This post may contain affiliate links. Read our disclosure here.
You were thinking that now is the time for mistletoe and holly… it may be, but it’s also the best time to be proactive with pre-tax planning. There are some key things you can do right now to reduce your tax bill in the spring, the catch is that most of them need to be done before the end of the year!
Most of these are only going to help if you are able to itemize your deductions and not taking the standard deduction (aka. More than $6,300 for singles or $12,600 for married couples).
1. Last Minute Donations
Now is the time to get in last minute donations to charities. This can be money donations, but can also be items you are cleaning out and getting rid of. With any donations make sure to get a receipt of your donation. To get an accurate assessment for the value of your donation we use the It’sDeductible app from Turbo Tax.
2. Review Deductions Now To Maximize
As I mentioned above, most tax deductions don’t apply unless you are able to itemize your taxes. If you are on the edge of being able to itemize a few things you can do to get above the standard deduction:
- Pay any state taxes (cars, house etc.) before the end of the year.
- Make extra donations to Charity.
- Take last minute Work-Related Education Courses. As long as they are needed for your job and not paid for by your employer they are probably deductible.
3. Organize Medical Expenses Now
Most families are not able to itemize their medical expenses. According to current tax law you can only deduct expenses that exceed 10% off of your Adjusted Gross Income (AGI). For a family with an AGI $40,000 a year, that means you can only claim medical expenses over $4000. If you had a baby this year and met your out of pocket max on insurance you may be really close to that level now. That means… if you’ve got dental work you need, or anything else you’ve been putting off this year may be a great year to get it done. You do need to pay for it fully in this year to be able to claim it though.
A few medical expenses that are overlooked: mileage to and from medical appointments, reading or prescription glasses or contacts, hearing aids, or the premiums on long term care insurance.
4. Contribute to a Traditional IRA or 401K Plan
The easiest way to pay less taxes is to save for retirement. This also directly can help with those medical expenses, as any contribution to a Traditional IRA or 401K plan reduces your adjusted gross income. You actually have until April 15th of next year to make these contributions, so start saving now!
Both of these retirement plans are putting money aside tax free now, but you will be taxed on them later when you withdraw the money. For families in higher tax brackets now, these are the best options since in theory when you retire you will have less income and be in a lower tax bracket. However, if you are in the lowest tax bracket right now a Roth IRA might be the better option. There are no tax breaks now, but when you pull the money out it’s entirely tax free.
5. Contribute to a Health Saving Account
If you have a high deductible health insurance plan, with a deductible of at least $1,300 for individuals or $2,600 for families you could be eligible for a Health Saving Account (HSA). These are the only account that exists that lets you put money in tax-free and withdraw it tax-free! Seriously that’s pretty awesome. The only requirement is that you have to have the right health insurance plan and make sure that the money is only used for medical needs. You can even put that money in stock market HSA accounts, everything it earns is tax-free!
You can contribute up to $3,350 if you are single or $6,650 if you are married every year. You do not have to use that money at all. You can keep contributing each year that you have an approved health insurance plan. Your contributions to an HSA plan also help to lower your Adjusted Gross Income, which helps you out with medical expenses too. You have until April 15th next year to make contributions for this calendar year.
Tip: Most financial planners would encourage you to use these accounts and let the money grow. Just pay as you normally would for medical expenses and leave this alone. When you are older you can use it when you have a lot more medical needs. It can even be used to pay long term care needs.