Yo what's going on everybody? My name is Ryan, I'm a CPA, and today we're going to be talking about
reducing your taxable income; primarily if you work for somebody as an employee, a W-2 employee.
And yeah, this is a, this is a fun topic because it's you know, what a lot of people try to do.
But first I would really appreciate it if you'd subscribe to my channel and obviously,
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So how to reduce your taxable income. Today it's going to be mostly for people who are employed
with an employer, who have a W-2 pay, who might see benefits like 401Ks and
health insurance and stuff. I'm going to be talking about all the stuff and how it works
with your taxes all right. The first obvious one is the 401K or anything like it. There's a 403B,
maybe your employer has simple IRA, a simple IRA plan but this is just something that is
like a retirement plan. So the most common one, the most popular one obviously is the 401K.
And obviously any contributions you make to the 401K plan is deductible from your income. And
now it might not be super obvious because really when you get your W2, it's your gross pay and it
already has your 401K subtracted from your gross pay so, it might not seem like it's doing anything
but it is. Trust me, you are making contributions of your own to a 401K plan or 413 plan
and or I'm sorry 403B plan and that is reducing your taxable income. And then the money in the
401K or the retirement plan grows tax-free until you know, you hit retirement age and
that's when you pay taxes on it, when you withdraw the money out. Now obviously you can withdraw the
money out before then but then you're going to pay penalties. The one important thing to note
here is some companies offer a 401K option with a 401K Roth option. Now if you have the Roth option,
that will actually not be deductible on your taxes on you know, that won't reduce your income at all.
That actually goes into your Roth account as post-tax money and then it grows tax-free,
and then when you withdraw at the end of the term you know, when you retire or whatnot then
there are no taxes paid at that time. So I really like the 401K Roth option mainly because you know,
a regular Roth IRA has such heavy limitations on it. Like how much you can contribute if you
have certain, if you make over a certain income threshold then you can't contribute at all. So you
know, usually when the 401, when the company has a 401K Roth option I usually tell my clients to just
take that because you know, especially if the the circumstances are right. Because you know, they're
making a lot of money, they're not going to get that option anywhere else. Next common benefit are
dependent care benefits. Usually offered through like an FSA which is a flexible spending account.
Usually you have up to $2,500 bucks per person to deduct from your pay but the catch is, you have to
use it to pay for child dependent care expenses. So, that means if you're married then you have,
you can deduct up to $5,000 per married couple. And again, you have to report your child dependent
care expenses on your tax return so that you basically prove to the IRS that you used that
money to pay for child care. Now if you took the deduction through your paycheck and you did not
pay for child care then you should be claiming that deduction back as income on your tax return.
So that's how that works you know, if you have that option at your company,
you take the deduction, make sure you pay child care.
Now if for whatever reason you are married and you and your spouse both have the option to do that,
and let's say you both want to do that for some reason, be sure to only take you know the $2,500
each you know for each spouse, if you both take the $5,000 then eventually you're going to have
to pay that back. You know you're going to have to claim it as income on your taxes for one of
the spouses. If you, even if you use all of it to pay for child care, because you are limited
to just $5,000 per couple or $2,500 per person. Insurance, health insurance, vision, dental,
if your company offers this to you to as an employee as a benefit, then you should
probably take it if you need health insurance. So there are two things that happen here,
one is the company might offer it to you but you have to pay for some or all of it. You know,
maybe the company gets a reduced rate compared to what you get in the marketplace. So if you have
to pay for any portion of it, that gets reduced from your gross pay and actually reduces your
taxable income. That means that health insurance through your company is paid with pre-tax money
which is pretty good okay. And if you're getting health insurance for cheaper than you would in
the marketplace that's also good. Now if the company happens to pay for everything for you,
then that money actually does not become taxable to you. You know, the insurance pays,
or the company pays for all your health insurance premiums, the company doesn't add it back to your
gross pay, it's just basically a non-taxable event for you which is also a really good thing.
You know, the company gets the deduction and you as the employee don't have to pay taxes on it.
So basically if, if a company offers health insurance, vision, and dental and you need it,
or you don't have those plans already, you should probably take it. And if you already have
health, vision, or dental you might want to reconsider you know, the plan that you have and
going with the company plan because that usually is more advantageous than anything you would
find on the marketplace, you know for a similar plan. What about an HSA, health savings accounts?
