Did you know that effective tax planning can actually be a powerful tool for building financial well-being and achieving your long-term goals? If you’re a millennial, you’re probably still in the process of determining how to establish a strong financial footing. But what you may not know yet is that tax planning can be a big part of that. Today, we’re focusing on how you can best leverage your student loan interest, Health Savings Account (HSA), and other areas of deduction so you can get the most (and spend the least) during tax season.
Understanding Tax Basics
Paying your taxes isn’t rocket science, but if you’re a millennial in the throes of finding your financial footing while navigating student loan payments, mortgages, side hustles, and more, you might be wondering how you can ever get ahead.
While paying your taxes is a necessary part of adulthood and American citizenship, there are ways to reduce your taxable income and save on your taxes each year. But before we dive into that, let’s start with a couple of important tax planning tips:
Your filing status matters.
How you file your taxes truly matters. How you file will determine your tax bracket and how much you will pay in taxes. Your bracket is determined by how many children you have, your marital status, and even what job you hold. Whether you’re single and filing on your own, married filing jointly, or married filing separately, each status has different tax brackets.
Accurate record-keeping is a big deal.
If you own your own business, it’s extremely important that you keep pristine records. This not only helps you during tax season, but it will help you as you determine your inventory, how much you’ve spent (and on what), what income you’ve received, and even profit and loss statements. Keeping these records accurate and consistent will also help you in the event of an IRS audit.
4 Ways to Help Reduce Your Taxable Income This Year
1. Contribute to tax-advantaged accounts.
Did you know that investing in tax-advantaged accounts like a 401k, 403b, traditional Roth IRA, and Roth IRA can actually help you come tax season? You can invest your money pre-tax and let it grow with the power of compound interest until you’re ready to use those funds in retirement. In retirement, you’ll pay taxes on your withdrawals then. It’s a great way to save those precious (and needed) dollars now.
2. Use an HSA or FSA.
Health Savings Accounts and Flex Spending Accounts are another great way to save money on taxes. The benefit of utilizing these accounts is that they’re tax-advantaged as well. When you invest in these accounts, you’re using pre-tax dollars on pre-approved medical or other health-related purchases.
3. Maximize your deductions.
Maximizing your deductions on your taxes is a great strategy for reducing your tax burden each year. One of our favorite ways to do this is through charitable giving. It pays to be generous. Not only do you get to help organizations and charities in need, but you also get to write off your charitable contributions.
Another way to maximize deductions is by itemizing, tracking business expenses, making use of tax credits, and more. Your financial planner or tax specialist is the perfect person to help you work through this on your 2023 taxes.
4. Deduct your student loan interest.
Student loan repayment can be pretty steep and it often takes a good chunk of your paycheck each month. If that’s the case for you, you may want to look into student loan interest deductions. If you paid interest on your student loans last year, you could deduct “the lesser of $2,500 or the amount of interest you actually paid during the year.”1 For more info and to see if you qualify, visit IRS.gov.
At SageSpring, we believe a little tax planning can go a long way when it comes to building your solid financial foundation. If you’re not working with a financial planner or a tax specialist, we’d love to refer you to one. Getting help Find your SageSpring Wealth Partner today or visit SageSpring Tax for more tax planning tips.
The information contained herein has been prepared solely for informational purposes and is not intended as tax advice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
