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Planning for tax season can be a daunting task. Developing a tax strategy will maximize your financial plan and tax efficiency, further ensuring your financial safety. Optimizing your tax plan can make all the differences during your career. When tax planning, the goal is to analyze and balance your assets and liabilities to optimize short and long term tax benefits. Tax planning is largely about the timing. There are many variables that will come into play, such as, size of income, time of income, type of income, and the deductions a recipient may qualify for. Some of the best ways to keep more money during tax season are, increasing your retirement account contributions, boosting your savings in a 529 college savings account, open a flexible spending account, take every tax credit available, and buy your own home!
Traditional IRA’s and 401(k) plans are two of the most popular forms of retirement plans. A traditional IRA is a type of individual retirement account, in which an individual can make pre-tax contributions and the growth of the investments in the account will not be subject to tax. The use of a traditional IRA can maximize your gross income up to $6,500. Removal of funds before reaching the age of 59.5 years old will result in a 10% penalty on top of the taxes assessed to those funds. Funds withdrawn after the age of 59.5 will not be subject to penalty, but since the funds invested in the traditional IRA were pre-tax, you must fill out a 1040 tax form on any funds withdrawn.
Additionally, a 401(k) is an employer-sponsored plan with its own set of rules. Investment options may be more limited for this option, depending on the advisor overseeing the fund. Although you may have less options in terms of investments, you may deposit much more into your 401(k) on a yearly basis than a traditional IRA. For 2021, the contribution limit for employees who partake in a 401(k)-employer plan is $19,500. Employees aged 50 and older can take advantage of the boosted catch-up rule recently raised by the IRS. In 2020, the IRS raised the limit on catch-up contributions from $6,000 to $6,500. Due to the catch-up rule, employees aged 50 and over may deposit up to $26,000 per year into their 401(k).
A 529 plan is a way for individuals to take advantage and save on education-based expenses. Contributions to this fund are after-tax dollars, but the earnings received from the account are tax-deferred while they’re invested within the fund. Currently, over 45 states offer deductions and credits for contribution to a 529 savings account. How much you can contribute to the fund differs from state to state. Additionally, a 529 plan has no annual contribution limit and high aggregate contribution limits. Maximum aggregate contributions limits vary by the state you reside in, but range from $230,000 to $530,000. Furthermore, a 529 plan offers a low maintenance and flexible way to save for future education expenses.
This plan offers a great way for individuals to pre-save for out-of-pocket medical expenses that may occur. These expenses may include but are not limited to, childcare, medical expenses, and prescriptions. The money contributed to this fund cannot be taxed; you will save the amount equal to the taxes you would have paid on the money you set aside.
FSA contributions are limited to $2,750 per year per employer. If married, your spouse is eligible to contribute up to $2,750 with their employer, a total of $5,500 per year. For dependent care, you may contribute up to $5,000 per year, as of 2021. These contributions do not roll over to the following year, all contributions unused will be lost and some items may not be reimbursable.
Taking the time to understand the tax credits available to you can greatly impact your financial future. This includes options such as the child tax credit. For the child tax credit, you can save up to $2,000 per child under the age of 17. This may include a stepchild, sibling, stepsibling, grandchild, and a niece or nephew. Furthermore, you may be eligible for a child and dependent care credit. If you care for a child or take care of a dependent, you can claim a credit for up to $3,000 for one dependent and $6,000 for two dependents. You will need to provide proof of the direct expenses associated with the child to receive this credit. Additional tax credits available are, adaptation tax credit, medical and dental expense credit, residential energy credit, student loan interest deduction, and charitable contribution deductions.
Buying a home can be a great investment, there are many tax advantages to owning your own home. Homeowners are able to itemize their mortgage interest and a portion of their property taxes to reduce taxable income. State and Local Tax Deduction (SALT), which includes property tax is capped at $10,000 for single taxpayers and married couples filing jointly. Additionally, if you happen to sell your home at a profit, your capital gains are tax-free up to $250,000 for single individuals and $500,000 for married couples. Furthermore, you may benefit from the residential energy credit, home office deduction, and standard deduction. Each individual will be in a different situation, utilizing a tax professional to optimize the tax benefit you receive is crucial.
Understanding and utilizing the tax credits available to yourself can be all the difference on your financial journey. Arrowroot Family Office Wealth Management Forward, offers the expertise needed to put yourself on top of your finances and optimize the money you receive in tax credits. During the golden years of working, it is of the utmost importance to have a tax plan in place that allows you to maximize the income you earn. Tax codes change rapidly and staying on top of the credits can be challenging to balance with other aspects of your life. Turning to Wealth Management Forward, allows you to properly file your taxes as well as manage your time more efficiently.
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