Lower Taxable Income with Savings Account

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As the tax report season is underway, the interest in possible deduction is growing larger by the day. The most beneficial way to do so is by opening a retirement or health savings account. A tax expert is filling out a digital tax report.
As the tax report season is underway, the interest in possible deduction is growing larger by the day. The most beneficial way to do so is by opening a retirement or health savings account. A tax expert is filling out a digital tax report.

Advisors are encouraging taxpayers to pay a detailed attention to their tax brackets for anyone interested in reducing their taxable income. In essence, taking lawful measures to reduce taxable income will obviously lower a payer’s taxes.

Most taxpayers already believe that income that falls into the tax bracket apply to their tax rates, but experts say that the tax based on income applies to marginal tax rate.

Assuming that a single-person household has an annual income of $50,000. The first incoming earning of $9,325 is applicable to a 10 percent tax rate, while the income between the initial $9,325 and $37,590 will draw 15 percent.

For earnings beyond that, the tax rate is at 25 percent. That means the 25 percent tax rate does not apply to the entirety of one’s income. So, lowering taxable income will help one to reduce the overall tax. There are five ways to go about making that happen.

◇ Utilizing retirement savings account
If your employer provides 401k, there is a way to reduce taxable income by increasing the monthly savings amount. For those without a 401k account, the alternative is the IRA as the income that goes into it does not count as taxable income. However, the account must be created before the tax report is filed and there is an annual cap on how much you can save. For 401k, $18,000 is the cap, while IRA caps every account at $5,500. For account holders who are 50 or older, the cap for both account rises to $24,000 and $6,500, respectively.

◇ HSA: Health Savings Account
If the deductible on your health insurance is too high, opening a health savings account could provide a feasible alternative. As long as the insurance holder pays a certain amount every month, the total amount may be exempt from the tax rate. If the health care costs exceeds the insurance holder’s deductible, the health savings account could provide the necessary funding, while those 65 or older could even use the account like an IRA and 401k. The savings cap per person for health savings account in 2017 is $3,400 for individual insurance holder and $6,750 for a family plan.

◇ Debt interest repayment
There is also a way to pay for your interest rate to earn tax deduction. Mortgage, college and business-related interests could grant a deduction. With exception of college loans, others must be reported by categories.

◇ Tax payment
Taxes are also subject to categorical deduction. Property taxes and other real estate related taxes could earn the taxpayer a deduction from the state and local governments.

◇ Donation
Donating to a charity group could earn the taxpayer up to 50 percent deduction of adjusted gross income. The donation must be provided directly to an organizations that are approved for tax deduction.

By Sung Cheol Jin

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