Quick and Easy Ways to Pay Less Taxes - The Broke Professional

Quick and Easy Ways to Pay Less Taxes

homer check

Tax season 2014 has come and gone.  The best thing about it being over?  No more seeing those unfortunate Liberty Tax employees dancing on the corner.  Way to make paying taxes even less dignifying.  Since you filed your taxes, are waiting for your refund (here are some things to do with your refund by the way), or have to send a payment in, it may be time to finally relax.

WRONG!  There is never a time to relax when it comes to taxes, because what you do this year will affect you next filing season.  Being mindful early on in the year, however, can make tax time 2015 a lot easier and hopefully more lucrative.  Here are some easy things you can do now in order to reduce your tax bill if you’re employed:

Contribute to (or increase) your 401k:  Can’t think of a quicker and easier way to reduce your taxes than this.  Though it is technically a tax deferral since you will be paying taxes on it when you eventually withdraw between age 59 and a half and 70, the earnings have time to compound.  And if you don’t think your income, and thus your tax liability, will be lower when you’re retired than in your prime working years, you have some priorities that need to be shifted.

Another thing to remember is that money contributed to a 401k is done so before taxes, so a $100 contribution doesn’t take $100 away from your next paycheck.  Having less money is the main reason that people don’t want to increase their 401k contribution, so this fact should be kept in mind.  Besides, just find one monthly expense to cut or reduce and voila!  You have successfully invested in your future and increased your net worth.

Open a Health Savings Account:  Regular readers on this blog know that I’m a big fan of the HSA (here and here).  Irregular readers should know that I’m a big fan of the HSA.  You can set aside pre-tax money for an expense you will need now and in the future: health care.  Everybody has to go to the doctor or dentist at some point, so why not save money on taxes and open an HSA?  The contribution limit for families in 2014 is $6,550.  That’s a lot less money to pay taxes on.  The best part is that when you eventually use your HSA money, you are not taxed on it.  Any earnings are not taxed either.

This is such a great deal but you have to have a high deductible health plan (HDHP) to participate.  Some people, especially those who see doctors a lot, are wary of these because you pretty much pay any emergency visits in full until you meet the deductible amount.  The advantage is that their premiums are much less and the plan still pays for routine annual visits.  If you run the numbers and find that even with the tax savings and lower monthly premiums you would be saving more money by having a traditional health plan, then signing up for a high deductible one wouldn’t be the best idea.  But if you’re not in that minority of the population, fully contributing to your HSA is an amazing way to reduce your taxes.

Open a 529 plan (some states):  If you would like to give your kid a little financial head start for college, you can open a 529 plan.  Each state has their own plan with different administrators, investments, fees etc.  Some states allow you to deduct some or all of your 529 contribution from your state taxes.  Currently, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming don’t offer this because they don’t have any state income tax (this is also a list of good states to retire in).  California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Hampshire, New Jersey and Tennessee have a state income tax but don’t allow for a 529 tax deduction.  I guess they don’t care about education.

All other states have some type of deduction from state taxes.  It’s also worth pointing out that 401k contributions should have priority over 529’s.  Not only do you get a federal tax break, you also probably get matching funds when contributing early on.  And if you don’t make sure you’re taken care of during retirement, your kids (if they’re good) will have to pick up the slack anyway.

Work less:  Not a popular piece of advice on personal finance blogs, but if you make less money then you pay less in taxes right?  While this is true, it’s probably not recommended in most cases, especially if you need money to pay off debt or save for retirement.  But if you are in that enviable position where you make more than enough money and want to spend some more time with family or just relaxing, work a few less hours per week and you’ll be paying less taxes.  Not a bad trade off.

These are just a few very quick ways to reduce your taxes and help your future self at the same time.  There are many other ways to reduce taxes, which is why there are books and CPA’s available.  The US tax code is complex but it is definitely worth learning since you will most likely be paying taxes until you’re in the grave, and even beyond.

Share

Comments

  1. “Make the bears pay the bear tax. I pay the Homer tax!” The HSA is my favorite tax saving tool, its a big help for those of us who aren’t offered a 401K through work.

  2. Haha good old Homer J. Yeah sometimes a 401k can be a blessing and a curse since some plans don’t have great investment options or have high fees. The HSA is a no-brainer if you have a high deductible health plan.

Trackbacks

  1. […] Quick and Easy Ways to Pay Less Taxes – The Broke ProfessionalType: article There are tons of ways, legal or not, to reduce your taxes. Here are a few of the easier and more lucrative ones. […]

Speak Your Mind

*