With a little advanced planning, you can put yourself in a better position for tax season. Consider these easy tips to get started.
Contribute as much as you can to your retirement plan
If you contribute to a retirement plan, you are saving for your future self while also saving on your taxes due next year. Most contributions allow you to deduct the amount paid into the retirement account from your taxable income. This reduces your total taxable income, and allows your money to grow tax-free until you take it out. There are income limits for this benefit.
Many employers allow you to set up automatic withdrawals from your paycheck. This means you don’t have to set aside money each month – it comes out of your paycheck before you see it.
Take advantage of other pre-tax options
You may consider contributing to a healthcare savings account or flexible spending account. Such contributions are made on a pre-tax basis and reduce your gross income. You may be eligible for other deductions based on your personal situation, such as donations to charities or some educational expenses. A tax advisor can help you understand if you’re eligible for deductions.
Give back with a donor-advised fund
If you contribute to multiple charities throughout the year and don’t want to handle the tax-deduction paperwork associated with keeping track of those gifts, a donor-advised fund (DAF) might be a good solution for you.
A DAF allows you to separate the timing of your charitable income tax deduction with the actual gift to the charities you seek to support. You can contribute to the fund and may be eligible to take the tax deduction this year, but hold off on when the actual gift is made. Note that contributions to a DAF are irrevocable. Legal control over the contributed assets transfers to the DAF, but you retain advisory rights.
This technique can be useful if you want to claim an income tax deduction in the year of your contributions, but want to spread out the gifts to the charities you seek to support over a longer period of time. A donor-advised fund is a separate fund or account that is maintained and operated by a charitable organization. You can donate appreciated securities and cash that you want to use as charitable gifts, whether now or in the future. Your TIAA advisor can tell you more about DAFs.
Understand required minimum distributions
If you’re nearing retirement or approaching age 70, you’ll likely need to start withdrawing money from your retirement accounts. If so, understanding how that withdrawal affects your cash flow and your income taxes is a must, especially if you consider that failure to withdraw them correctly may result in severe tax penalties. A TIAA advisor can help you help you avoid penalties and see how your required minimum distribution strategy fits into your broader retirement planning.