TODAY’S TOPIC: How to Legally Lower Your Taxable Income
Hosted By: Dominique J. Henderson, Sr., CFP® (Send me an email)
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Taxes, taxes, taxes…
“How can I reduce what I owe?” is probably the first question that comes to mind. The next should be how do I do it legally. (No, really…)
If you’ve ever been through an IRS audit you know what I mean, there’s no one that enjoys these. In this latest episode, I talk about some tax strategies you could employ given the new tax law and some of the changes that impact you.
Here’s what you should know about tax strategy…
It happens year-round. If you want to save the most amount of money you need to employ a strategy that happens in stages or in a sequence to maximize the dollars you save. You may want to even employ a financial professional or tax professional to assist with this.
Things the new tax law changed…
It eliminated the personal exemption ($4,050 in 2017) and increased the standard deduction. This does a couple of things. First, it reduces the amount of complexity associated with filing a return. It also saves the government on costs. Finally, it makes “itemizing” deductions that total less than $24,000 less valuable. Why? Because if you are “married filing jointly” then you can just claim the standard deduction. But what happens if you have itemized deductions of more than $24,000? Well, you should use schedule A to itemize…but are there any caveats? Of course, there are…
The biggest, especially for taxpayers in high tax states, is the sales and local tax cap at $10,000. Unfortunately, the new tax law caps the amount of a deduction you can claim. This means that you will have to find other (legal) ways to reduce your taxable income. In this podcast, I discuss one popular way that is often avoided although supported by many employers (in that, they help contribute to it). The health savings account (or “HSA”) represents a way to lower your taxable income. (see the example in this podcast to understand how it works). Suffice to say you may essentially fund your long-term health care strategy after several years of maxing out this type of account. (As a bonus, the account grows tax-free and distributions are tax-free as long as they are used for medical expenses.)
You might also consider using your 529 plan earlier than normal. If you highly value education and the ability to choose, you could use your 529 plan to pay tuition expenses at private or religious schools (K-12). This new feature in the tax law is capped at $10,000 per year and it will reduce the amount of compound growth you achieve in that plan, so this solution may not be for everyone.
There are several strategies that can be employed based on the nature of the situation and the preference of the individual. To discuss this further you can reach to me at 214-699-7599 ext. 1
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