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3 ways to be more tax-efficient year-round

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It’s easy to avoid thinking about your income taxes until just before the April deadline. In fact, according to the Internal Revenue Service, 20-25% of all Americans wait until the last two weeks before the deadline to prepare their tax returns. Common reasons filers procrastinate are because they are too busy, or they just plain forgot.

An effective way to not delay the inevitable and help reduce the stress of filing taxes is to do what you can throughout the year to minimize what you’ll owe. Including tax efficiency as part of your financial strategy might be easier than you think if you’re saving for retirement, raising a family or have access to healthcare saving accounts.

Consider these three ways to help stay tax efficient before you file in the spring.

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1. Save more for retirement by maximizing contributions.

Investing for your future retirement goals can help benefit you at tax time every year. Contributions to the following qualified retirement accounts grow tax-deferred until you’re ready to make withdrawals.1,2

Traditional IRAs

You typically are able to take a tax deduction for contributions to a traditional individual retirement account (IRA). However, if you or your spouse participate in an employer-sponsored retirement plan you must meet the income thresholds in order to tax advantage of the tax deduction.3

Roth IRAs

While there is no tax deduction for Roth IRA contributions, if you meet the Roth IRA income threshold, all future earnings grow tax-deferred and distributions you take after age 59½ will be tax-free as long as it’s been at least five years since your first contribution.

The maximum IRA contribution for the 2021 and 2022 tax years is $6,000 ($7,000 if you’re 50 or older). You have until the federal tax filing deadline of April 15 to make contributions to traditional and Roth IRAs for the previous year.3

Read more about how both traditional and Roth IRAs work.

401(k) and other employer-sponsored retirement plans

Your contributions to a 401(k), 403(b) or a similar salary deferral employer-sponsored retirement plan are funded with pre-tax dollars, effectively reducing your taxable income for the year by that amount.

The maximum 401(k) contribution is $19,500 in 2021 and $20,500 in 2022. The annual catch-up provision for anyone age 50 and older is $6,500, which means you can contribute up to $27,000 in 2022.

Read more about the tax treatment of various accounts.

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2. If you’re raising kids, look for child tax credits and college savings plans.

Raising a family is both priceless and expensive. Here are two options that can help you financially.

Child tax credit

Parents of children under age 18 received advance payments of the 2021 child tax credit and can claim the other half when filing your 2021 federal income tax return. Meant to help families, the advance payment was included in coronavirus relief efforts by Congress.

The tax credit provides up to $3,000 per qualifying dependent child under age 18 and increases to $3,600 for children under age 6. Other dependents, including children who are 18 and full-time college students ages 19-24, can receive a nonrefundable credit up to $500.

It’s a tax credit, which means it reduces your taxes due on a dollar-for-dollar basis. However, there are income thresholds above which the credit begins to phase out. The full credit is for single filers with adjusted gross income under $75,000 ($150,000 for married filing jointly and $112,500 for head of household).

529 Educational Savings Plan

If you’re planning to help your children with education expenses, a 529 education savings plan may be a tax-efficient option.4

These college savings plans are sponsored by states and let you set up an investment account to either prepay tuition costs at eligible colleges and universities or make after-tax contributions that grow tax-deferred. Any earnings on the investments are not taxable if the funds are used for qualified educational expenses.

While you cannot deduct contributions to 529 plans on your federal income taxes, most states with an income tax allow residents to deduct a portion of their contributions or receive a tax credit.

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3. Consider the advantages of healthcare savings accounts.

If you have access to a flexible spending account (FSA) or health savings account (HSA), they are both tax-efficient ways to help you manage the rising cost of healthcare.

Both can reduce your taxable income for the year and be used to pay for qualifying medical, dental and other eligible healthcare costs. But be aware of their differences.

Flexible spending account

If your employer offers FSAs, your contributions are typically made through payroll deduction on a pre-tax basis, which reduces your taxable income. However, the account does not belong to you. If you leave your job or don’t use the funds during the year, you lose the money—unless your employer allows some carryover.

In 2022, you can contribute up to $2,850 to a healthcare FSA.

Health savings account

To qualify for an HSA, you need to have a high deductible health insurance plan. You can make contributions until April 15 for the previous tax year, and any funds you contribute up to the annual limit are yours if you leave your employer and carry over from year to year. Any earnings grow tax-free.

In 2022, individuals can contribute up to $3,650 and families can contribute up to $7,300—an increase from $3,600 and $7,200 in 2021. If you’re 55 by the end of the year, you can contribute an additional $1,000.

Be mindful of the contribution limits and withdrawals for eligible expenses for FSAs and HSAs, or you could face tax penalties or forfeit unused funds.5

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Consider options to protect your livelihood

Finally, have you thought about life insurance? If you or your spouse dies, income taxes may be affected adversely. Sometimes called a “widow’s penalty,” it happens with the shift from married filing jointly to single filer. The surviving spouse’s tax rate may stay the same or even rise despite a drop in family income.

While you can’t predict the future, you can plan for it. The death benefit from life insurance is generally income tax-free and could help your family during a difficult transition.

A financial advisor can help you take the right precautionary steps to shelter your finances from the unexpected. While Thrivent advisors do not provide specific legal or tax advice, they can partner with you and your tax professional or attorney.

Want tax resources at your fingertips? Check out our tax resource center.

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¹ Any interest, dividends or capital appreciation is subject to taxation when realized. Gains subject to income tax when withdrawn.

2Distributions prior to age 59½ may incur a 10% premature distribution penalty.

3State tax rules may differ from federal governing the tax treatment of Roth IRAs and there may be conflicts between federal and state tax treatment of IRA conversions. Consult your tax professional for your state's rules.

4 Offered through a brokerage arrangement with Thrivent Investment Management Inc. 529 college savings plans are not guaranteed or insured by the FDIC and may lose value. Consider the investment objectives, risks, charges and expenses associated before investing. Read the issuers official statement carefully for additional information before investing. Investigate possible tax benefits that may be available based on the state sponsor of the plan, the residency of the account owner, and the account beneficiary. Consult with a tax professional to analyze all tax implications prior to investing.

5 Withdrawal taken to pay for non-qualified expenses will incur a 20% penalty.

Thrivent and its financial professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.
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