There are completely legal ways to reduce the amount of taxes you pay. Benjamin Franklin said, “In this world, nothing can be said to be certain, except death and taxes.” Taxes are unavoidable.
There is little that can ruin your day as much as an unexpected tax bill. You can take specific and intentional steps to protect your income from taxes. The extra effort will be worth the results.
While all the tips offered are valuable, they may not all apply to your tax situation. Whether filing your social security or a joint return, you should be proactive in your taxes.
- Managing your deductions through your W-4 ahead of time can set your tax year for success.
- Contributing your income appropriately can provide you with financial security and tax deductions.
- Finding the right tax expert that considers your individual situation is the key to success.
Methods to Reduce the Taxes You Pay
#1. Find the Perfect Tax Expert for You.
There are plenty of resources online that can provide you with a general map to go at your taxes on your own. However, a tax expert is needed if you plan to maximize your deductions and tax-free contributions and secure every credit available.
Take the time to source a tax expert that is ethical and considers your individual situation. A good expert will provide you with the best solutions to reduce the amount of taxes you pay.
#2. Adjust Your W-4 to Reduce the Amount of Taxes You Pay.
Your W-4 can be adjusted at any time. This form you give to your employer directs how much tax is to be taken from your income.
If you received a large return last year, consider adjusting the amount of taxes you pay on each paycheck. You may be living on less income than necessary. The same applies in reverse.
If your taxes were very high, you could adjust your W-4, so more is taken each paycheck, giving you a more solid foundation.
#3. Contribute to a Retirement Account.
Saving for retirement doesn’t need to be complicated. Contributions to IRA and 401 (k) accounts are tax-deductible. Further, the IRS does not tax contributions made directly from your paycheck to a 401 (k).
You may be able to deduct contributions made to an IRA account. However, there are limitations. Refer to your tax expert for the specific deductions you qualify for.
Some employers offer fringe plans that allow you to exclude benefits or contributions from your income. These benefits reflect non-taxable income on your paycheck. Speak to your employer for more information on how these benefits can reduce the amount of taxes you pay!
#4. Contribute to a Health Savings Account.
You can have a health savings account offered by your employer or a private account. Contributions made to these accounts are tax-deductible, and qualifying withdrawals are tax-free.
Additionally, keep track of your medical expenses throughout the year. Keep an itemized log with receipts. Medical expenditure that exceeds 7.5% of your yearly income is tax-deductible.
#5. Contribute to a Flexible Spending Account.
Some employers offer a flexible spending account. Contributions made directly from your paycheck to an FSA are tax-free. This money is available for medical and dental expenses throughout the year.
You may also be able to use this money for everyday items such as pregnancy tests and bandages and child and elderly dependent care.
# 6. Get Credit for Higher Education.
There are multiple forms of tax credits available to offset higher education costs. The first is available for the first four years of college and may result in a refund.
The second credit is available for adults who are continuing their education in such a way that improves their job skills.
Alternatively, if you are saving for your child’s college tuition, you can use a 529 plan. These contributions may be deductible on your state taxes.
#7. Qualify for Earned Income Tax Credits.
Speak with your tax expert to see if you qualify for an Earned Income Tax Credit. Formulas used range from single-income homes to joint filing with children. If you earn less than $57,000, you may qualify.
This means that it doesn’t deduct paid expenses but reduces the amount of tax you pay on each dollar earned.
#8. Make Charitable Donations.
The most common way to save on your taxes is to give the money away. If you are already donating regularly to a church or other non-profit organization, start keeping records. These charitable donations are tax-deductible.
Donations do not have to be money either. You can claim donations of clothes, food, and sporting gear.
#9. Start a Small Business.
If you have a side hustle or small business, you can reduce your tax obligation. To qualify for these deductions, you must conduct business for a profit. Hiring a bookkeeper can dramatically change your small business!
If you work from home, you can deduct a portion of your home expenses as a home office. Deductions can include utilities and internet costs. Health insurance premiums are also deductible if specific requirements are met.
#10. Get Your Timing Right.
It is important to know the timing of each deduction you are making. 401 (k) deductions are only available during the calendar year, whereas IRA deductions are allowed until filing.
You can gain mortgage interest by paying January’s mortgage in December and may qualify for medical deductions if you push your surgery into December instead of postponing it.
Know what expenses you have coming up in the early months of the new year, and find out which of those can benefit your taxes by paying them early.
Taxes are inevitable, but you don’t have to feel like you are working just to pay them! The common theme here is that you can lower your taxes while securing a more stable financial future by contributing smartly.
By finding the right tax consultant, like Sherry Borshoff, Indiana’s tax expert, you know you are getting the most out of your income. Book a free consultation today!