Every year millions of citizens scramble to beat the April 15 deadline to file their tax returns and the one thought occupying the minds of each one of them is how to pay fewer dues to the Internal Revenue Service (IRS) than they are currently shelling out but most of them are ignorant about simple tips for saving income tax which can help them immensely.
Most citizens see the Employee's Withholding Allowance Certificate form at the beginning of a new job when their employer asks them to mention the number of withholding allowances they want to claim but they do not know that it can be changed anytime. The more with holdings you add the less IRS will deduct from your salary and that translates into increased savings. People generally report a lesser number which leads to a substantial refund in springtime but claiming more withholding simply means getting that refund in installments each week in the form of your weekly pay.
The traditional version of this retirement plan that lets people save by fixing a part of their wages to be contributed to the fund is a good way to minimize the burden as the amount is deducted from the salary before paying off the usual levies thus lowering the chargeable earnings of the concerned individual. Generally sponsored by employers, self-employed people can also open their own accounts. For 2018, the maximum limit for the amount that a person can invest in the scheme has been raised from $18,000 to $18,500 for people under 50 years of age and older people can put up to $24,500 in this plan.
The Roth 401(k) is its variant which differs from the 401(k) in the way it is funded from the amount that one deducts from the paycheck after paying the IRS and this means the payments after the term matures do not attract any levies. In the traditional plan, no such facility is provided and the requisite amount is charged.
Individual Retirement Account (IRA)
This fund also comes in two variants and anyone with an earned income under the age of 70 ½ is eligible for a traditional IRA account while the Roth version does not have any age restrictions with the deposit threshold amount being $5,500 for citizens under 50 and $6,500 for older people. A major eligibility factor is that for an individual already has a 401 (k) fund or any other retirement plan at work, contributions to this plan can be made only if the earnings are below a certain figure. Similar to the 401 (k), traditional IRAs are tax-deductible while the withdrawals at the end of the plan are subject to charges at normal rates whereas there are no such encumbrances in the Roth version.
Dependent Care Flexible Spending Account (FSA)
One of the most important tips for saving income tax when it comes to Salaried professionals with children or other dependents. This account which allows one to pay for certain medical expenses using the pre-tax money, can be a boon for such people as the savings in FSA can be used for prescription or over the counter medications, medical supplies & equipment like bandages and portable sugar- testing kits. A maximum of $2650 can be contributed by an individual (single or married but filing separately) and $5,000 (if filed jointly or as head of the household) to the account by enrolling with the benefits office of your organization. The amount specified by you would be deducted from your taxable income, lowering your monetary obligation for the year while saving on some of your medical expenses. The downside is that you do not get the unspent part of the invested sum and therefore it is wise to use up all the specified amount for the year by paying for eligible items.
Health Savings Account (HSA)
Only those people with no Medicare (Part A or B) registration and who have signed up for a high- deductible health insurance plan with minimum annual deductible amount being $1,350 for self and $2,700 for family plans and the maximum out of pocket figure being $6,650 for single and $13,300 for family can benefit from this scheme. The contributions are tax-deductible with the maximum limit being $3,450 for individuals and $6,850 for family and all interests and dividends are also treated in the same manner. The withdrawals when done for qualified medical expenses as notified by the IRS also do not attract any levies.
Planning in advance helps in avoiding unpleasant situations like a hefty bill and a thoughtful approach along with awareness about the relevant laws can help maximize your deductions and with the help of these tips for saving income tax you can enjoy more of your hard- earned money while being on the right side of the authorities.
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