2 Easy Ways to Reduce Your Taxes
In preparation for this week’s Prosper On commentary, I Googled “How to reduce taxes.” The result: nearly 45 million pages. I didn’t have a chance to go through all the results, but those I did see led to ads and articles discussing all the complex options for reducing your tax bill.
With three weeks remaining in the 2012 tax year, our theme for Prosper On has turned toward taxes. From planning to organization, we want to provide some relief and strategies during this busy season.
As anyone can learn from the Google search I mentioned, there are several ways to “reduce your taxes.” However, many of them involve either large expenditures like purchasing a home, or searching for small deductible options like tracking your medical expenses. I can’t speak for everyone, but my wife and I aren’t buying a house just for the tax deduction.
Ultimately, we believe there are two very important ways to significantly reduce taxable income:
1. Contribute the maximum amount to retirement accounts
No one in history has ever saved too much for retirement. By making contributions to retirement accounts one can directly reduce their taxable income and defer that tax until distributions are made in retirement. For 2012, the deferral limit is $17,000 (plus $5,000 for individuals over 50 years old). For those with an employer matching plan, be sure to at least contribute the maximum amount the employer will match. Contributions to reduce your taxable income must occur before your filing date or April 15th, whichever is earlier. It’s not too late to make 2012 retirement contributions and reduce taxable income!
2. Make charitable contributions for 2013
This is by far the most emotionally rewarding way to reduce tax liability. However, unlike retirement deferrals, charitable contributions must occur by December 31st to be deducted in the following year’s tax return. Looking forward, plan charitable contributions for 2013 keeping in mind the benefits, both emotionally and financially, of a donation. The most effective way to make a charitable contribution is through donating appreciated securities. Not only does it avoid any tax on capital gains, but the market value of the security can be deducted rather than the cost basis. What’s better than making a charitable donation AND avoiding gains taxes?!
There are several ways to reduce a tax bill, many of which are complicated and have little impact on the bottom line. But making the maximum contribution to retirement accounts and considering additional charitable contributions is a smart move to help reduce your overall tax burden. If you have any questions about additional strategies for your specific situation, contact your CPA or give us a call.
Thank you for being a client of Prosperion Financial Advisors.