Most of us want to lower our income tax bills, and with a little bit of planning, there are ways you can. When thinking about how to lower taxable income, consider these easy tips.
Contribute as much as you can to your retirement plan
Your employer may offer a 401(k), 403(b) or other retirement savings plan. Contributions to these plans may be made pretax, which means they will reduce the amount of your income that is subject to tax for this year. Most employers will allow you to have the money automatically come out of your paycheck each month before you even see it.
IRAs are another way to save for retirement while reducing your taxable income. Depending on your income, you may be able to deduct any IRA contributions on your tax return. Like a 401(k) or 403(b), monies in IRAs will grow tax deferred—and you won’t pay income tax until you take it out.
Build additional retirement savings with an after-tax annuity
An after-tax annuity might not reduce your current tax bill, but it can help you build additional retirement savings and is not subject to income rules or contribution limits like your 401(k), 403(b) or IRA. Another key advantage is that you pay no taxes on any growth until you begin taking income.1
Will you itemize deductions or take the standard deduction?
Beginning in 2018, the standard deduction amount nearly doubled over previous years. At the same time, some itemized deductions were reduced while others were eliminated completely. Many taxpayers are now taking advantage of the standard deduction. To decide if you should claim the standard deduction or itemize, a good starting point is to add up your itemized deductions. If that number is higher than the standard deduction amount, you would itemize. If it’s lower, then you can take advantage of the standard deduction. If you are itemizing your deductions, look for ways to maximize the amount, for example, by increasing your charitable contributions.
Consider how you make charitable gifts
If you are taking the standard deduction and you make charitable gifts, you might not be recognizing any income tax credit for those charitable gifts. There are a couple of ways that you can still give to your favorite charity while still receiving some tax benefit.
If you are over age 70½ you could consider a qualified charitable distribution (QCD) QCDs are a direct transfer of money from an IRA to an eligible charitable organization. This is more commonly known as "IRA to charity." To take advantage of this strategy, you must be 70½ and direct money from your IRA a qualified charitable organization. Talk with a TIAA financial professional or tax advisor to see if this might be a good strategy for you.
Understand required minimum distributions
As of January 1, 2020, the age to start withdrawing the minimum amount from your retirement accounts was changed to 72 for those who will reach age 70 1/2 after 2019. Make sure that you have a plan in place and actually start taking your required minimum distributions (RMDs). If you miss an RMD or forget to take them, you could face severe income tax penalties (up to 50% of the RMD amount). For more information, visit our RMD Rules page.
Together with your tax advisor, a TIAA financial professional can help you understand the distribution requirements and see how your required minimum distribution strategy fits into your broader retirement planning.
Front loading charitable gifts
Not taking RMDs from an IRA? Or do you have other assets that you want to give to charity? Think about "front loading" or bunching your charitable gifts. For example, if you usually give $5,000 per year to your favorite charity, but that amount combined with your other itemized deductions will not be greater than the new standard deduction, you could consider bunching several years' worth of gifts (or contributions) into a single year. Making multiple years’ worth of gifts at once might bring you over the standard deduction amount. With this strategy, in year one you might make $20,000 of charitable gifts, but then you wouldn’t make any gifts in years two, three or four.
Consider a donor-advised fund
If you decide to "bunch" your charitable gifts, or even if you just want to streamline your charitable giving, you could consider giving to a donor-advised fund (DAF).
With a DAF, you can establish your very own charitable fund and will make a gift to that fund. For income tax purposes, you will keep track of the contributions you make to the fund. You can distribute the funds to charity over time (you don't have to distribute all of the funds in the year that you made the gift), and you do not have to keep track of each distribution to each charity. Note that contributions to a DAF are irrevocable, meaning once you make a gift to your DAF you cannot get the funds back for your own personal use. However, you do retain certain advisory rights over which organizations you wish to benefit from your DAF. A TIAA financial professional can tell you more about DAFs.
For more information, don’t forget to visit your one-stop tax advice center for all things taxes.