Personal Finance

5 Money-Saving Tax Tips to Use This Summer

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Getty Mowing Grass

If you think you're done with taxes now and can enjoy not thinking about them until March or April of 2017, think again. To minimize your tax bill next year, there are some smart moves you can make now and in the months ahead. Savvy tax planning doesn't have to take a lot of time, but it's a year-round undertaking. Here are five money-saving tax tips to put to use this summer.

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Brian Feroldi

One of the smartest ways to lower your tax bill is to put more money into your tax-deferred retirement accounts, such as traditional IRAs and 401(k) accounts. Since pre-tax money is used to fund these accounts, adding more money now will lower your total taxable income and lead you to pay out less in income taxes next year.

There could be other benefits to increasing your retirement contributions, too. That's especially true if your employer offers a matching contribution to your 401(k) and you are not yet contributing enough to take full advantage of that. As an example, if your company provides a 50% match on the first 6% of your salary, and you are not yet contributing 6%, then you are saying no to free money. Bumping your contribution rate up to that 6% will not only provide you with an immediate 50% return from your employer, but it will also lower your tax bill. That's a huge win!

If you're worried that can't afford an increase, then I'd still advise you to go for it, but start out small. Simply add an extra 1% of your salary to a tax-deferred plan right now and judge for yourself how it goes. My hunch is that after a few paychecks, you'll hardly notice the difference. If so, then add another 1% a few months down the road, and repeat that process as many times as possible. Do that enough times, and you'll be at the maximum level, turning you into a retirement rock star.

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Selena Maranjian

A final way you might shrink your tax bill this year is by opening a Flexible Spending Account (FSA) if you're able. These plans are typically offered by employers, with contributions coming out of your paycheck on a pre-tax basis. (That means you're not taxed on them.) For 2016, the limit is $2,550. If you're in the 25% tax bracket and can shrink your taxable income by $2,550, you'll avoid paying nearly $640 in taxes.

There are several varieties of FSAs. A healthcare FSA (not to be confused with a Health Savings Account, or HSA) lets you sock money away for healthcare expenses, while others focus on dependent care expenses (such as day care) or adoption expenses or health insurance premiums. With a healthcare FSA, the money you contribute to the account can be used tax-free on qualifying healthcare expenses, such as: birth control pills, breast pumps, chiropractor services, dental work, drugs, eyeglasses, fertility treatment, hearing aids, optometrist services, psychiatric care, smoking cessation programs, some weight-loss programs, wheelchairs, wigs, X-rays, and more. Expenses that miss the mark include cosmetic surgery, diapers, gym memberships, electrolysis, many nonprescription drugs, nutritional supplements, teeth whitening, and veterinary services.

An FSA has a significant drawback, though: It's use-it-or-lose-it with the money you contribute each year. The rules were recently relaxed just a little so that now your employer may choose to extend the spending deadline by up to 2-1/2 months or permit you to carry over up to $500 to spend in the following year. It might not offer either option, though, so learn the rules for your particular account. Also, you generally have to set up an FSA during your employer's open enrollment period, so find out when that is.

Take some action now and you can save hundreds or thousands of dollars in taxes.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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