When it comes to taxes, most people take the most obvious tax deductions, pay their tax bill, and move on. However, what if there are individual tax strategies you could be utilizing to lower or eliminate your tax liability outright?
At John F. Dennehy CPA, we are a team of experienced tax accounting professionals who specialize in helping individuals and business owners strategically use their taxes to achieve their goals. And regardless of your tax bracket, we have learned the best way to minimize your taxes is with knowledge. Let's take a closer look at a few of the top, little-known individual tax strategies you can use to lower your tax liability.
Dependent Care Individual Tax Strategies
If you have little ones, you know first hand how expensive they can be. And if you pay for daycare, childcare, or private school, your expenses can quickly take on the form of what appears to be a mortgage.
However, if your employer offers a dependent care flexible spending account (FSA) at work, you can cash in on a relatively large tax break and significantly reduce your taxable income. You can set aside up to $5,000 pre-tax each year to pay for childcare costs for kids who are under age 13. The cost of daycare, preschool, a nanny, after-school care, before-school care, and even summer day camp can count.
You must decide during the open-enrollment period whether you'll participate in the plan and use this tax strategy. By doing so, you can reduce your taxable income by up to $5,000. Even though this amount may cover a quarter of the year in child care costs, such as daycare, it's a strategy that you should be taking advantage of if you can.
Start a Business
Whether you begin freelance writing, start a partnership, open a brick-and-mortar building, or take advantage of any other number of entrepreneurial opportunities, starting a business can create extra streams of income as well as open the door to a range of tax advantages. You may be able to deduct certain business-related expenses from your income, which can lower your tax obligation.
For example, if you conduct business out of your home, you may be able to deduct part of your home expenses through the home office deduction. And you may be able to do the same with any vehicles used in the course of business. To put it simply, starting a business is a robust individual tax strategy that can open the door to a range of impactful deductions and tax credits.
Utilize the Health Savings Account
If you are currently enrolled in a high-deductible health insurance plan, you may be able to use a health savings account to reduce your taxes, save money for health care expenses, and save for health care expenses in retirement. But for now, we'll just focus on how HSAs can be used to reduce taxes.
Similar to a 401(k) and dependent care accounts, all money contributed to your HSA is done so with pre-tax dollars. The maximum contribution amount for 2020 is $3,550 for an individual and $7,100 for a family. Once you contribute to your HSA, the funds will grow without the requirement of paying taxes on the earnings. As an added bonus, your withdrawals from the HSA will not be taxed either — as long as the funds are used on qualified medical expenses.
Consider Using Itemized Deduction
Deciding whether to use the standard vs itemized deduction is a big deal and can make a significant difference in your tax bill. The standard deduction is the no-questions-asked, flat-dollar tax deduction. While the standard deduction does make the tax process go by a lot faster, you may be leaving money on the table — a lot of money.
Instead of taking the standard deduction, you can itemize your tax return and maximize your deductions. Itemization is an individual tax strategy where you take all of the deductions you qualify for, one by one. Here are a few key points about this individual tax strategy:
Max Out Your Retirement Contributions
For 2020, you can improve your retirement outlook and reduce your taxable income by up to $19,500 by contributing to your 403(b) or 401(k) plan. If you are 50 or older, you can increase this amount by $6,500. Here's how it works: an employee who makes $100,000 in 2020 and contributes the maximum amount of $19,500 would only pay taxes on $80,500 of their salary instead of the full $100,000
Even if you don't have an employer-sponsored retirement plan, you can still take advantage of the retirement-related tax break. You can contribute up to $6,000 a year to a traditional individual retirement account (IRA). And if you are over 50, you can contribute up to $7,000 in tax-deductible funds.
Contact John F. Dennehy CPA for Personalized Individual Tax Strategies
When it comes to individual tax strategies, the team at John F. Dennehy CPA can help. As a team of experienced CPAs, we'll work closely with you to create a tailored strategy that best meets your needs and helps you achieve your goals.
Contact John F. Dennehy CPA.