Things You Must Start Doing Today in Order to Decrease Your Tax Debt
Adjusting your W2 Form may be one of the biggest impacts toward decreasing your tax debt. The annual tax season is about truing up what you owe the government or what the government owes you. Depending on your income level, many taxpayers pleasantly discover that they have a refund coming. It’s not free money though. It’s what the government owes you! It’s money that has been taken out of your paycheck. Oftentimes, they’ve taken too much which results in an annual refund. Other times, not enough money was taken out of your paycheck. In a case like this, you owe the Internal Revenue Service (IRS).
Most people prefer to get the refund for the sake of getting money instead of paying the IRS, but if you adjust your W2s just right, you will receive either a modest refund, or not owe at all. This requires a sacrifice though. This means you must adjust your W2 so that the IRS is taking a little more out of your paycheck. Think of it this way: would you rather make monthly payments, or pay them a lump sum in April?
2. Save Money
If you’re not comfortable having the IRS take more money from your annual paycheck, then create a saving account to have a certain amount of money directly deposited there. This way, when tax time rolls around, you’ll have the money tucked away to pay what you owe. Very simple, but it takes a considerable amount of discipline to not use that money for anything else!
3. Give to Charity
The more money you give to charitable organizations, the more money you can write off from your annual income. This in turn, reduces your adjusted gross income (AGI) possibly placing you in a lower tax bracket. Get generous! Give to your local church, food bank, children’s hospital—any non-profit organization will do. Just be sure to ask for the receipt. They’ll be happy to provide you with one!
4. Take Advantage of Retirement Savings
If your job offers 401K benefits, then take advantage of it. In some cases, you can save up to 10-15% of your annual income to your 401K account. The money you invest in 401K accounts is before taxes. This means you don’t have to pay taxes on the money you put toward 401K until after you start withdrawing. So however much money you can afford to put toward your retirement savings will also reduce your AGI.
5. Put More Money Toward a Flexible Spending Amount
The Flexible Spending Amount (FSA) benefit that comes with healthcare is yet another before-tax contribution that can reduce your AGI. Be wise when contributing this amount. You don’t want to invest too much, because for most companies, if you don’t use it within that fiscal year, you will lose that money. The smart thing to do is assess how much money you spent on healthcare the previous year and then make the decision of how much you want to put toward your FSA account.