As we approach the end of January you’ve probably gotten your W2s in the mail and are thinking about filing your tax return. If you are expecting a refund, you might even be well on your way towards completing it by now.
But what if you feel like you are paying too much in taxes. Maybe your refund isn’t as big as you were hoping. Or maybe your tax return says you have to write Uncle Sam a check. Nobody likes to do that.
There are ways you can reduce last year’s tax burden, even though last year is long gone. Here are two ways that you can either decrease your tax bill or increase your tax refund immediately.
Contribute Money to a Traditional IRA
If you haven’t already maxed out your IRA contributions for 2013 then you can contribute money to a traditional IRA that will be considered a 2013 contribution. You can make 2013 contributions all the way up until April 15th, 2014.
Every dollar you contribute to a traditional IRA reduces your taxable income for that year. Lower taxable income means you pay less in taxes. Let’s look at an example to clarify:
Pretend you make $70,000 a year (as a married couple), which probably places you in the 25% tax bracket. Let’s also pretend that you’ve looked at your taxes and you are supposed to pay the federal government $250.
You could write a check for $250 and move on with your life. However, you could also contribute $1,000 to a traditional IRA and put that money away for your retirement.
This would reduce your taxable income by $1,000, which would decrease your tax bill by $250. Now you don’t have to write anyone a check.
So basically you can either pay the government $250 or pay yourself $1,000 (which will be taxed later once you reach retirement age).
It is very important when you are adding funds to an IRA that you make sure to specify that the contribution is for the 2013 tax year. If you don’t specify the year, you could end up contributing towards your 2014 IRA, which will decrease your tax bill a year from now but won’t do anything for your current tax bill.
Also, it’s important to talk with a tax professional (that’s not me). Depending on whether you are single or married, if you have a retirement plan at work, and/or how much money you make during the year, you may or may not be eligible to take a deduction on IRA contributions.
Contribute Money to an HSA
Another option that may be available to you is contributing money to a health savings account. This is available to fewer people because you must have had a HSA last year and it is only available to people with high deductible insurance policies.
However, if you are like me and have an HSA then you can do the same thing here. Every dollar you put in the HSA for the 2013 tax year will reduce your taxable income, and therefore, your tax bill.
I might want to put $1k or so in there to pay myself back for my root canals and crowns. I actually prefer the money in my HSA because it’s like a retirement account that can also pay for medical bills today.
Again, I’m not a tax advisor and this may not apply to your situation. Please consult with a tax professional if you want to explore this option.
Pay Yourself to Lower Your Tax Burden
You can use one of these two methods to lower your tax burden. That means either writing a smaller check to the government or increasing your refund.
Oh, and you’re also saving money for retirement, health care expenses, or both. Sweet!
Readers: Do you have any other tips for decreasing last year’s tax burden?