Don’t Forget About Tax Breaks on the Table
If someone told you there’s a way for you to potentially save hundreds if not thousands of dollars on your income taxes by simply spending a few minutes reviewing your benefits and tax paperwork, would you think it sounds like a late-night TV marketing scam? It’s not.
You’ve still got a couple of months to tweak your employer-provided benefits and line up a few tax deductions that’ll have you smiling next April 15.
Here are a few strategies to consider:
401(k) plan. If you haven’t already maxed out on contributions for 2013, ask your employer if you can increase contributions to your 401(k) plan for the remainder of the year. Most people can contribute up to $17,500 in 2013, plus an additional $5,500 if they’re over 50.
If you contribute on a pretax basis, your taxable income is reduced, which in turn lowers your taxes. If you contribute using after-tax dollars, you’ll pay tax on the amount now, but the entire account value, including interest earned over the years, will be non-taxable when you retire. Either way, if your employer offers matching contributions (essentially, free money), you should contribute at least enough to take full advantage of the match.
Flexible spending accounts (FSAs). If you participate in employer-sponsored health care or dependent care FSAs, which let you use pretax dollars to pay for eligible expenses, be sure to spend the full balance before the plan-year deadline (sometimes up to 75 days into the following year); otherwise, you’ll forfeit the remaining balance. If it looks like you’ll have a surplus, consider which 2014 expenses you could pay before December 31, 2013.
You can use your health care FSA for copayments, deductibles and medical devices (e.g., glasses, contact lenses and braces). Note: Except for insulin, over-the-counter medicines are only eligible with a doctor’s prescription.
Charitable contributions. If you plan to itemize deductions this year, charitable contributions made to IRS-approved organizations by December 31, 2013, are generally tax-deductible. If you’ve got extra cash now and want to lower your 2013 taxes even further, consider moving up donations you would have made in 2014.
Gifts. Most people probably will never reach the $5.25 million lifetime gift tax exemption limit beyond which you would have to pay the 40 percent gift tax. But, if you’re feeling generous, remember that if you give someone gifts worth more than $14,000 this year, you’ll need to file a Gift Tax Return along with your federal tax return, even though you won’t necessarily owe any taxes on the amount. (Married couples filing jointly can give $28,000 per recipient.)
Roth IRA conversion. People at any income level can convert part or all of their existing traditional IRAs or 401(k) plans from previous employers into a Roth IRA. With a Roth, you pay taxes now, but future earnings will accumulate tax-free. If your retirement is a long way off or you believe your income tax rate at retirement will be higher than it is today, such a conversion might make sense.
Remember, however, that converted balances (for pretax savings and their earnings) get added to your taxable income, thereby increasing your taxes and possibly boosting you into a higher tax bracket for the year. Just make sure you don’t need to borrow money especially from a retirement account to pay for the additional tax burden today; otherwise you could undo the potential long-term tax advantage of converting to a Roth IRA.
Jason Alderman directs Visa’s financial education programs.