Each year eight out of 10 people get a tax refund averaging more than $2,700. However, there are still millions who will owe taxes in the spring. If you are one of those people, here are a few ways that may help reduce your chances of having to pay.
Contribute more to your retirement
Reducing your gross income is one way to lower your taxes in the future. You can do this by contributing to your employer-sponsored retirement plan. The amount you contribute, up to a limit set by the IRS, will not be included in your Adjusted gross income or AGI when completing your returns.
In 2020, you can contribute up to $19,500 to your employer-sponsored retirement savings plan (e.g., 401(k), 403(b) or 457). That amount goes up to $26,000 if you are age 50 or older by the end of the year and take advantage of the $6,500 catch-up contribution. You can also contribute up to $7,000 to some individual retirement accounts (IRAs), depending on your age. Some or all of your contributions may be tax deductible, depending on your other retirement account activity and your income.
Set aside pre-tax dollars to cover medical bills
Participate in your employer-sponsored flexible spending account (FSA), if your employer offers one, or a Health Savings Account (HSA). If you think you’ll incur a lot of medical expenses during the year, these special accounts — often offered as employee benefits — allow you to set aside pre-tax dollars to pay for those expenses. The HSA is associated with a high-deductible insurance plan to help defray your out-of-pocket costs.
In addition to health care expenses, an FSA covers other non-medical expenses, such as child care. HSAs can be used to pay for doctor visits, prescription drugs or over-the-counter medicines prescribed by a doctor for you, your spouse and your dependents.
In 2020, you can contribute up to $2,750 to an FSA. As an individual you can contribute up to $3,550 to an HSA or up to $7,100 as a family. The catch-up HSA contribution limit for those over age 55 will remain at $1,000. Check with your human resources representative to see if your employer offers one or both plans and how to contribute. You can contribute to one or both accounts.
Change your withholdings
One reason you may owe money to the IRS is you’re not withholding enough money — or pre-paying the IRS — from your paycheck. Withholding less means more take-home pay with each paycheck. However, it also increases your chances of owing money to the government at tax time. Use the IRS withholding calculator to help you figure out your federal income tax withholdings. It’s also a good tool to help you make sure your employer is withholding the correct amount from your pay. If not, update your Form W-4 with your employer.
Look for tax credits and deductions
Tax credits are a good way to help reduce the amount of your tax bill. Take time now to review your options for next year, in case there are tax credits you might have missed in your most recent filing. Credits go directly against taxes due, so don’t let them get by you!
Ask your tax advisor about itemizing your deductions this year and beyond. While the standard deduction is certainly easier, if your expenses in relevant categories are hefty, it may be better to itemize.
Let the Credit Union help with tax preparation
Whether you prefer to do your taxes yourself or you need help from a professional, LGFCU can help. 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.
The advice provided is for informational purposes only. Contact your tax advisor for additional guidance.