Laura Medigovich for Recordonline.com writes: As the 2012 tax season draws to a close, many taxpayers are still smarting from the pain of writing large checks to pay for their federal and state tax bills. If you are one of those people, and you are looking for ways to reduce your tax liability for 2013, then you might consider these tips for reducing future tax bills.
Contribute to a state 529 college-savings plan
New York state's 529 plan allows New York taxpayers who are account owners up to a $5,000 state tax deduction on annual contributions. Married couples filing jointly in New York can deduct up to $10,000 of contributions annually.
The money grows tax deferred. Withdrawals for qualified education expenses are free from federal tax (New York state 529 plans also provide qualified withdrawals state tax free).
Withdrawals of earnings that are not used for qualified education expenses are subject to federal and state taxes and carry a 10 percent penalty. Go to nysaves.com for more information.
Contribute to your employer-sponsored retirement plan
Contributions to your 401(k) or 403(b) lower your taxable income. Every dollar you contribute to your 401(k) reduces your tax liability.
For the 2013 tax year, individuals can contribute up to $17,500 to an employer-sponsored retirement plan. Employees 50 years or older can make additional catch-up contribution of $5,500.
Money invested in a 401(k) grows tax-deferred, so you won't pay taxes on the funds until you withdraw them. When the money is withdrawn in retirement, it is subject to federal and state income taxes.
Since this account is intended for retirement, withdrawals prior to age 59½ usually carry a 10 percent penalty.
Contribute to a tax-deductible traditional IRA
Similar to employer-sponsored accounts, contributions to tax-deductible traditional IRAs also lower your taxable income. The money also grows tax deferred.
For the 2013 tax year, individuals can contribute up to $5,500 to a traditional IRA. Taxpayers 50 or older can make additional catch-up contributions of $1,000.
Since this account is intended for retirement, withdrawals prior to age 59½ usually carry a 10 percent penalty.
When the money is withdrawn in retirement, it is subject to federal and state income taxes.
All of these accounts were designed to provide tax savings and tax-deferred growth of your investments. Each has its own set of tax rules that govern withdrawals and tax-deductibility, which is beyond the scope of this article. That is why it is always a good idea to seek professional guidance from your tax adviser regarding your specific situation.
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