In life, your goal should not be a tax refund. Instead, aim to pay as few taxes as possible. Trust me, I study the tax code for a living and I help creatives reduce their taxable income daily with my tax tips.
But you don't need to be a tax guru like me to save money on taxes. Listen up because I am about to tell you a secret. YOU have the power to lower your taxable income. Use these five tax savings tips, and you could save thousands this year.
Boost Retirement Your Contributions
Saving for retirement is a great way to reduce taxable income. That's why this is my first and most important tax tip.
When you save now, your retirement money will save you later. Besides, no one is going to give you a loan to finance retirement. So, you might as well maximize your savings now.
If you are a creative working for an employer, take advantage of your employer's retirement account. You can deposit up to $19,500 pre-tax income and reduce your taxable income by the same amount.
Depending on your income, you could change tax brackets with a deduction like that.
However, if you are self-employed, the possible income tax savings are even higher. If you work for yourself, you can make tax-deductible contributions to a Simplified Employee Pension account or SEP IRA. The limit is up to 25% of your net earnings, up to a maximum of $56,000 this year.
Fund a Health Savings Account
I am a true believer that your health is your wealth. If you are not well, you are not able to be the best creative you can be. A health savings account (HSA) is a way to save for medical expenses and reduce your taxable income.
To qualify to invest in an HSA, you must have a high-deductible health insurance plan, specifically HSA eligible. Some employers offer high deductible plans and HSAs. If your job does not, you can open a separate HSA account as long as you have a qualified health insurance plan.
The government has mandated the maximum amounts you can contribute to an HSA account. To fund your HSA, set up automatic contributions to your account through your payroll office.
Then, you'll receive a debit card or checks that you can use on eligible medical expenses. Costs covered by an HSA include health insurance deductibles, copays, plus other qualified medical expenses not covered by your plan.
Unfortunately, health insurance premiums usually cannot be paid for with HSA funds. So, your paycheck will pay your premiums.
HSAs have three tax advantages. When you contribute through an employer, your contributions can be pre-tax, but if you open an HSA on your own, your contributions are tax-deductible. Also, money in an HSA can grow, and you don't pay taxes on those gains.
Lastly, you don't pay taxes on withdrawals for eligible medical expenses. Now that's what I call a win-win-win situation.
Claim Tax Credits
When you claim tax credits, you reduce your tax bill by the dollar amount of the tax credit. For example, if you have a child under 17, you may qualify for the $2,000 child tax credit. That's an instant $2,000 tax savings.
If you pay for daycare, you may qualify for the Child and Dependent Tax Credit up to $3,000 for one child or $6,000 for two or more. For this tax credit, get your childcare provider's tax ID number and add up what you spent on childcare. Easy, right?
So many people miss out on tax credits because they don't claim them. Don't be that guy who leaves free money on the table. Check out these five tax credits most people forget.
Find More Deductions
The 2018 Tax Cut and Jobs Act raised the bar on the number of deductions you can take and itemize, but that doesn't mean deductions aren't worth it.
One perk included in the bill was the qualified business income or QBI deduction. This deduction allows entrepreneurs with S-corporations and partnerships, to deduct up to 20% of their qualified business income.
How you set up your business is so important. Your business entity can determine how you operate, protect your assets, and what you can deduct.
Check out these additional tax-deductible expenses just for creatives.
Adjust Your Withholdings
Remember, at the beginning of this article, I said, a tax refund is not the goal? Well, now I'm going to explain why with this last tax tip.
When you get a tax refund, you overpaid taxes throughout the year, and Uncle Sam is returning your money. However, wouldn't you rather have more money to spend during the year? Uncle Sam does not pay interest on the money you give him. Besides, you could use that extra cash to invest, save, and build wealth during the year.
If you qualified for a refund this year, take a second to review your tax withholdings. A refund means you withheld too much, giving the government an interest-free loan. On the other hand, if you withhold too little, you'll end up owing Uncle Sam at tax time.
To adjust the amount of taxes withheld from your paycheck, file a new Form W-4 with your employer to decrease the amount you want to have withheld. Adjusting your withholdings to avoid a tax refund, puts more money in your paycheck right away.
Did you know the average person pays 40% of their earned income to Uncle Sam in taxes? Let me teach you how to stop being average. I can show you how to save thousands in taxes with my Deduct Everything Course.