Your clients are likely overpaying in taxes. They may not know it, but there are tax strategies they could potentially implement that could bring sizable savings by lowering their taxable income. If you’d like to know how to reduce taxable income for your clients, here are a few simple ways to begin.
Advise Clients to Sell Certain Stocks
If any stocks are weighing down their portfolio, it may be worth selling them for a tax deduction. This helps offset taxable capital gains they might have and thereby reduce taxable income. Keep in mind the limit for offsetting is $3,000 for married filing jointly or $1,500 for married couples filing separately. Also, remind them they can’t buy back the stock within 30 days or the IRS could take back the deduction.
Advise Clients to Contribute to an IRA if They Haven’t Yet
A client of yours could deduct contributions to a traditional IRA. Limits are $6,000 per year, or $7,000 for those 50 or older. The amount they can deduct depends on whether the client or their spouse is covered by a retirement plan at work and if they are filing jointly with their spouse with a modified adjusted gross income of over $125,000 (for 2021).
Advise Clients to Take Advantage of the EITC
The Earned Income Tax Credit (EITC) has some complex rules, but if your client earned less than $57,000, it is worth looking into to see if they are eligible. Factors include income, marriage status and how many children they have. They could qualify for a tax credit up to almost $7,000 in certain situations. Keep in mind that a tax credit is better than a deduction because a credit is taken directly off their tax bill, while a deduction only indirectly reduces their bill by decreasing how much of their income is taxed.
Advise Clients to Use Their 401(k)
Whenever you can help clients reduce their taxable income, it’s going to help them save money on taxes. 401(k)s are another popular way to do this. For 2021, your clients can put up to $19,500 into their account, and if they are 50 or older, they can contribute an additional $6,500. If they aren’t aware if their employer offers a 401(k) plan, have them ask. Sometimes employers will also match the contribution up to a certain percentage, which makes this strategy even more useful.
Advise Clients to Establish a 529 Plan
If your client has a child, they can reduce their taxable income by putting money into a 529 plan, which is a savings account for college. While this isn’t a federal income deduction, your client might be able to deduct on their state return. Be careful, however, about having them contribute more than $15,000, as there could be gift tax consequences.
Advise Clients to Set Up an HSA
If your client has a high-deductible health care plan, you could potentially lighten their tax liability by advising them to contribute to a health savings account (HSA). This allows them to build a tax-exempt account to pay for medical expenses. The individual coverage contribution limit for 2021 is $3,600, but a family can contribute up to $7,200. Those 55 and older can add an extra $1,000 to their HSA.
Advise Clients to Donate to a Charity
Of course, one simple way to ease tax burden is to make charitable contributions. Even donating clothes, food and other items can lower a tax bill if your client makes sure to get a receipt. The bigger the gifts, the bigger the deductions.
Advise Clients to Deduct Medical Expenses
If your client has been in the hospital this year or has had expensive medical or dental costs, they can deduct qualified medical expenses that are more than 7.5% of their adjusted gross income for the year. As an example, if a client has $80,000 in gross income, anything beyond $6,000 in medical bills could be deductible.
Knowing How to Reduce Taxable Income Isn’t Rocket Science
While the tax code is large, these ideas are a good place to start learning how to lower taxable income and reduce a client’s tax liability. The average American CPA can help their clients know how to pay less tax, it’s just a matter of finding available tax deductions and credits they qualify for.
In many cases, the basic strategies work extremely well. For example, if you have clients who are a married couple over age 55, they could significantly reduce their earned income down to a much lower adjusted gross income simply by taking full advantage of 401(k), IRA and HSA contributions.
Knowing how to reduce taxable income for clients is key to helping them beyond just getting their tax return done. It’s possible to legally reduce an individual’s tax obligation to zero, even for clients who earn six figure salaries. If you would like more advanced strategies, including learning how you can automatically calculate tax plans, schedule a free demo with Corvee Tax Planning software.
Going Beyond Tax Preparation
As you look to save clients money, there are three main things our tax planning software can help you with:
Finding out how much someone has overpaid in taxes in the previous year.
Calculating how much can you save them in taxes in the current year.
Understanding how much can you save them every year going forward.
These three benefits help produce powerful tax plans that many clients are paying up to $9,800 for. The software helps you identify proactive strategies, including calculations, descriptions, code references and the ability to add new custom strategies and combinations yourself.
You can go through hundreds of strategy combinations and finalize a multi-year, multi-entity plan for clients. By utilizing tax planning software technology, your tax and accounting firm will be a step ahead of your competitors.
