Less Taxing Taxes
Think Beyond Deductions
There is a misconception that the only way to lower your tax bill is to load up on allowable deductions, such as mortgage interest. If you have no mort-gage interest, charitable contributions, or any of the other popular deductible items, you can still lower your taxable income on a pre-tax basis.
In terms of retirement savings, you can lower your current tax bill by contributing to a 401(k) or 457 plan. For example, if your annual income is $40,000 and you set aside $5,000 in a 401(k), you are lowering your taxable income to $35,000 and building your retirement savings. For tax year 2007, you can con-tribute $15,500 to a 401(k) and/or 457 plan. If you are over age 50, you can take advantage of a “catch-up” provision to contribute an additional $5,000 to each plan. Another example of pre-tax opportunities is the flexible spending account (FSA). Setting aside money in an FSA for dependent care and/or medical expenses allows you to lower your current taxable income and reimburse yourself for incurred expenses. Just be careful with an FSA not to overestimate expenses because it is a “use it or lose it” plan.
Let Money Work for You
As consumers, we have to pay interest when we borrow money. By the same token, we expect a return on money we deposit. Yet, millions of Americans allow far too much money to be withheld from every pay check only to receive their tax refund each spring with no interest. The easy solution to this problem is to change your with-holdings on a W-4 form. Your human resources or payroll department should have these forms available for you to complete.
