Adulting and tax hacks – it doesn’t get any more real than when you work your butt off for minimum wage at your first job. Remember that? After 20-30 hours of long and hard work, you eagerly waited for your first paycheck.
Then payday finally came, and wow, all that hard work amounted to this?! You ask yourself what in the heck happened to all my money. It only took a second for you to realize Uncle Sam took a huge chunk of your paycheck.
Welp, it only goes downhill from there unless you start to learn the tricks and the trade to the tax game. Seriously, did you know that the average person pays over 40% of their lifetime income in taxes?
In this article, I’ll explain several tax hacks you can do to save thousands in taxes. Keep reading. You’ll thank me later.
1. Increase Your Retirement Contributions
Saving for retirement is a great way to reduce taxable income. When you save now, your retirement money will save you later.
How To Save On Taxes Now
If you are working for an employer, take advantage of your employer’s retirement account. You can deposit up to $19,500 pre-tax income and reduce your taxable income by the same amount.
Pre-tax contributions, means you’re saving money for retirement before taxes are taken out of your paycheck. As a result, you can lower your taxes and increase your take home pay.
If you are over the age of 50, you qualify to deposit, even more. Individuals over 50 can deposit an additional $6,500 into their employer retirement account.
For some people shaving almost $20,000 off your taxable income could cause you to change tax brackets, which is always a good thing. Plus, your future self gets a head start on a nice retirement nest egg.
However, if you are self-employed, the possible tax savings are even higher. If you work for yourself, you can make tax-deductible contributions to a Simplified Employee Pension account or SEP IRA. The limit is up to 25% of your net earnings, up to a maximum of $58,000 this year.
How To Save On Taxes Later
On the other hand, one way to save thousands in taxes later is to invest in a Roth Individual Retirement Account (IRA). A Roth IRA is an account where you can save after-tax dollars.
Because taxes are taken out before you make Roth IRA contributions, you get to withdraw the money in retirement completely tax-free.
The annual contribution limit on a Roth IRA is much lower than work retirement accounts. For anyone under 50 years old, the max you can contribute is $6,000. While anyone over 50 can contribute $7,000.
Everyone is not eligible to contribute to a Roth IRA. Who can contribute is based on your income. Check here to see if you qualify.
2. Fund Your Health Savings Account
Remember this mantra. My health is my wealth.
If you are not well, you are not able to be the best creative you can be. A health savings account (HSA) is a way to save for medical expenses and reduce your taxable income.
Before you can invest in an HSA you need to take a look at your health insurance plan.
To qualify to invest in an HSA, you must have a high-deductible health insurance plan, specifically HSA eligible. Some employers offer high deductible plans and HSAs. If your job does not, you can open a separate HSA account as long as you have a qualified health insurance plan.
If you contribute $3,000 to an HSA and make $50,000 a year, your taxable income is $47,000. You can make contributions to an HSA through your employer so that payments come right out of your paycheck.
HSAs have three tax advantages. When you contribute through an employer, your contributions can be pre-tax, but if you open an HSA on your own, your contributions are tax-deductible.
Also, money in an HSA has the ability to earn interest, and you don’t pay taxes on those gains. Lastly, you don’t pay taxes on money you withdraw for eligible medical expenses. Sounds like you can consider that three tax hacks in one.
3. Claim Your Tax Credits
When you claim tax credits, you reduce your tax bill by the dollar amount of the tax credit. It is one of the simple yet powerful tax hacks. For example, if you have a child under 17, you may qualify for the $3,000 child tax credit. That’s an instant $3,000 tax savings.
Parents with children under six years old are eligible for a $3,600 tax credit.
Adults at least 25 and under 65, may qualify for the Earned Income Tax Credit. It was created to offset Social Security taxes and is based on your income.
So many people miss out on tax credits because they don’t claim them. Make sure you claim every credit you are eligible to receive. Check out these five tax credits most people forget.
4. Adjust Your Withholdings
Your goal each year should not be to get a tax refund. If you do, that means you’ve been allowing Uncle Sam to hold on to some of your money interest free. However, you could have been investing that money or using it to cover your monthly expenses during the year.
When you get a tax refund, it means you overpaid taxes throughout the year. Fortunately for you, Uncle Sam gives you an opportunity to get this money back.
If you qualified for a refund this year, take a second to review your tax withholdings. A refund means you withheld too much, giving the government an interest-free loan. On the other hand, if you withhold too little, you’ll end up owing Uncle Sam at tax time.
To adjust your withholdings you must file a new Form W-4 with your employer to decrease the amount you want to have withheld. After you adjust your withholdings you should see more money in your paycheck.
5. Take a Course to Teach You The Tax Game
Recently, I learned about a tax expert Carter Cofield and his course Deduct Everything. This course breaks down the tax law so you don’t have to study it like a pro.
Carter shows you how to save thousands in taxes with his course and provides additional resources like a tax saving calculator and a list of popular and less known tax deductions. Since Carter is also an entrepreneur he gives great tips for business owners too.
Now that you are aware of these five tax hacks to save money and lower your taxes, get to saving. Let me know in the comments, which tip was most helpful to you.
What are your thoughts? Are these useful tax hacks? Tell us in the comments below!
This is a guest post.
Acquania Escarne is a life insurance producer and wealth strategist. Through her website, blog, and podcast, The Purpose of Money, she educates women on how to build generational wealth one dollar at a time. Acquania is also a real estate investor that owns a hotel and rental properties.
Best of luck adulting!
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