to redirect part of your salary to an account that you can use to pay your medical bills. The advantage? You avoid income taxes and Social Security on the money and can save between 20% and 35% or more than spending after-tax money. The maximum you can contribute to a flexible health plan is $2,500.


Change in a flex plan

If you get divorced or married or have or adopt a child during the year, you can change the amount you allocate in a medical reimbursement plan. If you have more than one medical bill, put more pre-tax money into your account; If you anticipate fewer, you can withdraw your contributions, so you don't have to worry about the "use-it-or-lose-it" rule.


Pay child care expenses with pre-tax dollars.

After-tax, it can take $7,500 or more in wages to pay $5,000 in child care expenses. But if you use a child care reimbursement account at work to pay these bills, you can use the pre-tax dollars. This can save a third or more of the cost by avoiding income taxes and Social Security. If your boss offers you such a plan, take advantage of it.


Switch to a Roth 401 (k).

But if you're worried about future tax increases or want to diversify your taxable income during retirement, consider changing your partial or full 401(k) contributions to Roth 401(k) if your employer offers one. Unlike a regular 401(k), you don't receive tax refunds when your money is deposited into a Roth account. On the other hand, money coming from a Roth 401(k) during retirement will be tax-free, while money coming from a regular 401(k) will be taxed at the highest level.


Put the money in a self-employed retirement account.

If you run your own business, you have several options for tax-advantaged retirement accounts, including Keogh plans, Simplified Employee Pensions (SEP), and Individual 401(k) accounts. Contributions now reduce your tax burden while your income increases with your deferred retirement tax.


Pay taxes sooner on restricted stock.

If you are given Restricted Stocks as a side benefit, consider doing what is called the 83(b) election. This enables you to pay taxes on the value of the share immediately, rather than waiting for the restrictions to be lifted when the shares "vests." Why pay taxes sooner or later? Because you pay tax on the value at the time of the possession of the stock, which can be much less than the amount at the time it vests. Therefore, the tax on any appreciation that occurs between them enjoys favorable treatment of capital gains.

 

Pay off a 401 (k) loan before you quit your job.

Otherwise, the loan amount will be considered a distribution that will be taxed at a high level and, if you are under 55 in the year you leave your job, you will also be fined 10%.


Track the cost of moving to a new job.

If your new job is at least 50 miles from your old home as your old job, you can subtract moving expenses even if you don't itemize the expenses. If this is your first job, the mileage test will pass if your new job is at least fifty miles from your old home. You can deduct moving expenses and personal effects. If you drive your personal car, you can deduct money cents per mile, plus parking and taxes.


Keep records of your job search expenses.

If you are one of the unemployed Americans, be sure to check your job search costs. When looking for a new job in the same industry (the first job is not eligible), you can deduct job search costs, including travel costs, such as rooms, boarding, and transport, if the search takes you away from home at night. These expenses are miscellaneous expenses, deductible to the extent that these expenses exceed 2% of the adjusted gross income.


Use Roth to save for your first home.

Of course, the "R" in the IRA stands for retirement, but a Roth IRA can be a powerful tool when saving for your first home. All savings can come out of a Roth at any time, free of charge and without penalty. And after the account has been open for five years, you can withdraw up to $10,000 in tax-free, penalty-free income to buy your first home. Suppose $5,000 is paid to a Roth every year for five years, and the account earns an average of 8% per year. At the end of the five years, Roth would have approximately $31,680, which can be withdrawn without penalties for a down payment.


Let the IRS help you pay for your house.

A new home, whether it's a trade-up or your first, usually means a bigger mortgage. And that means a higher deduction for mortgage interest and maybe even more property taxes. You can adjust the withholding tax on your payment to account for new tax deductions and increase your home pay to help pay your bills.


Deduct your expenses, even if you don't itemize them.

Taxpayers claiming the standard deduction often complain that itemizers are getting the best deal. But this is not true. The only reason the standard deduction is used without questions is if it is more than the total you could deduct if itemized. And you can deduct several things, even if you don't itemize them, including student loan interest, work-related moving expenses, expenses incurred by reservists and performing artists, and contributions to corporate accounts—health savings and IRAs. Casualty losses can also be added to the standard deduction, which was previously only deductible by those who itemized. Keeping good records will save you money.


Rollover an inherited 401(k).

A recent rule change allows a 401(k) plan beneficiary to rollover their account to an IRA and distribute payments (and tax collection) over their lifetime. This can be a big advantage over the old rules, which generally required the withdrawal of these accounts and payment of all fees within five years. To be eligible for this break, you must be a 401(k) beneficiary. If the account goes to the owner's property and then to you, the old five-year rule applies.


Check the calendar before you sell.

You must have held an investment for more than a year to be considered long-term income and benefit from preferential tax rates. The "holding period" begins the day you buy a stock, mutual fund, or other asset and ends the day you sell it.


Beware of the IRS's interest in your divorce.

Look at the tax basis, which is the amount by which the profit or loss will be determined when the property is sold – when working towards an equitable property settlement. One asset of $100,000 may be worth much more or less than another once the IRS receives its contributions. Reminder: family allowances are deductible for the payer and taxable income for the beneficiary; a real estate contract is neither deductible nor taxable.


Include adoption costs.

Thousands of dollars in expenses incurred in adopting a child can be recouped through a tax credit, so it's worth keeping accurate records. The credit can be up to $13,190. If you adopt a child with special needs, you will receive maximum credit even if you spend less.


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