Young families can keep their tax bills low by following some significant measures. Our list will help them to save for college, benefit from their flex account, and through many other ways at tax time. Young families can save their taxes in the following areas.
How to keep your tax bills low
I. Work
1. Take advantage of a health tax break. If your company offers aflex plan or a medical reimbursement account, then take advantage of it. You can divert some part of your income to such an account, in order to pay your medical bills. Through this plan, you can avoid both Social Security and income tax on your money.
2. Get a raise. Fill up a new W-4 form and talk to your employer about it, in order to get more of your hard-earned money.
3. Change your flex plan according to the change in your family. You can change the amount of money that you are keeping aside in your medical reimbursement plan, if you get married, adopt a child, or get divorced in the tax year.
4. Shift to a Roth 401(k) account. If your boss offers a Roth 401(k) account, switch to one; as, a Roth 401(k) account offers tax-free withdrawals.
5. Use pre-tax money to pay for your child-care bills. If your employer offers a child-care reimbursement account plan, benefit from it. This will save you almost one-third of the total cost; as with it, you can avoid both Social Security and income tax.
6. Put away your money in a self-employed retirement account. In case you are self-employed or have your own company, you can put your money in one of the various self-employed retirement accounts, such as Keogh plan, individual 401(k), Simplified Employee Pension (SEP), etc.
7. Hire your kids. You can hire your own kids, if you have a self-employed business. This will allow you to deduct the amount that you pay them as salary, in turn shifting the earnings into their tax bracket.
8. Pay tax earlier on restricted stock. Go for an 83(b) election, if you get restricted stock.
9. Pay back your 401(k) loan, before you leave your job.
10. Keep a track of your job-hunting expenses. If you are looking for a new job in the same position as your previous job and if it’s not your first job, then you can deduct job-hunting expenses.
11. Track the costs of shifting to a new job. If your new job is a minimum of 50 miles away from your old house as compared to your old job, then you can deduct the moving costs of your belongings and yourself, even though you do no itemize your expenses.
12. Ask your employer to pay for your education. Most of the companies offer their employees as much as $5,250 for tax-free educational aid every year.
II. College savings
1. Save for your college. Put your money in a 529 college savings plan that is sponsored by the state. It allows you to take control of your money and makes your income tax-free.
III. House
1. Let the government pay for your house. For new tax breaks, you can adjust the tax withholding from your income account and increase your in-hand earnings, so that you can pay the bills of your new home.
2. Save for your first house with a Roth account. When you are saving for your first house, you can withdraw from your Roth IRA account anytime, without any taxes or penalties.
IV. Non-itemize deductions
1. You can deduct some of your expenses, even if you are a non-itemizer, such as student loan interest, performing artists’ and reservists’ costs, job-related shifting expenses, and IRA and health saving account contributions.
V. Retirement and investment savings
1. Do not purchase a tax bill. Purchase a mutual fund after the payout, so that you do not have to pay a tax bill, even if you get a lesser amount.
2. Before you sell, know the date. Make sure that you have an investment for over a year, in order to make it a long-term gain and benefit from its special tax rates.
3. Contribute to your IRA sooner. Contribute as early as possible to your IRA account, in order to earn tax-deferred income; or in case of a Roth IRA account, to obtain tax-free returns.
4. Consider your divorce for property settlements. If you have had a divorce, then a property settlement is not taxable, but it cannot be deducted. On the other hand, alimony can be deducted by the payer and the recipient gets the taxable income.
VI. Inheritance
1. Surrender your inherited 401(k) account. You can surrender your inherited 401(k) account to an IRA, in order to increase tax bills and payouts over your lifetime.
VII. Your kids
1. Record the adoption expenses. You can get back the costs of adopting a child through a tax credit, so better maintain a record of them.
2. Save tax through an infant. You can get tax returns, if a new child is born or adopted in the tax year.
Follow these important measures and get the best out of your income, while paying fewer taxes. Through this, you can keep your tax bills low and subsequently increase your savings.
Patrick O'Hara, EA