10 Tips for Cutting Your Tax Bill

Avoid unpleasant tax surprises following these tips and strategies. Some require extra time and a tax professional but might be worth the extra effort. 

1) Contribute to an IRA You may be able to deduct contributions to a traditional IRA, though how much can depend on whether your spouse is covered by a retirement plan at work and how much they make. 

2) Contribute to a 401(k) Less taxable income means less tax, and 401(k)s are a popular way to reduce tax bills. 

 3) Save for College You can’t deduct your contributions on your federal income taxes but might be able to on state returns if putting money in a state’s 529 plan. 

4) Update your W-4 If you received a huge tax bill this year and don’t want another surprise next year, raise your withholding so you owe less when it’s time to file a tax return. 

5) Sell underperforming stocks You can deduct losses on stock sales, which can offset any taxable capital gains you might have. (Never let tax avoidance be a substitute for wise investing). 

6) Charitable contributions Charitable contributions are deductible, and they don’t even have to be in cash. 

7) Earned Income Tax Credit Depending on your earned income, this could be worth looking into. 

8) Contribute to an HSA If you have a high-deductible health care plan, you may be able to lighten your tax load by contributing to a health savings account, which is a tax-exempt account can be used to pay medical expenses. 

9) Dependent Care FSA If your employer offers a dependent care FSA, this could be a great way to lighten the tax bill while paying for preschool, day care, camp, etc.

10) Medical Expenses Make sure you keep track of your medical expenses as you can deduct a percentage of your qualified medical expenses.

- Doug Myrick

*This information is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not intended to provide specific legal or tax advice and cannot be used to avoid penalties or to promote, market, or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney. 

Is This Simple But Costly Mistake Lurking in Your Clients’ IRAs?

Let me tell you about a couple I knew who were married for 34 years. They managed to raise and educate four children through college. He retired from his first career early due to heart disease and then began a second one as an accountant. Years later, she also retired and was ready to enjoy life with her husband as a homemaker. Unfortunately, he died unexpectedly while doing the job he loved, suffering a massive heart attack literally at his desk while working with clients.

She was devastated and had the most difficult time coping with this sudden tragedy. Luckily, they had put away some money over time and most of it was in IRAs established years earlier, which had grown nicely. One of the great things about IRAs is that they can be easily transferred to beneficiaries without going through the timely and expensive probate process.

But this couple never named beneficiaries for their IRAs. They just assumed that the surviving spouse would inherit the deceased’s money. Then the reality of this costly mistake hit home. Unless the spouse or child is named as the beneficiary, the money must go through probate court. His IRA could not simply be rolled over into hers. The result? Income taxes were due on the entire amount instead of being able to defer them until much later. And those taxes dramatically reduced what she had hoped to receive for her grandchildren and her own living expenses.

This often happens when people forget to update their IRAs and wills. Money that could be passed down to subsequent generations becomes snared in the probate process. Parents or grandparents whose bank and IRA accounts still carry the beneficiary designation of “per stirpes” or left to “the estate” of the deceased will cause headaches and potentially cost hundreds or thousands of dollars unnecessarily.

Few parents would want their children to suffer due to the unnecessary early payment of income taxes on their hard-earned savings. Even worse, there are often cases when, after a divorce, beneficiary designations are forgotten about. Then, when a death occurs, money may actually go to the “ex” and his or her new spouse instead of the children of the deceased.

Ensure your clients don’t make this mistake with their beneficiary designations and protect them from unnecessary hassle.