By Antonio Porretta
Could financial planning reduce your tax bill? If you’ve asked yourself this question, then there’s no doubt you’ve been hit with some pretty killer tax bills in the past. And trust us, there’s nothing worse than paying money to the IRS all year long only to find out that you owe even more than you thought. It’s frustrating. It’s disappointing. And it adds unnecessary strain to your finances.
But thanks to the power of financial planning, there are proven ways to reduce your tax bill. Want to learn more? Here are 4 ways to strategically lower your taxes with a little bit of financial planning.
1. Max Out Your Retirement Accounts
The easiest way to reduce your tax bill is to max out all your retirement accounts. Contributing to these plans lowers your taxable income dollar-for-dollar.
For most employer-sponsored retirement plans—including 401(k)s, 403(b)s, and 457 plans—the annual contribution limit is $19,500. If you’re 50 or older, you can contribute up to $27,000. (1)
Once you’ve maxed out those accounts, move on to a traditional IRA. The maximum contribution for 2020 is $6,000 or $7,000 if you’re at least 50.
See this financial planning strategy in action:
Meet John and Lisa. They’re a married couple in their early 50s. They both work and have a combined annual household income of $140,000. For 2020, they plan on contributing the maximum amounts to their employer-sponsored retirement plans ($27,000 each) and their traditional IRAs ($7,000 each). These contributions reduce their taxable income from $140,000 to $72,000. The best part? Now they’re automatically in the 12% federal income tax bracket instead of the 22% bracket for married filing jointly.
2. Open A Health Savings Account (HSA)
HSAs may sound boring, but they’re jam-packed with tax benefits. For example, did you know that HSAs are 100% tax-free? That’s right. You make contributions with pre-tax dollars, your money grows tax-free, and you make tax-free withdrawals for qualified medical expenses.
But that’s not all! Once you turn 65, you can use the money for literally anything. It’s true. You can use it for everyday living expenses, that overseas vacation you’ve been dreaming about, or anything else your heart desires.
If you have a high-deductible healthcare plan, you can contribute up to $3,550 for single plans and $7,100 for family plans. If you’re at least 55, you can save an additional $1,000 on top of those limits. (2)
See this financial planning strategy in action:
Going back to our example above, John and Lisa have successfully lowered their taxable income from $140,000 to $72,000 just by maxing out their retirement plans. They also have a high-deductible healthcare plan through John’s work. It’s a family plan, so they contribute the maximum amount ($7,100). This lowers their taxable income even more, from $72,000 to $64,900.
3. Make A Charitable Contribution
Donating to charity helps the greater good and helps you lower your tax bill; it’s a win-win. But there is a catch. You must itemize your taxes to receive the benefits that come with charitable contributions. If you take the standard deduction, charitable giving has no impact on your taxes.
That’s why we recommend lumping charitable donations into one year, so you can receive the full tax benefit up front. For example, many of our clients use donor-advised funds (DAFs) to help them qualify for an itemized deduction. With this strategy, you transfer one large sum of money to the DAF at once, claim the contribution on your taxes, then slowly give out the money to charities over time.
Depending on how much charitable giving you wish to do, you could make these large lump-sum contributions every other year or every few years to ensure you get the full tax benefit.
Generally, you can contribute up to 50% of your adjusted gross income to charity, although there may be some exceptions to this rule. (3) In John and Lisa’s case, they could donate up to $32,450 to charity.
4. Get Help From A Financial Professional
There are countless ways to use financial planning to reduce your tax bill. And unless you’re a financial professional, it can be difficult to know what steps will maximize your savings. That’s why we recommend working with a trusted financial advisor. At Blackbridge Financial, we’d love to review your unique financial situation and help you strategize the best ways to reduce your taxes this year. To get started, email me at email@example.com or call 704.960.9646.
Antonio Porretta is an independent wealth manager at Blackbridge Financial with 18 years of experience. He specializes in helping people create, distribute, and preserve their wealth. Antonio received an executive MBA from Saunders College of Business at Rochester Institute of Technology in 2007 and also holds the Accredited Asset Management Specialist (AAMS®) designation. Originally from Rochester, NY, Antonio has been a resident of Harrisburg, NC, since 2007. Outside of work, he enjoys playing soccer and tennis, coaching, and spending time with his wife, Laura, and their children, Cristiano, Victoria, and Matteo. To learn more about Antonio and how he can make a difference in your financial life, visit www.blackbridgefinancial.com.
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Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Independent Advisor Alliance and Blackbridge Financial are separate entities from LPL Financial.
Content in this material is for general information only and not intended to provide specific investment, tax or legal advice or recommendations for any individual. Consult the appropriate professional prior to making any decision. No strategy assures success or protects against loss. Investing involves risk including loss of principal.