Reader Question: Diminishing My Taxable Income
Ok, I have admitted many times before that I purposely don’t advise on taxes or investing on this site for a reason. That reason is because 1) I changed from Accounting to an IT major intentionally and 2) Taxes and Investing are both boring and scary to me. However, reader Renee has a question I think I can give some guidance on based on my on recent experience.
So as I am preparing this year’s taxes, I realize I made a little more money, although it surely didn’t feel that way. My expenses also increased, namely for daycare. I am a single mom of 2, receiving NO child support. I don’t make bad money in IT. Anyway, I realized that I paid almost 22k for daycare this past year and all the gov’t is giving me is a 1600 tax credit for daycare. This is insane. So, what I would like is some of your advice about ways to diminish my taxable income. What ideas do you have to cut down my income with before-tax deductions, yet after taxes being able to bring home a decent amount. I know I should contribute more to 401k and my HSA, but do you have any other suggestions for me to research? Uncle Sam is killing me.- By the way, I’ve been reading yor blog for a few years and you’ve done a great job.
How Renee can save on her taxes
First off, I’m going to put out there that to save on taxes, generally you need to either make less money or spend more money on things like pre-tax or tax-deferred investments, so there’s no easy way to just get rid of taxes and keep your existing quality of life, but here are some tips:
- Max out your 401(k) – While investments aren’t guaranteed to go up, at least put in as much as is needed to get any company match, if your company offers it. Whatever you contribute, up to the max you’re allowed, will come right out of your taxable income.
- Contribute to a Traditional IRA – This is something I’m lazy at doing, but you can still contribute to your 2010 Traditional IRA if you haven’t yet and reduce your taxable income. Yes, it’s spending money to save money, but again, it’s investing in your future.
- Contribute to a Dependent Care Flexible Savings Account (FSA) – It will just make a small dent in your $22k/year daycare bill, but if your employer offers the benefit and you can work out payment with the daycare (this is where my experience and knowledge fall short), then do it. It’s another way to reduce your taxable income.
- Donate to charity – I know, it’s yet another way of spending to save, especially when you’re not getting the direct benefit of the money spent, but what do you think the rich do to lower their taxable income? The Gates Foundation isn’t there just because Bill Gates is extremely generous! If you have causes you want to support, then support them dangit! And get a little bit back from the feds in return. You can also look into donating non-cash items, but make sure you understand all the related rules and restrictions.
Those are the quick tips that come to mind, and I know each of them mean that you have less money in your paycheck at the end of the day, but the reality is taxes suck and we just need to plan for them properly by hedging with pre-tax and tax-deferred options and available tax deductions.
What do my other readers have to say? I’d love your input because I’m sure your collective intelligence is far greater than mine!