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The age-old question of how to lower taxes is one of the most common financial planning concerns among individuals and business owners. Paying taxes is unavoidable, but ample opportunities exist to help achieve a lower tax bill. Although each taxpayer has a different obligation to the Internal Revenue Service (IRS) each year, the potential to reduce taxable income is available across the board with the help of a few strategic steps.
Save Toward RetirementThe simplest way to reduce your taxable income is to maximize retirement savings. If your company offers an employer-sponsored plan, such as a 401(k) or 403(b), make pretax contributions throughout the year up to a maximum of $18,000 (for the 2015 tax year). If you are over the age of 50, make catch-up contributions of $6,000 above that limit as well for an additional opportunity to save money while reducing your taxes. Because your contributions are made on a pretax basis through paycheck deferrals, the money saved in your employer-sponsored retirement account is a simple and direct way to lower your tax bill.
If you do not have the option to save through an employer-sponsored plan, contributions to a traditional individual retirement account (IRA) may be a smart alternative. The maximum contribution to an IRA for the 2015 tax year is $5,500, with a catch-up provision of an additional $1,000 if you are over 50. Contributions to a traditional IRA lower your taxable income only if you do not have access to an employer-sponsored plan or when your total income is under a certain threshold.
A wide variety of retirement savings plans exist for the self-employed, including an individual 401(k) and a simplified employee pension (SEP) IRA. Both options provide an opportunity to lower your taxable income through pretax contributions and allow for higher limits on contributions each year.
Consider Flexible Spending PlansSome employers offer flexible spending plans that allow for pretax savings for expenses such as medical costs and dependent care. A flexible spending plan (FSA) provides a way to reduce taxable income by setting aside a portion of your earnings in a separate account managed by your employer. An FSA has a contribution limit of $2,550 for the 2015 tax year, and the total balance must be used each year contributions are made.
A health savings plan (HSA) is similar to an FSA in that it allows you to make pretax contributions that you can use for health care costs later. HSAs are only available to employees with high deductible health insurance plans, and contributions can be made up to a maximum of $3,350 for individuals and $6,650 for families. Unlike FSA balances, HSA contributions can be rolled over if you do not use them in the year in which they were saved. However, both HSAs and FSAs provide for a reduction in your tax bill during the years in which you make contributions.
Track Business DeductionsA lengthy list of deductions are available to lower taxable income if you are self-employed either full- or part-time. Use a home office deduction to reduce your taxable income if at least one-fifth of your home is utilized as dedicated office space, and you can deduct a portion of your mobile phone and Internet bills as well. In addition, expenses for advertising, marketing, travel and shipping can all be used to lower your taxable income each year.
Read more: What are the best ways to lower my taxable income? | Investopedia http://www.investopedia.com/ask/answers/012715/what-are-best-ways-lower-my-taxable-income.asp#ixzz41ZokHCiF
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