Money Management

It’s definitely one worth making. 

Paying taxes can be a drag, whether you earn $50,000 a year or $500,000. And so chances are, you’d like to pay the IRS as little as possible.

There are different steps you can take to minimize your tax bill. You could, for example, write off expenses you incur in the course of running a business or being self-employed, like internet service and office supplies. These deductions are perfectly legal. You can also, if you own a home, write off the interest you pay on your mortgage (assuming you itemize on your taxes and don’t just claim the standard deduction).

But there’s another really effective move you can make to slash your tax bill substantially. And it’s one worth making this year if you can swing it.

Max out that retirement plan

Saving for retirement is important. Without savings, you might struggle financially later in life.

Thankfully, the IRS offers tax incentives for retirement plan contributions. And if you put money into a 401(k) or traditional IRA account, you can exempt a large portion of your income from taxes.

Now, the IRS does set limits on how much money you can put into an IRA or 401(k). And to be clear, those limits can change from one year to the next.

In 2023, you can put up to $6,500 into an IRA and up to $22,500 into a 401(k) plan if you’re under the age of 50. If you’re 50 or older, you get a $1,000 catch-up option in an IRA and a $7,500 catch-up option in a 401(k), bringing these limits up to $7,500 and $30,000, respectively. This means that if you’re 52 years old and max out your IRA at $7,500 this year, that’s $7,500 of income the IRS won’t tax you on. That’s a pretty sweet deal.

One big misconception about catch-up contributions is that you need to be behind on savings to take advantage of them. Not so. You could have $2 million in your retirement plan and still make a catch-up contribution if you so wish.

Plus, many companies that sponsor 401(k) plans match worker contributions to some degree. Those employer contributions don’t count toward the aforementioned limits.

So let’s say you’re 52 and have a 401(k) through work, and that your employer will match up to 100% of your first $3,000 in contributions. This means that you can still put $30,000 into your 401(k) this year, and between your contribution and your employer’s, you’ll have funded that account with $33,000.

An option worth taking advantage of

Many people are not in a financial position to max out a 401(k) or even an IRA this year. And if that’s the boat you’re in, don’t sweat it. Not only is inflation still driving living costs up, making it harder to carve out room for retirement plan contributions, but a lot of people are still recovering from job or income loss during the early days of the pandemic.

But even if you can’t max out your IRA or 401(k) contributions for the year, do your best to sock away as much money as you can in one of these accounts. Doing so won’t just save you money on taxes — it could also help set the stage for the financially secure retirement you deserve.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2024

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More 

Anything you can do to make filing taxes easier is worth your time. 

If you’re one of those rare souls who keeps your tax documents organized throughout the year, congratulations. You’re ready to file. For the rest of us, this is the time of year when we try to remember where we stored receipts, W-2s, 1099’s, interest statements, and all the other important information we’ll need to file our returns accurately.

This list may help you organize if you still need to get all your documents together. Here’s what you’ll need to file your return.

Information and documents nearly everyone will need

Social Security numbers and birthdates for you, your spouse, and dependents.If you would like a refund check directly deposited into your bank account, your bank account and routing number.A copy of last year’s return.

Income-related documents

W-2s for you and your spouse if you’re married.1099-G forms for unemployment income, or state or local tax refunds.1099-C for cancellation of debt.1099-S for income from the sale of a property.1099-INT, -DIV, -B, or K-1s for interest or investment income1099-NEC forms for you and your spouse if either of you did any contract work in 2022.Form 1099-R, for pension or IRA distributions.SSA-1099, for Social Security benefits you’ve received.Income from business or farming, including a profit/loss statement and capital equipment information.Rental property income and expenses.Alimony received by you or your spouse.Installment sale information, including the payer’s Social Security number and address.Investment income.Gambling winnings.Jury duty payments.Taxable health savings account (HSA) distribution.Awards and prizes.

Documents associated with income adjustments

Alimony paid for divorces that occurred before 2019.IRA contributions made during the tax year.For 1098-T, for tuition paidForm 1098-E, for student loan interest paid.Receipts for qualifying energy-efficient home improvements.Self-employed health insurance payment records.Moving expense records.Solo 401(k), SIMPLE, SEP, Keogh, or other self-employed pension plan contributions.For teachers: receipts or canceled checks for expenses paid toward your classroom, including supplies.

Deduction and credit documentation

Adoption expenses.Child care costs.Forms 1098, including mortgage interest, private mortgage insurance (PMI), and any points you paid.Charitable donations.Medical and dental expenses.Casualty and theft losses, including any insurance reimbursements.Union dues.Unreimbursed employee expenses, like supplies, seminars, travel, or publications.Business use of the home expenses, including the size of your home office.

Tax documents

State and local income tax you paid.Real estate taxes paid.Personal property taxes paid.Estimated tax payments made if you’re self-employed.Prior-year refund applied to the current year.

Miscellaneous documentation

Any amount paid with an extension to file.Vehicle license fees, based on the value of your vehicle.Foreign bank account information.

While they’re not documents, you may also want a quiet room to work in, your favorite beverage, and chocolate. For some of us, these things make tax preparation bearable.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2024

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More