Who likes handing money over to the IRS? If you can, why not try to hold on to as much money as possible, especially if you can invest that money for the future or give to a charity of your choice.
Contribute to an IRA or 401(k)
One of the most common, but effective ways, to keep your tax bill low in 2018 is to put a percentage of each paycheck into an IRA, 401(k) or contribute a lump sum at the end of the year. All contributions to either account are tax-free.
Make an extra mortgage payment
Homeowners have a variety of tax benefits. One of the most infamous being the mortgage interest rate deduction. The IRS allows homeowners to deduct any mortgage interest you pay in a year. Why not make an extra payment in 2018? The IRS won’t mind if the extra payment is not in your mortgage schedule. With an extra payment, you shorten your home loan and reduce your tax bill. A win-win!
Donate to charity
Giving to charity is not just beneficial for a community, it can lower your tax burden as well. All charitable donations are tax deductible. Make sure to keep a receipt for the sum you donated so you can accurately report it on your tax filings.
Clean out your closets
Want to reduce your tax bill while doing some spring cleaning? If you have goods you are willing to part with, hand them over to a registered charity. You can deduct that donation on your tax return. Note: You can only deduct the fair market value of the goods.
Track your mileage
A self-employed individual using his or her vehicle for work purposes is allowed to deduct mileage. Make sure to keep a detailed log, along with your other business expenses.Sign up for an FSA
Does your employer offer a flexible spending account (FSA)? If so, it might be a wise move to sign up. With an FSA, you can pay for childcare and healthcare expenses with pre-tax dollars. Doing this will lower tax burden.Hold profitable investments for at least a year and a day
When you sell an asset for more than your purchase price you are subject to capital gains tax. Short-term capital gains tax is greater than long-term capital gains. If you have an investment with a healthy gain, try to hold on to the asset for at least one year and a day. This will place you in a friendlier tax bracket and have you pocketing more money.
Sell poor investments at a loss
Selling an investment at a loss is an unconventional tactic, but it can help when trying to reduce your taxes for 2018. This is because selling an investment at a loss can be used to offset capital gains. If you are taking a profit on an investment but a loss of the same amount in another, the two will cancel each other out.
Invest in municipal bonds
A municipal bond is a debt issued by a city, state, or county. Investing in municipal bonds is a great strategy if you are trying limit your taxes because the interest collected is tax-free at the federal level. If you purchase bonds issued in your home state, you will avoid state and local taxes.
Set up a home office
Are you self-employed? One way to reduce your 2018 tax bill is to set up a home office. To qualify for this deduction, you must dedicate a space in your residence for strictly business purposes. The selected space must be the primary place of business, meaning you can’t work out of your son’s old bedroom one day a month while spending the majority of your time at an office outside of your home, and still deduct a “home office.”
There it is. Managing your tax liability may not be as complicated you thought. If you are an independent contractor, how about setting up a home office or diligently tracking your mileage while behind the wheel for business endeavors? If your company offers a 401(k) plan, contribute a set amount every year.
Check out our W4 Assistant to ensure you achieve accurate withholding!