Like it or not, there's no getting out of paying taxes. But while it's one thing to lose some of your earnings to the IRS, it's another thing to come away feeling you're getting downright robbed. If your tax bill seems to be going nowhere but up year after year, it could be a sign that you're not being tax-savvy enough. With that in mind, here are a few strategies to utilize if you're tired of having the IRS take too much of your money.
1. Save in a tax-advantaged retirement plan
Many filers think they can't save money on their taxes because they don't itemize. But whether you take the standard deduction or not, here's one tax break you can't afford to give up: retirement plan contributions. When you fund a traditional IRA or 401(k), that money goes in tax-free, and your associated savings become a function of your effective tax rate.
This year, workers under 50 can contribute up to $5,500 to an IRA, and $18,500 to a 401(k). Those 50 or over, meanwhile, get a sizable catch-up that raises these limits to $6,500 and $24,500, respectively. Even if you can't max out, saving in either type of plan is a good way to automatically slash your tax bill. Case in point: If your effective tax rate is 25%, and you put $5,000 into your 401(k) this year, you'll lower your 2018 taxes by $1,250, just like that.
2. Rethink the way you sell investments
The goal of investing is to make money, but unfortunately, the profits you reap aren't all yours to claim. When you invest in a traditional (non-retirement) brokerage account and sell investments at a price that's higher than what you initially paid, you instantly land on the hook for capital gains taxes. But you can lower those taxes if you sell your investments strategically.
Any time you hold an investment for a year and a day before selling it at a profit, you put yourself in the long-term capital gains category. And that's the one you want to be in, because long-term capital gains are taxed at a lower rate than short-term gains, which apply to investments held for a year or less before being sold. Specifically, short-term gains are taxed as ordinary income, whereas long-term gains max out at a 20% rate. Most filers pay just 15% though, and lower earners pay 0%.
So imagine you sell an investment at a $1,000 gain, and that your effective tax rate is 25%. If that gain falls into the short-term category, you'll lose $250 to the IRS. But if you wait long enough to qualify for the long-term capital gains rate, you'll most likely lose just 15%, or $150. That's an instant $100 in savings.
3. Be smart about medical expenses
Medical bills are a burden for most Americans, but if you're smart, you can use them to your advantage tax-wise. Specifically, if you keep tabs on your medical spending, you might snag a tax break this year if your total costs surpass 7.5% of your adjusted gross income (AGI). And the expenses you're allowed to count toward that total run the gamut from in-office copays to prescription eyeglasses to travel to and from appointments.
So let's say your AGI is $100,000, and you spend $9,000 on medical care this year. You're allowed to deduct anything in excess of $7,500 -- so in this case, $1,500. And assuming the 25% effective tax rate we've been working with all along, that deduction will put $375 back in your pocket.
Another way to lower your tax burden via medical expenses is to sign up for a flexible spending account, or FSA, which lets you use pre-tax dollars to pay for your healthcare costs. This year, you can contribute up to $2,650 to a healthcare FSA, and if your effective tax rate is 25%, that'll result in $662 in savings, provided you use up your account balance entirely. Keep in mind that if you overfund an FSA and don't rack up enough eligible medical expenses, you risk forfeiting some of your money, so be smart about estimating your out-of-pocket costs for the year.
Losing more money than necessary to taxes is an absolute shame. So don't stay caught in that trap. Follow these tips, and with any luck, the IRS will start getting less of your hard-earned money.
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