How can I reduce the amount of my taxable income?
I am 38 years old and have two jobs at non-profit companies. My annual income is $115,00. I am contributing 8 percent of my bi-weekly salary into my 401(k), which is not matched by my employer, though they typically deposit about $2,500 annually depending on their financial status. Last month I paid off all credit card debt, and now the debt I have is $7,800 on a car loan and $50,000 in student loans. I live in a cooperative apartment and pay about $1,000 monthly for living expenses.
How can I reduce the amount of my taxable income? What should my financial strategy be?
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You seem to be doing well overall with your financial strategy, so the focus will be on optimizing what you are already doing. The following are a few of the most common practices for reducing your income, although I'd need to understand more about your actual situation to be able to guide you in the right direction. I have also included the approximate amount you could reduce your taxable income by with each strategy.
CONTRIBUTE MORE TO YOUR WORKPLACE PLAN
(~$10,300 Reduction)
At 8% of your income, you are contributing about $9,200 annually to your workplace plan. You could double this amount and still be under the cap for 401(k) and 403(b) accounts. Your contributions to the two workplace plans are added together to determine if you are over the contribution limit, so you will need to coordinate the contributions to avoid having a tax problem. Additionally, you will want to analyze the fees and investment options in each plan before choosing how much to contribute to each plan
SEE IF YOU HAVE A 457 PLAN
($19,500 potential reduction)
If one of the non-profits also has a 457 plan, you can contribute another $19,500 this year to the plan on top of your contributions to your 401(k)/403(b) plans. This is because the 457 plan is a different part of the tax code. However, make sure to analyze the plan's investment options because several older (and some newer) 457 plans only allow you to invest in high-fee and low-return annuity products.
CONTRIBUTE TO HEALTH ACCOUNTS
($3,600 reduction or more)
If your employer offers Flexible Spending Accounts (FSA) or Health Reimbursement Accounts (HRA), consider contributing to them. These accounts will allow you to reduce your income and use the money to pay for your average (qualified) medical expenses. You are shifting your medical costs to be paid for by tax-free income instead of after-tax income. Be careful, however, with the amount you contribute. Any money not spent will be lost at the end of the year or when you quit your job, depending on the type of account.
If you have a high-deductible health plan, you should also consider starting a Health Savings Account (HSA). These accounts allow you to invest for your future health needs and take a tax deduction for it. For a single person, you can contribute $3,600 this year or double that amount if you are married. This guide to healthcare accounts can help you understand the differences between the FSA, HRA, and HSA.
SEEK A COMPREHENSIVE FINANCIAL PLANNER
You may have other income reduction strategies available to you based on your unique situation. A comprehensive financial planner can help you review all of your options and put together a plan that lowers your income based on integrating your financial goals and circumstances. Be careful, however, because lots of people call themselves financial planners who actually aren't. If the planner is pushing you toward investing in a particular product, they are likely a commissioned sales representative. Similarly, if all they are talking about is investments, they aren't looking at your comprehensive financial picture.
I always recommend a fiduciary and fee-only adviser, meaning they are legally required to work in the client's best interest, and they are not conflicted by commissions, referral fees, or other kickbacks.