The United States Internal Revenue Code is one of the most complex documents ever assembled. Currently, it contains about 75,000 pages and continues to expand every year, but along with its complexity there are opportunities buried within this document that can help us keep a little more money in our pockets, if we plan appropriately.
Here are some of the most common tax deductions available to help you reduce your taxable income throughout the year:
Max-out your retirement plan: This will not only reduce your taxes but it will put you on the path to a more enjoyable retirement. Depending on your plan, you can put as much as $24,000 away (401k/403b) before taxes are deducted from your pay. And if you are self-employed, the tax savings are even greater, as some plans allow in excess of $200,000 to be contributed before taxes depending on the plan and your age.
Long-term investing pays off: Short-term gains are a killer so selling an investment before you have owned it for a year can take a big “bite” out of your profits. This doesn’t apply for tax-qualified accounts, such as IRAs, Roths, Retirement Plans, etc. but for those accounts that are not tax qualified, they are taxed at your ordinary income tax rates that can be as high as 39.6%. So when you hold an investment for at least a year, any gains will be taxed at the long-term capital gains tax rates and this can be as low as 0%, but no higher than 20% and it is all depending on your overall income for the year. You don’t want to sell an investment based solely on the tax consequences, but as always taxes is a factor in the overall investment strategy for all of us to consider and especially me, as Chief Investment Officer.
Contribute to a Health Savings Account: Like retirement plans, contributions to health savings accounts (HSAs) are made with pre-tax money, usually through payroll deductions, thus reducing your taxable income even more. For 2017, you can put in as much as $3,400 for individuals and $6,750 for families. This grows tax-deferred and you can withdraw it at any time, tax-free, to pay for qualifying medical expenses.
Giving is good for you: Donating to charity not only helps people and places in need as well as makes us all feel good about impacting others, but it also lowers your taxable income. One of the easiest ways is to have it deducted out of your pay. In any case, make sure that you have records of your charitable contributions, including what you donated, to whom, and when and then use these charitable contributions to not only impact others, but to lower your taxable income.
Bundle your medical expenses: You can deduct most medical and dental expenses, but only the amount that exceeds 10% of your adjusted gross income. So, if your family and you have a couple of scheduled procedures coming up like a colonoscopy, root canal or knee replacement, we suggest trying to schedule those in the same year as this will give you a far better chance of taking advantage of this deduction.
Remember, there are always caveats, exclusions, and qualifications for anything related to the tax code as it is ever-changing and relatively complex so make sure that you reach out to us at VisionQuest Wealth Management with any concerns and/or questions so that we can handle it for you. And if you have any questions or concerns regarding this article be sure to contact me at firstname.lastname@example.org or by calling me at 919.433.3560.
Joe Baker, CFP®
Chief Investment Officer
VisionQuest Wealth Management