As we approach the end of the year, many of us start thinking about ways to reduce our taxable income. While some methods may be more effective than others, there are a few relatively simple ways to do so that even a novice can implement, says the Outlook Wealth Advisors.
Here are five of them:
Make Use of Tax-Advantaged Accounts
If you have a 401(k) plan at work or an IRA, you can reduce your taxable income by making contributions to these accounts. The money you contribute will grow tax-deferred, and you won’t have to pay taxes on it until you withdraw it in retirement. Just be sure you don’t exceed the contribution limit for the year or you may be subject to a penalty.
Sell Investment Losses
If you have investments that have lost money, you can sell them and use the losses to offset any gains you’ve realized from other investments. This is a strategy that should be used with caution, however, as it can be easy to lose more money than you gain if not done carefully.
Defer Income into the Following Year
This one is most effective for those who are self-employed or receive bonuses from their employer. If you receive income that isn’t subject to withholding, consider deferring it into the following year so that it isn’t included in your current year’s taxable income. Just be sure you have enough cash on hand to pay any taxes due when the time comes.
Make Charitable Contributions
Charitable contributions can be deducted from your taxable income if you itemize your deductions. This is usually only beneficial if your deductions exceed the standard deduction, which is currently $12,000 for single filers and $24,000 for married couples filing jointly. However, even if your deductions don’t exceed the standard deduction, making charitable contributions can still lower your tax bill if you are in a higher tax bracket.
Invest in Energy-Efficient Home Improvements
Making certain energy-efficient home improvements can also help reduce your taxable income. Nonbusiness Property Credit allows homeowners to claim a credit of up to $500 for energy-efficient upgrades made to their homes in 2018. Some of the eligible improvements include insulation, windows, doors, and roofing.
Reducing your taxable income doesn’t have to be complicated or difficult; there are several relatively simple ways to do it. By taking advantage of tax-advantaged accounts, selling investment losses, deferring income into the following year, making charitable contributions, and investing in energy-efficient home improvements, you can give yourself a much-needed break come tax time. Consult with a wealth advisor to see which strategies make sense for your individual situation and financial goals.