5 Real Tax Breaks You Must Not Miss

Posted on July 2, 2014 at 2:51 PM PDT by

Absolutely nobody likes to pay taxes, and we certainly don’t like the feeling we pay more than our peers. Yet, chances are, you probably do.

How do I know this? Because 401(k) participation rates are not 100%. At best, it’s 73%, according to the latest data from Vanguard Group. A 2012 study by LIMRA found that 65% of workers earning between $40,000 and $99,000 were setting aside 5% of their income, not the 15% or 20% retirement planners recommend.

Not all of us save at work and when we do we aim far too low. The result is that we pay more in taxes now, and considerably more, since we lose the tax deferral provided by 401(k) savings plans and also lose the compounding effect those savings would enjoy in a qualified plan.

tax breaks

How can you turn this around? Here are five major tax breaks you must not miss:

1. Up your 401(k) contribution

This is the easiest, highest-impact change you can make and you can make it today. Go to your human resources office and ask them to raise your pre-tax deferral to as high a number as you can stand. Aim for that double-digit dream figure. Every dollar you don’t take in pay today is untaxed and grows in your name in an account.

You will pay taxes later, but only on withdrawals well into retirement. The current maximum deferral is $17,500 per year.

2. Consider adding to an IRA

If you are in a one-income relationship, open a spousal IRA in your wife or husband’s name. The total you can set aside will be lower but it’s not zero. You can add up to $5,500 and $1,000 more if he or she is over 50.

3. Open an HSA or FSA

If you have a high-deductible health plan, and these are increasingly common, you can set aside $3,300 tax-deferred as an individual and up to $6,550 as a family (add another $1,000 if you are over 55) into a health savings account (HSA).

It’s pre-tax, just like a 401(k) or IRA. Real tax savings, right now. A flexible spending account (FSA), which operates through work, can bring similar tax benefits.

4. Taxable accounts? Go long

Once you maximize your tax benefits in qualified plans, if you have extra cash to invest remember that you will be taxed at a higher rate for securities that you hold for less than a year.  If you are in a low tax bracket the rate is zero on qualified dividends and long-term capital gains. Ordinary dividends are taxed your income tax rate while long-term gains are at 15% for most people and at 20% for those in the 39.6% tax bracket.

If you must buy and sell in under a year, make sure it’s worthwhile. Your taxes on short-term gains will be at your ordinary income tax rate.

5. Consider a Roth

Maxed at work, all set with taxables, now what? Well, you’ll be paying taxes a long time. If you have income to invest, a Roth IRA gives you no ta breaks today but will grow tax-free and the withdrawals later are tax-free too. Opening a Roth IRA is easy and contribution limits are similar to normal IRAs, although high-income earners can be shut out.