Tax Season Is Approaching: Know The Most Common Deductions
There are two certainties in life, death and taxes.
We all can probably remember the first job we had, and the first time we got a paycheck.
We tore it open, only to find there was a huge chunk of money missing!
Don’t think you aren’t getting anything for that money, you get the clean water running out of your tap, the police patrolling your neighborhood, and the garbage that gets picked up curbside.
As we near tax time, one of the more common concerns you might have is how to reduce your tax bill or what deductions qualify.
But first, it’s important to understand, that you either take the standard deduction of $12,400 if you’re Single or you can choose to itemize.
Let’s a take a look at some of the most common deductions you have.
Save more towards retirement
Your TSP contributions are pre-tax dollars (unless you’re using the Roth version).
Each dollar you contribute to your TSP reduces your taxable income.
Let’s look at an example…
2020 Salary: $60,000
2020 TSP Contribution: $10,000
2020 Taxable Income: $50,000
By contributing $10,000 to your TSP, you actually reduce your taxable income by that amount.
You don’t pay the tax now — you’ll pay taxes when you withdraw the money in retirement.
The more you contribute to your TSP, the more you reduce your taxable income.
In 2020, the current TSP max contribution is $19,500 or $26,000 if you’re over age 50.
This is also true for any Traditional IRAs you have outside of TSP. IRA contributions reduce your taxable income up to $6,000 per year or $7,000 if over age 50. These are a great avenue if you to save more for retirement, while also reducing your taxable income.
Use flexible spending plans (FSAFEDS)
Using a flexible spending account lowers your taxable income if you use the funds for eligible medical, dental or vision care expenses.
This money isn’t subject to payroll taxes.
One thing to note, you must incur eligible expenses by the end of the year in order for the money to stay off your tax bill. You can make a claim for expenses incurred in the 2020 benefit period until April 30, 2021.
You can also carry over $550 of unused funds into 2021 as long as you are re-enrolled in the program.
The 2021 contribution limit is $2,750 — you can sign up on FSAFEDS during Open Season to enroll.
Save for college
You can contribute to a 529 plan which is designed to help pay for higher education expenses.
529 plans are typically established by parents or grandparents on behalf of a child or grandchild.
These types of plans are tax-deferred and exempt from federal and state income tax, as long as the money is used for qualified educational expenses.
The contributions reduce your taxable income, the plans grow tax deferred, and the withdrawals are tax free if they qualify.
These are great plans if you want to help a loved one out with the rising cost of higher education, while giving yourself a tax break.
Donate to your favorite charity
Charitable contributions you make are deductible.
And they don’t necessarily have to be in cash.
If you donate old clothes, food, or items to Goodwill, this will lower you taxable income.
It’s recommended to always get receipts and keep them handy when making these deductions come tax-time.
Contributions help your community, while also giving you a tax break. It’s the definition of win-win!
Now while this list is in no way all the deductions or itemizations you could have, it gives you a good idea on how things work.
As a reminder: this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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