When Tax Day rolls around, there are two kinds of people: Those that do a happy dance and gleefully wave around their refund, and those that quietly seethe as they write a big fat check to the IRS. Which were you this year?
If you ended up owing Uncle Sam, you may be able to avoid a similar predicament in 2019. Maximizing your company’s benefit plans is one of the best ways to reduce your taxable income and maybe even score a refund next year. Here’s how…
- Rethink Your 401(k)
Sure, saving in your 401(k) is important for long-term retirement planning, but it’s also a smart and convenient tax shelter in the short-term. The contributions you make to your 401(k) this calendar year become a tax deduction that will reduce your overall 2018 taxable income — and potentially lower the amount of taxes you’ll owe next year. For 2018, the maximum allowable contribution tops off at $18,500 (a $500 increase from 2017) making this the number one way to use your company’s benefits to lower your tax debt.
- Make Your Healthcare Expenses Work Harder
Many employers offer healthcare flexible spending accounts (FSAs) or health savings accounts (HSAs). These plans let you divert a fraction of your salary (up to $2,650 for FSAs and up to $6,850 for HSAs) tax-free to pay your medical, dental and pharmacy expenses. This tactic not only brings down your taxable income, but also stretches your dollar, giving you an extra 20-35% to spend on out-of-pocket costs like orthodontics, prescriptions and allergy medications.
- Deduct What You Pay for Daycare
Got kids? If the answer is “Yes,” then you probably also have child care expenses. If your employer offers a dependent care flex plan, you can set aside up to $5,000 pre-tax to pay daycare costs. Again, this reduces your taxable income and means the $5,000 you set aside will be worth about $6,500 since it was not taxed. If you have children but they don’t use a daycare program during the work week, chances are your children attend a summer camp or similar program that may still qualify as deductible dependent care.
Through these tactics alone, an average family could reduce their annual taxable income by as much as $30,350! Considering the median family income in America is about $60K, that’s a powerful number at tax time.
Sure, taking deductions from your paycheck reduces the funds available to spend each month, but it can also help you hang on to more of your hard-earned dollars in the long run. Done right, putting your employer’s benefits to work for you could mean that next year you’ll be waving around a refund check, too.