How to Reduce Your Tax Liability in 2013
By Ellen Chang
NEW YORK (MainStreet)--Single taxpayers have several options to reduce their tax liability each year, enabling them to save more money.
If purchasing a house is not in your immediate plans, tax professionals recommend various methods to lower the amount you pay to the IRS annually.
Investors should take advantage of their employee retirement plans, which are commonly known as 401(k)s or 403(b)s, said Michelle Mullen, a CPA with Briggs & Veselka Co., based in Houston, Tex. The money invested into a 401(k) or 403(b) is tax deferred, which means you do not have to pay taxes on the amount until you reach retirement age and make a withdrawal. The 2013 limit for contributions is $17,500.
Even allocating as little as 3% of your salary into a 401(k) plan adds up quickly, but Mullen suggests stashing away 15% of your salary.
"I recommend that investors save absolutely as much as they can afford," she said. "If you form a savings habit early when you are not making that much money, you won't miss it. Start now. Every little bit counts. If you are already established in your career, it's never too late to start saving and tax planning."
Some companies encourage you to save more money by matching your contributions, which maximizes your savings.
"The first rule is to take advantage of your employer retirement plan," Mullen said. "If you are single without any dependents, you are likely to be in the 25% tax bracket. It is absolutely crazy to pass it up, especially if an employer matches your contributions, which is free money."
Some companies offer a Roth 401(k). Although you don't get a deduction for your contributions, the funds you withdraw when you reach retirement age will be tax free, said Ed Gardner, a CPA and CFP at Edward M. Gardner PC, based in Houston.
Some companies offer both options to put funds into a 401(k) or a Roth 401(k). If you feel that you will be in a higher tax bracket when you retire, a Roth 401(k) contribution might be a good choice.
Another priority is to take advantage of your company's health savings account (HSA). These accounts allow you to allocate a portion of your salary that has not been taxed for medical purposes such as your co-payment during a doctor's visit or for prescription drugs. In order to qualify for a HSA, you must be covered by a high-deductible health plan.