5 Ways to Lower Taxes Besides Donations
By Kevin Estes
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A T-Mobile employee recently asked:
What kind of tools do people use to lower their taxable income and thus reduce their tax burden?
1. Pre-Tax Retirement Accounts
These are odd numbered accounts like 401(k), 403(b), and 457.
Contributions by employees reduce taxable income and grow tax deferred. The funds are taxed when withdrawn.
In addition to lowering taxable income, these contributions are often partially matched by the employer. That's like free money!
2. Health Savings Account (HSA)
HSAs are an increasingly popular tax savings tool.
They're special because they're triple tax advantaged. Contributions:
are excluded from income the year they're made,
grow tax-free, and
can be used tax-free for qualified medical expenses.
That is, they might avoid taxes altogether!
3. Spousal Individual Retirement Arrangement (IRA)
This is an often overlooked way to reduce taxes.
Let's say someone works full-time. Their spouse manages the household and cares for the children.
The stay at home parent will likely be able to contribute to a traditional Individual Retirement Arrangement account.
They don't actually need to earn any money to contribute as long as their spouse has enough income to cover them both!
4. Tax Loss Harvesting
Investment losses up to $3,000 may reduce taxable income for the year.
If someone has assets which have fallen in value, they may be able to sell them for a tax benefit.
There are many limitations, so care is required!
5. Sell Specific Shares
Investments held at least a year and a day are generally taxed at a lower rate than if they’re held for a year or less.
Many custodians default to selling the last shares purchased. Ouch.
Unfortunately, the tax impact of equity compensation is all over the board!
If you’re interested in a review of your situation, feel free to…
Disclaimer
In addition to the usual disclaimers, neither this post nor this video includes any financial, tax, or legal advice.
