Did you recently get promoted? Congratulations! That’s good news, but if your promotion came with a salary boost, it could also result in increasing your taxes. One way to keep more of that raise is to lower your taxable income.
The most popular — and in many cases, most effective — ways you may be able to decrease your taxable income is through contributions to a retirement account, like a 401(k) or an IRA. But that’s not the only option. Here are some prime ways to make sure you get the most from that new position:
Max out your 401(k) or 403(b) contribution
Contributions to a 401(k) or 403(b) account are generally deducted from your paycheck before taxes, so the more you can max that out, the lower your taxable income. Many employers also match the employee’s contribution, so you could be doubling your money by increasing your contribution. For 2018, the annual dollar limit is $18,500, up $500 from last year. If you haven’t hiked your contribution yet this year, there’s a good chance you’ll be able to increase it — at least a little bit.
Increase Your Retirement Savings with an IRA
If you don’t have access to another retirement plan – or maybe even if you do – you can open an IRA. Any contributions you make to an IRA are fully deductible if you (and your spouse if you’re married) are not eligible for a retirement plan at work. The 2018 limit for IRA contributions for most people is $5,500 – or $6,500 if you’re 50 or older. Even if you’re already in a 401(k), you maybe be able to contribute to an IRA as well. Single taxpayers with access to a workplace retirement plan can generally make a fully tax-deductible contribution to an IRA if their adjusted gross income is below $63,000 ($101,000 for married couples) in 2018.
Open a health savings account (HSA)
If you have a high-deductible health plan, you may qualify to open an HSA to help pay for any unreimbursed medical costs (you can see the IRS definitions here). Contributions you make to that HSA are pretax if you have them deducted from your paycheck. If you do that, rather than contributing to the HSA after you get paid, you also get to avoid paying Social Security taxes on that income. The 2018 annual contribution limit for individuals to an HSA is $3,450, and $6,900 for those with qualifying family medical plans.
Make an extra mortgage payment
The mortgage interest deduction has lost a bit of its juice, since the new tax law nearly doubles the standard deduction to $12,000 for singles and $24,000 for married couples. That makes it much less likely that you’ll want to itemize your deductions. The number of itemizers is expected to drop from 46 million to 13 million, according to one early analysis from the Tax Policy Center. But if you’re still taking it, you might want to consider making one or more additional monthly mortgage payment this year. You may be able to deduct the extra mortgage interest. Make sure your lender knows it’s intended as a regular payment, consisting of both interest and principal, or they may assume you’re just paying down principal.
Donate to charity
Charitable contributions of up to 60% of your adjusted gross income are also deductible if you itemize. The new tax law is likely to be bad news for charities, given that it reduces the incentive to itemize deductions. One idea to take advantage of the new law: Stagger your donations so you give twice as much as normal to charities in one year, then nothing the following year. This may help you accumulate enough deductions to itemize and write off more than the standard deduction.
Donate to charity – in the future
If you’re looking to offload some income but don’t have a specific charity in mind, consider a donor-advised fund (DAF). With a DAF, you make the charitable contribution right now and get an immediate tax benefit for it. Then, when you have decided on a charitable cause, you can recommend that the fund make a distribution to that charity. On top of that, your donation can be invested and grow tax free for as long as the assets remain in the DAF you establish.
Things to Consider:
- Help reduce your taxable income by investing in a retirement plan.
- Consider creative ways to make charitable donations.
- Make an extra mortgage payment to boost your interest deduction.
Neither Transamerica nor its agents or representatives may provide tax, investment or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.