Whether it's your first time doing your taxes or you've been doing them for years, it can feel like there's always more to learn about how to prepare them properly. There are plenty of strategies, or loopholes, you can use to save money on your taxes, but lots of average taxpayers may not be taking advantage of them.
Various money-saving methods experts recommend, like contributing to your HSA or your 401(k), can help you save big when you're filing your taxes. But many Americans don't know that several smart strategies are actually legal, according to a 2019 Nerd Wallet survey of over 2,000 U.S. adults. For example, a quarter don't know you can make a prior-year contribution to your IRA, and 17% don't know that same benefit is legal for health savings accounts.
Here are four legit and recommended ways to save money on your taxes this season.
Many Americans think it's illegal to make an IRA contribution for a particular calendar year after that year has ended, according to that 2019 survey.
Surprise: That move is perfectly legal and actually pretty smart, says Richard Stumpf, a certified financial planner at Financial Benefits Inc., in Wichita, Kansas.
You have until the April tax deadline to fund your IRA for the previous tax year, he says. That means you have until April 15, 2020, to make your 2019 contribution, up to last year's limit of $6,000. Just be sure to tell your financial institution that you want the money to count for 2019, rather than 2020.
If your employer offers a health spending account (HSA), there's a loophole similar to the one for IRAs. Up until this year's tax deadline, you can make a contribution that counts for last year.
An HSA is a tax-advantaged account you can use to pay medical expenses. They have a triple tax advantage: Contributions to HSAs are either pretax or tax-deductible, meaning the funds grow tax-free, and withdrawals are tax-free, too, so long as you use them for qualified medical expenses.
"It's one of the best tax loopholes still out there, and you can contribute a fair amount," says Stumpf.
In 2020, HSA holders can save up to $3,550 for an individual and $7,100 for a family. If you're making a contribution for the 2019 tax year, those limits are $3,500 and $7,000, respectively.
Video by Stephen Parkhurst
Roughly 1 in 5 taxpayers who are eligible for the earned income tax credit never claim it, according to IRS data.
The EITC is a credit that reduces your tax bill dollar for dollar. So if you owe $3,000 but qualify for a $1,000 credit, your tax liability goes down to $2,000. Deductions, which effectively lower your taxable income, are less valuable.
If you earned less than $56,000, you may be eligible for the earned income tax credit. This is a benefit for working individuals with low to moderate incomes, and can be worth up to $6,557.
Eligible taxpayers must be U.S. citizens who are at least age 25 but less than age 65, or who have children who meet certain eligibility requirements. You also must have earned income through employment. You can have investment earnings, but only if the total is less than $3,500.
Your 401(k) is a retirement plan provided by your employer that allows eligible employees of a company to save and invest for their own retirement on a tax-deferred basis. And if you're looking to make the most of tax breaks for the upcoming year, consider 401(k) contributions: They are pretax, and you don't have to do anything to document that at tax time. Every dollar you put in reduces your taxable income and can save you money next year.
Many Americans will depend on savings accumulated in a 401(k) or another workplace plan to fund a comfortable life in retirement, which is why it's so important to start saving as early as possible.
And 401(k)s have other advantages, too. Many employers match a portion of contributions, for example, which means they give you what amounts to free money that can supercharge your savings.
Your 401(k) is also a surefire way to reduce your taxable income, so the more you put in, the more you'll save when tax season rolls around. For 2020, the maximum limit is $19,500.
"Increasing how much you have going into your 401(k) if you're not getting the maximum match — that's a double bang," says Stumpf. "As far as a tax dodge or something that's going to give you an additional savings right now, your 401(k) is a great option."
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