Three Personal Finance Secrets To Lower Your Taxes

Written by on January 16, 2013 in Money - No comments | Print this page

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Taxes

It has been said by many people that there are only two things that are certain in life: death and taxes. No one likes to pay taxes, but a certain amount of taxes are necessary to pay for some of the common goods in society like roads, bridges, ports and military protection.

While some taxes are necessary, there is no need to pay more than that required by law. In the United States, there are several ways to minimize the amount of income tax that is due in a calendar year. Below are three of the most common.

Mortgage Interest Deductions

It may seem strange that buying a house can help when it comes to paying the tax man at the end of the year, but it is definitely the case for those who are able to come up with enough deductions to itemize.

The government has set up a plan to subsidize homeowners for their mortgage interest expenses. For every dollar spent in mortgage interest (this does not count the principle that is being paid down), taxpayers can deduct a dollar from their income.


While this does not cut taxes on a dollar-for-dollar basis, it can cut several thousand or even tens of thousands of dollars off of income in a year. This deduction may be the difference between tax brackets, and with the top marginal rate going up to 39.6 percent from 35 percent, every dollar counts.

Retirement Contributions

Financial advisors throughout the country recommend that every American stash some money away for his or her retirement. This recommendation is even more urgent for younger citizens because of the uncertainty caused by attacks on and underfunding of social security that could hit today’s young adults very hard in the future.

There is also a tax advantage to investing for retirement for those who take advantage of a tax-sheltered retirement plan. Traditional Individual Retirement Accounts (IRAs) and 401k plans fall into this category. Funds deposited into traditional IRAs and employer sponsored personal retirement accounts have tax deferments.

This means that any funds deposited into the retirement account are not taxed when saved. The interest and dividends then accrue tax-free until they are withdrawn. Investing in a tax-sheltered retirement account can be especially beneficial for those who are near the threshold for another tax bracket.

It is likely that the tax will be lower in retirement because of a lower income. Therefore, those who utilize these vehicles will cut taxes now and have more funds available in the future.

Health Savings Accounts

There are restrictions to the amount of savings that can take place in a health savings account (HSA). The purpose of these accounts is to pay off the expenses that are incurred for holders of high-deductible medical insurance policies.

They are a tax advantage because any funds placed in the HSA are deductible. Contributions are tax-free even for those who are not otherwise able to itemize their taxes for a given year. In addition to the tax benefits of the HSA, there is also an added peace of mind that can come from knowing that an insurance deductible will not cause a financial hardship.

The previous paragraphs have shared three major personal finance strategies that can lower the amount of income tax that is due to the IRS at the end of the year. In addition to the tax benefits, these strategies also provide additional security.

Homeowners frequently find that owning a home can be cheaper than renting in some markets. Those who save for retirement can enjoy their golden years and avoid becoming a burden on their children. Finally, an HSA can provide funds to pay medical bills that are not covered by a high-deductible insurance policy.

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This is a guest post.  Debra Dean is a financial advisor and guest author at BestFinanceSchools.net, where she has contributed to guides to top-rated online masters degree programs in finance.

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