In the midst of all the holiday excitement, don’t forget tax season is just around the corner. If you’re wondering how to reduce your taxable income at the end of the year, here’s what you need to know to possibly owe less on filing day.
Contribute to retirement accounts
Retirement could be a year away or more, but it’s always good to contribute to your plan. That’s because maxing out your 401(k) and Individual Retirement Account (IRA) contributions may help reduce your tax bill and help you reach longer term goals.
The IRS sets annual maximum 401(k) contribution limits as well as contribution limits for your IRA. If you’re under that cap and your finances allow, go ahead and bump up those contributions to get close to the maximum limit set by the IRS.
Help a charity and help yourself
If you itemize your tax return, contributing to a charity is a good way to get an additional tax deduction. Whether you itemize deductions or take the standard deduction, the CARES Act of 2020 allows for $300 in “above the line” deduction for gifts to qualified charitable organizations.
In addition to cash, you can donate appreciated stock or even personal property. If giving clothing or household items, remember the IRS only allows deductions for items that are at least in good condition, and only at current fair market value for the used item. Be sure to ask the charity for a receipt or letter with your donation you can reference with your returns. Keep a copy with the rest of your tax records.
Look for lesser known deductions
Did you spend a lot at the doctor this year? Were you hospitalized at any point? If your out-of-pocket medical expenses amounted to more than 7.5% of your adjusted gross income, include them in your itemized deductions. Other common expenses to itemize include some portion of state taxes and interest paid on your mortgage. Remember that itemizing is only worth it if the total amount you would itemize is greater than this year’s standard deduction.
If you do choose to itemize, there are other less commonly known deductions that may apply to you as well, such as interest paid on student loans.
Find and organize receipts
Gather and organize your receipts now, so they’re ready when you visit your tax preparer. If you don’t have a filing system for your tax records, start one. Having all your tax records organized is a real timesaver come tax prep time. Make sure you get every credit and deduction that is coming your way! (Plus, the IRS typically requires you to keep tax records for at least three years unless your tax preparer suggests otherwise.)
Decide how you’ll file your taxes
You could prepare your taxes on your own or seek help from a professional. If you like doing taxes yourself, members can get a special discount using TurboTax® online. If you prefer to leave it to the professionals, there’s low-cost tax help available at your nearest branch.