It may only be the start of November, but it's never too early to start thinking about money-saving tips that could help cut your tax bill. Far too few Americans want to involve themselves in their taxes, and for good reason -- there's enough tax code to fill nearly 58 median-length novels. (That's about 3.7 million words, in case you were curious.)
Although that's a somewhat unnerving total, it still pays for Americans to be proactive in managing their income, as it could allow them to hang on to money that may have otherwise wound up in the hands of the Internal Revenue Service. Because time is the greatest ally of investors, learning proper tax-management now is crucial to setting in motion a great retirement plan.
With that in mind, today we'll take a closer look at seven money-saving tips you can employ right now to help cut your tax bill in the upcoming year and beyond.
1. Consider adjusting your W-4
In 2011, according to NPR, more than 80% of the 143 million federal tax returns that were filed resulted in taxpayers getting some form of refund. Although a refund does serve as a form of forced savings for Americans (and we as a nation are notoriously bad savers), it's also a way of allowing the IRS to borrow money from you at a 0% interest rate.
In order to maximize your income now and start investing it as early as possible, it's a good idea to estimate how much you'll earn during the course of the year and adjust your federal withholdings accordingly. This way, you'll receive a smaller refund, or no refund at all, but you'll have extra take-home income in your paychecks that can be used for investments or expenses.
2. Contribute to a tax-advantaged retirement account
By contributing to a tax-advantaged retirement account, such as an employer-provided 401(k) or a traditional IRA, you achieve a deduction against your income and also allow your retirement savings to grow tax-deferred.
If you're willing to forgo an upfront tax deduction, you can consider contributing to a Roth IRA, which allows your investments to grow completely tax-free so long as you don't make any unqualified withdrawals before age 59-1/2. As icing on the cake, Roth IRAs do allow up to $180,000 to be withdrawn completely tax- and penalty-free in order to pay for college bills, regardless of your age.
3. Contribute to your favorite charity
Another smart move is to consider making a donation to a charity or charities of your choosing. The IRS will allow you to deduct some percentage of the charitable contribution against your income, which will ultimately lower your tax bill. Additionally, you'll be supporting a cause you strongly believe in.
Another suggestion here, courtesy of Kiplinger, is to consider gifting stocks or mutual fund shares that you've owned for at least a year and which you're currently making money on. These shares are gifted at their current value, not your purchase price, and you'll never pay a cent of taxes on your monetary gain!
4. Exercise your "green" thumb
This is one tax credit you'll want to act somewhat quickly on, as it's set to expire in 2016, but homeowners looking for a healthy deduction on their taxes -- and a potentially sizable reduction in their energy bill -- can consider going green and upgrading certain aspects of their home via the Solar Investment Tax Credit.
The IRS will allow homeowners to net a credit of 30% on the cost of both the parts and the labor associated with installing these green systems with no cap on the amount of the credit. Examples of qualifying upgrades would include solar water heaters, solar roof electrical systems, wind turbines, geothermal pumps, and so on.
5. Hang onto those investments
In addition to being poor savers, far too many investors are also quick to the trigger with their investments, selling stocks within weeks or months of purchasing them. The problem with this strategy, other than the fact that timing the stock market is practically impossible, is that short-term capital gains rates are often significantly higher than long-term capital tax rates.
Short-term capital gains are taxed at ordinary tax levels ranging from 10% to 39.6%. Long-term capital gains are taxed at either 0%, 15%, or 20%, making them far more desirable for investors. In order to qualify for the long-term capital gains tax, all you need to do is hold your investments for at least one year.
6. Keep those receipts handy
Everyone's tax situation is different, but one of the money-saving tips you'll need to take to heart is to keep your receipts orderly so you can access them come tax time. The IRS allows a number of deductions to taxpayers, but many have to be itemized, which is where having easy access to your receipts will come in handy and save you time (and money).
Self-employed workers offer a great example. They're potentially allowed to deduct expenses related to their ongoing business, medical expenses, and a number of other deductions, so long as they can itemize these costs and provide evidence of their nature if requested by the IRS.
7. Stay healthy and wealthy
Lastly, you should consider taking advantage of a health savings account, flexible spending account, or health reimbursement arrangement account if you qualify. These employer-offered plans offer a way for qualified Americans to pay for some of their medical expenses or even child care with pre-tax dollars.
For example, a flexible sending account uses pre-tax money (i.e., money without Social Security and Medicaid taxes taken out) and has a maximum contribution of $2,500 in 2014, or $5,000 for dependent care. The downside to a plan like this is it's a use-it-or-lose-it deal. In other words, you can't carry the funds over to the following year. Conversely, a health savings account may or may not use pre-tax dollars, but the account does carry over any unused portion, with interest in the account accruing tax-free. HSAs also have a higher individual contribution limit: For 2014, it's $3,300 for those aged 54 and under and $4,300 for those aged 55 and over.
Ultimately, everyone's tax situation is different, but there are money-saving tips that each and every one of us can employ to reduce our taxes and potentially add some pep to our retirement account. Remember, you're in the driver's seat of your financial future, and no matter how intimidating taxes in general might seem, it's in your best interest to be proactive.