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Start Early, Lower Your Tax Bill

Ideas to help you lower your tax bill

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Lowering Your Tax Bill

The last thing on your mind at the end of the day is probably not taxes. However, thinking ahead of ways to save on your taxes may benefit you greatly when tax time rolls around.

Max Out

If possible you will want to contribute the maximum amount of money you are allowed to, to your 401(k). By maxing out your 401(k) you are reducing taxable income. The funds you deposit into your 401(k) are pulled out of your salary before taxes are withheld. Putting the most amount of money possible into your retirement account you may be able to protect yourself from moving up into a higher tax bracket.

Invest in Munis

Municipal bonds also known as munis or better yet, tax-exempt bonds are government issued bonds. These types of bonds are great for growing your savings if you do not need the money back right away. However, municipal bonds are available in many terms, from short to long term fixed rates. Munis are primarily used for public purpose projects like fixing roads and affordable housing projects. Today you are able to find high quality 10 year munis that are yielding around 2.4%, which would be equal to earning a taxable 3.4% if you are in the 28% tax bracket. Not a bad deal.

Plan for the Future

Get the kids started in a 529 Plan. 529s allow your savings to grow tax-free, however the money must be put towards earning a higher education. Many states do offer tax deductions, to find out if your state offers this benefit a good website reference is findaid.org and click on “savings”.

Donate your Stocks

Donating stock is almost a win-win type of deal. If you are in a 15% or higher tax bracket donating stock is something you may want to consider. Some of the benefits of donating stock to a qualified charity include a charity deduction and the possibility of avoiding tax on unrecognized capital gains. Here’s an example of how this works:

  • Say you bought a stock for $11,000 last April, and today it is worth $21,000 and you would like to donate the entire $21,000 to charity. If the tax rate for long-term capital gains is 15%, your total tax savings for donating the stock would be $1,650 ($11,000 x 15%). Also, you may be able to claim deduction on the donated shares’ market value, the entire $21,000. Hypothetically, if you are in the 25% bracket you may be looking at a $5,250 ($21,000 x 25%) tax savings. That would bring you to a total tax savings of $6,900!

Remember when donating appreciated stock it has to be held for more than a year. If the stock is held less than 12 months it will be treated as ordinary income property.