With over half of 2021 finished, now is a good time to start thinking about how reduce your taxable income; especially if you are a high earner; making over $100k.
Tip #1 - Max out your 401k contributions!
This is something that I see a lot of high earners fail to do. In 2021, the IRS allows you to contribute $19,500 to your 401(k), with an additional $6,500 catch-up contribution allowed for those turning age 50 or older. This amount is based on individual contributions and not on the match received from your company. For example, a tax payer earning $125k would fall within the 24% tax bracket; by reducing your income by maxing out your contributions to your 401(k) you can generate $4,680 of tax savings. Those who are in higher tax brackets have the most to gain by contributing to a 401(k) plan. An employee in the 37% tax bracket who maxes out a 401(k) plan could reduce his income tax bill by $7,215.
Tip# 2 - Contribute to a traditional IRA!
The max contribution amount to a traditional IRA for 2021 is $6000. A single taxpayer covered by a retirement plan at work; cannot making more than $76k for 2021 cannot take a deduction for this. If your income is under $76k, a single tax payer in a 22% tax bracket can reduce their tax bill by $1,320. This means more money in your pocket! Married filing jointly tax payers making less than $105k can take the full deduction. This can generate $1,440 in savings per person to a married couple.
Tip# 3 - Fund your FSA or HSA
Let's face it you will have medical and dental expenses that will occur during the year. If your employer offers a flexible spending account (FSA), you might want to take advantage of it to lower your tax bill. In 2021, the max amount you can contribute is $2,750. By pre-funding your FSA you can pay for your medical expenses using tax free dollars. For a single tax payer in a 22% tax bracket, this can generate $605 in tax savings through-out the year that can go to meeting other expenses. You will have to use the money during the calendar year for medical and dental expenses, unless your company allows you to carry it over. Health savings account (HSA) differs in that you can only contribute if you have a high-deductible health care plan. Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, so long as you use them for qualified medical expenses. For 2021, the individual coverage contribution limit is $3,600 and $7,200 for families.