Here’s the very first thing the tax experts at Kiplinger stress to readers about tax planning: This is not a game just for the wealthy. Tax planning will save you money.
I’m most certainly not wealthy at this stage of my career, but I’m not going to get rich by giving away more money to Uncle Sam every year than I need to. So I’m happy and eager to do some tax planning, but what does that really mean?
Just because I work at Kiplinger doesn’t mean I’m an expert (yet!) in tax planning, but I’m surrounded by several friendly experts (and their writings). Follow me as I explore the topic -- with a goal of trimming my tax bill next spring by more than $100 thanks to some newfound tax-planning tips. You’ll come away with an understanding of the basics of tax planning so that you can make some smart money-saving moves of your own.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of Kiplinger’s expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of Kiplinger’s expert advice - straight to your e-mail.
The tax bill you owe each spring is based on the working, saving, investing, spending, business and other personal decisions you make during the year. At its core, tax planning revolves around reducing what Uncle Sam considers taxable income to let you save or spend more of your money. For me, a childless, healthy single person, that means reviewing my retirement and health savings account contributions (opens in new tab) -- my best bets for tax breaks that can reduce my taxable income. (Others can apply tax-planning principles to college costs, their home, their healthcare and other big-ticket expenses.)
Boosting retirement savings is a great way to not only build for the future, but to also score a tax-planning win without too much difficulty. For example, let’s assume you make $50,000 per year and make no contributions to your 401(k); you’d face a $6,790 tax bill, leaving you with $43,210 in take-home pay -- and no money stashed away for your future self.
Now, let’s consider a 401(k) contribution of 4%, or $2000. Your taxable income would be reduced to $48,000, and Uncle Sam’s cut will fall to $6,350.
And if you boost retirement savings to 6%, or $3,000, that lowers your taxable income to $47,000 -- for a savings of $220 on your tax bill. Take a look at how you pay Uncle Sam less and pay yourself more as you increase your 401(k) contributions:
| Base Salary | 401(k) Contribution Percentage | Contribution Amount | Taxable Income | Federal Tax Owed | Take-Home Pay | Total to You (including 401(k) funds for your future self) |
| $50,000 | 0% | $0 | $50,000 | $6,790 | $43,210 | $43,210 |
| $50,000 | 4% | $2,000 | $48,000 | $6,350 | $41,650 | $43,650 |
| $50,000 | 6% | $3,000 | $47,000 | $6,130 | $40,870 | $43,870 |
Your tax savings are multiplied if you also boost contributions to a health savings account. A health savings account is a powerful tool to cover out-of-pocket medical expenses: HSA contributions are tax-deductible (just like 401(k) contributions), contributions made by your employer are excluded from your taxable income, the funds grow tax-deferred in the account, and withdrawals are tax-free for qualified medical expenses, without a time limit. In 2020, you can contribute up to $3,550 if you have self-only coverage or up to $7,100 for family coverage if you are enrolled in a health plan with a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage.
For 2021, I plan to boost my 401(k) contributions by 1 percentage point. As a tax-planning move, that will save me more than $100 in taxes next year. Better to save that money for the day I stop working than to hand it over to Uncle Sam. My HSA? I'm holding off on making funding decisions for 2021 until the end of the year, so I can better forecast my health expenses for the year ahead.
-
-
10 Most Tax-Friendly States for Middle-Class Families
state tax If a move from one state to another is in your future, you could save big bucks by relocating to one of these states where the tax bite is light for middle-class families.
-
Where Is the Economy Heading? Velocity of Money Provides Clues
Financial adviser looks at the rate at which money is being spent in the economy for an idea of whether we’ll see a recession in 2023.
-
10 Most Tax-Friendly States for Middle-Class Families
state tax If a move from one state to another is in your future, you could save big bucks by relocating to one of these states where the tax bite is light for middle-class families.
-
IRS Form 1099-K: Will You Get One From Venmo, PayPal, or Cash App?
A new $600 reporting threshold for IRS Form1099-K involves payment networks like Venmo, PayPal, Amazon, Square, and Cash App.
-
States Sending Stimulus Checks in December 2022
Residents in these states could get an additional holiday gift this month in the form of a state "stimulus" payment.
-
Student Loan Forgiveness Blocked For Now Due to Court Rulings
Biden's student loan debt forgiveness program is on hold until the U.S. Supreme Court can weigh in.
-
$2.04 Billion Powerball Lottery Jackpot Winner Will Have a Massive Tax Bill
The $2.04 billion-dollar Powerball jackpot has its big winner and the federal government will get a big chunk of the prize from taxes.
-
December “Stimulus”: Massachusetts Tax Refund Checks Are Still Being Sent
Massachusetts is returning nearly $3 billion to eligible taxpayers through tax refunds until around December 15.
-
What's the Standard Deduction for 2022 vs. 2023?
Tax Breaks Most Americans claim the standard deduction on their federal tax return instead of itemized deductions. How much can you claim on your 2022 and 2023 returns?
-
What Are the Capital Gains Tax Rates for 2022 vs. 2023?
capital gains tax The capital gains tax rate that applies to a capital gain depends on the type of asset, your taxable income, and how long you held the property sold.