Okay so first of all, an HSA is only valid if you have a high deductible plan. You know,
if you have an, if you have a low deductible plan where your insurance company pays for
everything and you only pay for co-pays, HSA is not going to work. It's not technically legal. So,
make sure you have a high deductible plan before you open up an HSA okay. So the next thing is if
your company has high deductible plan, you know that you can enroll in, they might also have HSA
banks or plans that you can enroll in as well. Now if the company has this option, then you
know typically you can contribute money from your paycheck directly to the HSA bank and then it gets
reduced from your gross pay. Or the company might match or contribute some money for you as well.
You know if you contribute some, the company might match. So any contributions you make from
your paycheck reduces your gross pay, therefore reduces your taxable income. If the company
matches anything to your HSA that does not you know, get deducted from your pay obviously, and
it's also not taxable to you. So that's you know, the company matches with the 401K too. If there's
any kind of match then you've got to take it, it's just, it's common sense, it's free money there.
So if the company does not have an HSA enrollment program, and you have a high deductible plan,
then you can go out on your own, open your own HSA bank account. You know some banks offer, I think
Fidelity, like Optum bank, you know just check with your with your local banks. I'm sure they'll
have an HSA option that you can open if you have a high deductible plan. And if you just, you know,
if you just contribute money to that outside plan, you know after you get paid with your paycheck,
and after you got taxes deducted and everything, if you contribute to your HSA after the fact,
it's still deductible because you can you can report it on your tax return,
and then reduce your taxable income that way. So just because your employer does not sponsor any
HSA plan doesn't mean that you lose out on the benefits okay. You open it on your own,
you still get the tax deduction as long as you report it correctly.
All right, so what about IRAs. IRAs are basically retirement accounts that are
similar to a 401K where your contributions are deductible however, the contribution limits on
IRAs are much lower than the 401K. And I'm talking about traditional IRAs. You know,
there's different kinds of IRAs. For this purpose I'm going to talk about traditional IRAs.
So if your employer does not have any kind of retirement plan, like 401K or anything
then you, and you want to reduce your taxable income, then you probably would want to open an
IRA so you can one, contribute to your retirement and two, your contributions are tax deductible. So
you will then you know, reduce your in your income, pay lower taxes, all that,
all that good stuff. Obviously with IRAs there's a Roth option. Same thing with Roth 401K,
the Roth IRA contributions are not deductible now but they are also not taxable later on when
you go and withdraw them. Now you've got to be careful with IRAs if you, if your employer offers
a retirement option at their job. Even if they offer, if you don't, if you don't enroll
in their retirement option, if you don't make any contributions to their retirement options
at work, but you contribute money to an IRA, then your deductibility of the those contributions
might actually be very limited because the IRAs are meant for
people primarily who don't have retirement options at work. But if you do, the contributions you make
to the IRA might not be deductible. So something to watch out there for. A lot of people still,
even if they maxed out their 401Ks at work, a lot of people will still contribute to the IRA,
and even, and they'll make non-deductible contributions. You know, you're
making contributions that are not deductible but then when you go and withdraw the money
down the road you actually have what's called basis in your contributions.
And so while the withdrawal won't be completely tax-free, the taxes will be reduced when you
go and make those withdrawals. So not quite the same as a Roth, kind of like a Roth, tax, the tax
treatment is different on the back end when you go to withdraw but still worth it to some people
to stow away money and have it grow tax-free, and you know, in as many avenues as possible.
All right the last thing I'm going to talk about today in regards to reducing your income,
and I know there's a lot more things that you can do to it to reduce your income, I might make like
another video on those. But the last thing I'm talking about for today is the 529 plan. Now 529
plans are contributions that you make to save for a college education or for some kind of education
that is approved by the 529 plan maker. Now each state has their own 529 plan rules
and 529 providers so check with your state on this. But usually 529s are tax deductible
on the state level. That means you know, you're not saving any money on the federal taxes, you're
reducing your income on the state level, which is still something. You know if you are somebody who
makes a lot of money, who has a bunch of kids who want, who you want to go to college, you know in
contributing to a 529 for each kid could be a valuable option for you, you know to reduce
your state taxes. Some states don't even have a contribution limit on 529's or some states have a
extremely high contribution limit like half a million dollars or something per year.
So you know, another option there, it's a good way to save for retire, for a college education for
your kids. It is growing tax free okay, and then when you, when you spend the money on approved
expenses like tuition and stuff, then that is also done tax-free okay. So that's all the information
I'm going to give you today. It's kind of a lot but, I appreciate you joining me. And again,
if you found this video helpful, please smash the like button. And if you're new to the channel,
please consider subscribing, I'd really appreciate it. Take care for now and I'll see you next time.