Many Americans are feeling the pinch of inflation through rising gas prices, higher grocery bills, and high sales tags on homes and cars. And while there's little the average taxpayer can do about structural inflation, you can help yourself weather it with strategic tax planning. What might you do to reduce your inflationary burden? Here are a few things to consider.
1. Work With a Professional. Keeping up with tax rules and changes as well as ensuring you get every cent back to which you're entitled calls for working with a tax preparation professional. They will help you locate and qualify for all available credits and deductions, understand how to maximize nontaxable income, and minimize taxes as you make financial decisions over the next year.
2. Harvest Tax Losses. If you have any investments, the end of each year should be a time to do some tax loss harvesting. This refers to the process of selling losing investments — and taking a tax loss — to go against any capital tax gains you have from winners.
3. Invest in Tax-Free Growth. Beat the rise of inflation by opting for investments, which won't be subject to income tax at all. The two most common investment accounts to do this are a Roth IRA and a Health Savings Account. Although these do not offer a reduction in the current year's taxes, you won't have to pay any tax during growth or eligible withdrawals.
4. Get Your Refund in Bonds. Did you know that the IRS allows taxpayers to receive their refund in Series I paper bonds? These bonds return a variable interest rate and are adjusted for inflation. During times of high inflation, this is a safe place to put money you don't need to spend right away.
5. Consider a Conversion. Roth conversions withdraw money from traditional tax-deferred IRA and some 401(k) accounts and put it instead into Roth IRAs. This allows you to grow money tax-free even if it was originally put into a different tax-advantaged account. If your tax rate is low in any given year, a Roth IRA conversion could take advantage of this by paying the taxes now instead of later.
Getting and staying ahead of high inflation requires diligence, research, and proactive planning. A qualified tax preparer in your state can help. Make an appointment today to confirm that you're leaving no tax money on the table this year and prepare in order to save money next year.