Saving on Taxes
One of the ways that buyers & sellers can boost their budgeting power, especially prior to a house purchase, is by saving on taxes. Keep in mind that I am a licensed real estate agent, not a certified public accountant, attorney, or certified financial planner & any insights I have are best discussed with your CPA, financial planner, or attorney when relevant to their respective field of specialty.
Get Educated on Taxes
Part of good budgeting is not being overtaxed and using strategies based on your knowledge of the tax code so that you can stretch the money you have farther. I highly recommend that you get educated on tax saving strategies. You may be able to save hundreds or thousands per year through these tools, and in your lifetime these tools can save 10's of thousands, hundreds of thousands, and in more rare cases, millions. It's hard to underestimate just how high of a return on investment an education on the tax code including tax saving strategies can be. If you've never spent much time looking for strategies to mitigate your tax liabilities, the time that you spend doing so can go even farther than it could otherwise.
3 Retirement Tax Savings Possibilities to Keep in Mind
1. For those eligible through their work, especially when a match is possible, it's nice to be able to get a guaranteed immediate return through your workplace retirement account via a match, whether that be 50%, 100%, or another number. I personally like Roth 401(k)s & Roth 403(b)s, where you've already paid taxes on the income prior to it going into the account. Because of it, when money is eventually withdrawn while following the typical rules, the earnings don't get taxed, unlike a traditional retirement plan like a typical 401k. I have been contributing to the full match of 50% at my work since I started working there. There are not many ways to get that high of a guaranteed return, though of course often investments within these accounts are not guaranteed to grow and may reduce in value.
2. Roth IRAs, for those eligible, can be a great addition to their work retirement fund and can be useful as well if their work doesn't offer any retirement fund match. By contributing funds after taxes, any growth in the account is not taxed. Also, Roth IRAs may typically be used 5 years after contributions have been made to withdraw principal from the account for something like a down payment on a home without penalty. If you were to do the same thing with your employer's account (i.e. 401k), it's possible that you won't be allowed to contribute back to the account, missing that employer match, until the time when you've repaid your retirement account. Unlike a traditional IRA, there is no age limit on contributions and no required disbursements no matter how old you are.
Many retirement plans (i.e. Roth or traditional IRA, 401k, Roth 401k, 403(b), etc.) contributions are eligible for a saver's credit if your income is below median income. Instead of a match from your employer, here you can get a match from the government in reduced tax burden if you qualify, up to 50% of what you put in. It can also be stacked with an employer match, so if you got a 50% match from your employer, and receive a 50% saver credit match, it can be like a guaranteed 100% return, before factoring in any positive or negative growth within your portfolio since stocks and many other investments within retirement accounts are not guaranteed to grow. For those unaware, a credit is a $ amount of reduced taxes, so if you owe $1500 in federal taxes, a $1k credit can bring down what you owe to $500.
"The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), making the maximum credit $1,000 ($2,000 if married filing jointly). Use the chart below to calculate your credit."
Image courtesy https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit
Health & Education Tax Savings
"They are the only accounts that provide you with a tax deduction for contributions, no taxes on earnings, and tax-free access at any age — if used for qualified medical expenses (Marketwatch)."
Among qualifications for an HSA, you need a high deductible health plan meaning a minimum deductible of $1400 for an individual or $2800 for a family for tax year 2022.
With an HSA if you don't spend it all in a year, it can carry over to future years, so that when you do need to go to the hospital for a long period of time, if that ever occurs, you can cover a lot of it or all of it without the taxes you'd typically need to pay on that.
Without an HSA or other tax savings benefit, "If you itemize your deductions... you may be able to deduct expenses you paid that year for medical and dental care for yourself, your spouse, and your dependents. You may deduct only the amount of your total medical expenses that exceed 7.5% of your adjusted gross income." https://www.irs.gov/taxtopics/tc502
"If your spouse is the only designated beneficiary, your HSA will be transferred to your spouse and they will own the account. Your spouse will receive all the benefits of account ownership and can make tax-free withdrawals to pay for qualified health care expenses (Healthaccounts.bankofamerica.com)."
According to Marketwatch, if transferring upon your death to someone other than a spouse, whether children, estate, or trust, there will be taxes. If transferred to a charity, it will be tax-free.
Lively or Fidelity HSAs are good options for investment accounts.
If you plan to fund your own future education or your children's education, a 529 plan can be solid assistance, whether for kindergarten or college.
Some of the primary benefits, per IRS, include:
Earnings accumulate tax free while in the account.
The beneficiary doesn't generally have to include the earnings from a QTP as income.
Distributions aren't taxable when used to pay for qualified higher education expenses
Amounts can be withdrawn to pay principal or interest on a designated beneficiary's or their sibling's student loan.