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Five Simple Tips to a Lower Tax Bill

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Tax season is over and hopefully you’ve already filed or extended your tax return. If you didn’t like the results, now is the time to take action. Here are five simple tax planning tips for 2015.

  1. Check your withholding. If you owed money in 2014 and weren’t self-employed, chances are that you aren’t having enough tax withheld from your paycheck. If your refund was a couple thousand bucks, you probably are having too much withheld and could be getting a larger take-home check every week. Your employer withholds tax based on what you tell them on your Form W-4. The more allowances you claim on Line 5, the less tax your employer withholds. The less you claim, the more tax is withheld. If you ask, I bet your tax accountant would tell you what to claim.
  2. Increase your retirement contributions. Money you contribute to your §401(k), §403, or SIMPLE account reduces your taxable income, which in turn reduces your tax bill. Some employers will even match contributions to a certain extent. That doesn’t mean you should only contribute up to the match. Investing early unleashes the power of compounding interest.
  3. Make HSA contributions. If you have a high-deductible health plan, make HSA contributions through your paycheck to reduce your taxable income. Paycheck contributions (through a cafeteria or §125 plan) also reduce the amount of wages subject to FICA tax. This is great double benefit. You can make contributions outside of work, but they will only reduce your income tax.
  4. Know your tax bracket. Do you know how much of your income was taxed at 10 percent? 15? 25? The U.S. has a progressive tax system, meaning that your income is separated into brackets and each bracket is taxed at that percent. There is no gradual increase. Once you reach the edge of the 15 percent bracket for example, an additional dollar of income goes from being taxed at 15 percent to 25 percent. As you approach a higher bracket, increase steps 2 and 3. Your taxable income is from Line 43 of Form 1040. Here are the 2014 and 2015 tax brackets.
  5. Have a plan and seek advice. Unless you are Marty McFly, you can’t go back in time. Whether it’s your CPA, financial planner, mortgage lender, mechanic, etc., so many problems can be avoided by a two-minute phone call.

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