15 Ways People Are Losing Savings to Taxes

Earning is great but keeping it can feel like a constant battle. One of the biggest culprits for shrinking savings accounts is – you guessed it – taxes. While taxes are a necessary part of society, there are many ways people unknowingly drain their hard-earned cash through tax mistakes or missed opportunities.

This guide will explore 15 common ways people losing savings to taxes, along with actionable tips to keep more earnings in your pocket.

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15 common ways people losing savings to taxes

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Neglecting Tax-Advantaged Accounts

Many investment and retirement accounts offer tax benefits, but if you’re not utilizing them, you’re missing out on significant savings.

Options like Traditional IRAs, 401(k)s, and Health Savings Accounts (HSAs) allow contributions to grow tax-deferred or tax-free.

This means you pay less tax upfront and potentially even less when you withdraw the funds in retirement (for qualified withdrawals).

Action Tip: Review your financial situation and contribution limits for various tax-advantaged accounts. Consult a financial advisor to determine which accounts best suit your needs and goals.

Not Maximizing Deductions and Credits

The tax code offers a variety of deductions and credits designed to reduce your tax burden.

Common deductions include mortgage interest, charitable contributions, and student loan payments.

    Action Tip: Stay informed about current tax deductions and credits. Utilize tax preparation software or consult a tax professional to ensure you’re claiming all eligible deductions and credits.

    Poor Record Keeping

    The burden of proof for deductions and credits lies with the taxpayer. Without proper documentation, the IRS may deny your claims, leading to higher tax bills and potential penalties.

      Action Tip: Develop a system for organizing receipts, invoices, and other relevant tax documents. Maintain digital or paper files categorized by expense type.

      Missing Tax Deadlines

      Filing your taxes late can result in penalties and interest charges, significantly increasing your tax liability.

        Action Tip: Mark important tax deadlines on your calendar well in advance. Consider filing electronically or using an extension if needed.

        Not Filing Married Filing Jointly (When Applicable)

        For married couples, filing jointly can offer significant tax benefits compared to filing separately.

          Action Tip: Consult with a tax professional to determine which filing status – married filing jointly or separately – will result in the lower tax liability for your specific situation.

          Under withholding Taxes

          If you underestimate the amount of tax withheld from your paycheck, you could face a hefty tax bill at the end of the year.

          Conversely, over withholding means you’re essentially giving the government an interest-free loan.

            Action Tip: Utilize the IRS withholding calculator to estimate your tax liability and adjust your withholding accordingly.

            Not Taking Advantage of Tax Breaks for Self-Employed Individuals

            Self-employed individuals have access to unique tax deductions not available to traditional employees.

            These can include home office expenses, health insurance premiums, and business travel costs.

              Action Tip: Familiarize yourself with tax deductions specific to self-employed individuals. Maintain separate records for business and personal expenses for accurate tax filing.

              Forgetting About State and Local Taxes

              Federal taxes aren’t the only ones to consider. Depending on your location, state and local taxes can also eat into your savings.

                Action Tip: Research state and local tax regulations in your area to understand your full tax liability.

                Not Planning for Capital Gains Taxes

                When you sell investments for a profit, you may owe capital gains taxes.

                  Action Tip: Consider tax implications when making investment decisions. Utilize strategies like tax-loss harvesting to offset capital gains and minimize your tax burden.

                  Failing to Account for Payroll Taxes

                  Even as an employee, you’re responsible for a portion of payroll taxes like Social Security and Medicare. While these aren’t directly deducted from your paycheck, understanding these taxes helps with overall financial planning.

                    Action Tip: Factor in payroll taxes when calculating your take-home pay and budgeting for expenses.

                    Not Claiming Moving Expenses (When Applicable)

                    Under certain circumstances, moving expenses can be tax-deductible.

                    Action Tip: Research the qualifications for deducting moving expenses on the IRS website. Keep detailed records.

                    Ignoring Student Loan Interest Deduction

                    For qualified individuals, a portion of student loan interest can be deducted from taxable income.

                    Action Tip: If you’re repaying student loans, investigate the student loan interest deduction and ensure you’re claiming it if eligible.

                    Missing Retirement Savings Saver’s Credit

                    This credit is available to low- and moderate-income earners who contribute to retirement accounts like IRAs.

                    Action Tip: Find out if you qualify for the Retirement Savings Saver’s Credit by reviewing IRS guidelines.

                    Not Considering Tax Implications of Inheritance

                    Inheriting assets can come with tax liabilities.

                    Action Tip: Seek professional guidance to understand the potential tax implications of inheriting assets.

                    DIY Tax Filing When It’s Not Advisable

                    While tax preparation software can be helpful, complex tax situations may benefit from professional assistance.

                    Action Tip

                    Consider consulting a tax professional for personalized advice and guidance, especially if your tax situation involves significant investments, self-employment income, or complex deductions.

                    By staying informed and taking proactive steps, you can significantly save losing savings to taxes and keep more of your hard-earned money.

                    Remember, tax laws can change, so staying updated and consulting with a qualified tax advisor whenever needed is crucial for maximizing your tax savings.

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