How To Reduce Your Tax Liability

Photo Credit: enciktepstudio/

Photo Credit: enciktepstudio/

Reducing your tax liability also provides the added benefit of improving your retirement planning. It is time to be proactive in paying less income tax than you are required to pay and putting more money into tax-deferred savings investment accounts or savings plans. This article offers some excellent strategies to help you accomplish this.

1. Increase Your Retirement Contributions In Tax Deferred Accounts

You can deduct more from your taxable income than you may realize because you may not be aware of the maximum annual individual contribution to your 401(k) plan. The allowable deduction is $18,000 for 2015 and 2016. You can also put $5,500 into an IRA. If you are 50 years old or older, you can contribute an additional $5,500 into your 401(k) and $1,000 more into your IRA this year.

You can make contributions now and apply them retroactively to 2015 if you do so by April 15. You will be able to take advantage of compound interest and a larger amount of savings growth by depositing money that would otherwise be taxed. The tax advantage savings plans will get you closer to your retirement goal. If you haven’t started one of these plans, then consider doing so even if you can only deposit a few dollars monthly.

2. Organize Your Accounts For The Best Tax Advantage

You can keep more of your money working for you if you put your money into a plan that offers the maximum tax advantage. This is not to say that tax savings should be your only guide in selecting investments, but once your savings goals are established, you can allocate your funds among accounts that will meet your objectives and minimize your tax obligations. There are different tax implications for equities, bonds, REITs and commodities. Put the investments that have greater tax implications into your tax-advantaged accounts.

3. Practice Tax Smart Investing

Account activities that generate short-term gains are more likely to generate taxable income. This is apt to happen when your investments in mutual funds are frequently traded resulting in a short-term capital gains tax liability and unnecessary commissions. This is a double hit on your investment returns.

Your best chance of reducing your tax liability is investing in passively managed funds such as EFTs or index mutual funds.

4. Seek Professional Help

Our firm has experienced advisers who can help you navigate the complicated taxation waters and save you money by identifying the tax advantages available to you. Every person’s situation is different, but we can assist you maximize your investments and reduces your tax obligation.