Many Americans are able to take advantage of tax incentives every year. Here, I want to share my top five facts that people should consider when looking to decrease their tax load or improve the use of their cash:
States With No Sales Tax
It’s good to know which states don’t assess any sales tax, especially if you travel often or live near one of these states. Presently, Delaware, Montana, New Hampshire and Oregon have no statewide sales tax. When you consider that your own state might have a 5 – 7 percent tax rate, pretty sizable savings could be achieved by shopping in these other states. Granted, some items in these states may actually see higher prices since they know people come there just to avoid the sales taxes. But chances are, some discounts are still to be had.
The Roth IRA is one of the most powerful investment vehicles out there. It allows Americans to invest up to a set amount ($5,500 for most Americans and $6,500 if over age 50) each year in an account. That investment will grow tax-free and then not be taxed upon withdrawal either. This is a great opportunity for investors who intend to leave their funds invested for a decades-long period. By avoiding taxes on gains and withdrawals, it could mean a huge difference in net income upon retirement compared to other investments.
The 401(k) and other related accounts like 403(b) have a slightly different benefit. They are taxed upon withdrawal, but they allow you to deduct the amount invested from your taxable income in the year invested. So, this is a good way for people who may be in a higher tax bracket to shield some income legally. And there’s often an employer match to boot!
Flex spending accounts are relatively new in America. I’ve always taken advantage of this provision of the tax code because our family has fairly high medical expenses each year. Essentially, you could set aside $2,000 of your income each year to be dedicated to an FSA account. That amount would then be deducted from your annual taxable income and go toward medical expenses. So if your tax rate is 25 percent, that will have saved you a quarter of that $2,000 set aside for $500 each year. The biggest risk with these programs is that if you set aside more than you needed, you lose those funds. So you should always be conservative in your estimates.
529 Plans Are Sometimes Tax Deductible
The 529 plan is a newer college savings plan that all states now offer. Many states allow contributions into these college plans to be deducted from your state tax bill. (Check your own state’s website.) Plus, they grow tax-free. So, if your state has a 4 percent income tax and you invest $10,000 that year in a 529 plan, you could get back $400 at income tax time due to the deductibility of investments into 529 plans. What a great way to save for your children’s college!
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.