Saving money on taxes is pretty much a universal goal. No matter your age, salary, and personal financial situation, it's safe to say you don't want to pay the IRS more money than necessary.
But some tax breaks are difficult to come by. If you don't own a home, for example, you won't get the chance to itemize expenses like mortgage interest on your tax returns. If you're a moderate or higher earner, you'll lose out on certain tax credits that are only available to low-income filers.
Thankfully, though, there's one tax break that's widely available regardless of how much you earn, whether you have children or not, and whether you itemize on your annual returns or go with the standard deduction. If you're smart about capitalizing on it, you stand to reap some major savings.
Max out your retirement plan contributions
We're all supposed to be saving for retirement anyway -- that's a given. But the more money you sock away in a traditional IRA or 401(k) plan, the more of a tax break you'll get immediately.
Both traditional IRA and 401(k) contributions are made with pre-tax earnings, so that every dollar you put in is a dollar of income the IRS can't tax you on. Meanwhile, your associated savings will hinge on the tax bracket you fall into.
Imagine you're in the 24% bracket -- meaning, that's the tax rate you pay on your highest dollars of earnings. If you put $5,000 into a traditional IRA or 401(k) this year, you won't be taxed on that $5,000. Your associated tax savings will then amount to $1,200, or 24% of your contribution.
If you're under 50, you're allowed to put a maximum of $6,000 into your IRA this year. That limit is much higher for 401(k)s, though -- $19,500. Meanwhile, if you're at least 50 years old, your retirement plan contribution limits for 2020 are $7,000 for an IRA and $26,000 for a 401(k). Even if you can't max out these limits, saving as much as you can will lower your tax burden tremendously.
That said, if you're looking for a break on your 2020 taxes, be sure to contribute to a traditional retirement plan, not a Roth. There are plenty of good reasons to fund a Roth IRA or 401(k), but Roth contributions are made with after-tax dollars, so you won't enjoy immediate tax savings. On the flip side, your withdrawals in retirement will be yours tax-free -- whereas with a traditional IRA or 401(k), you'll pay taxes on withdrawals later in life. But again, if your goal is to snag a tax break for the current year, only a traditional retirement plan will help you attain it.
Protect your money
The IRS has a way of getting its hands on your money, whether it's your earnings from your regular job, interest income in your bank account, or investment gains. If you want to lower your tax bill in 2020, make an effort to put as much money as you can into a traditional IRA or 401(k). In doing so, you'll not only help keep the IRS at bay, but you'll also be doing your part to set yourself up for a financially secure future. That's a nice double win.