Like most Americans, you likely dread paying your taxes every year. While paying your annual taxes might be inevitable, there are ways to reduce your taxes before the deadline, meaning you pay a lower tax bill. While it might sound too good to be true, there are legal tax strategies you can put into play to help you hold onto more of the money you make, while remaining in compliance with the IRS.
Before the next tax deadline rolls around, take the time to educate yourself on the various tax relief options that you may be able to use to your advantage. While you might have to dedicate some time and effort, you will be thankful you did when you find your tax bill much more manageable.
Here are some of the most common ways taxpayers can reduce how much they owe:
1-Open a 401(k) or HSA
You can contribute to retirement and health plans and save on your tax bill at the same time. This strategy is popular because it benefits you both now and in the future.
Money that you contribute to a 401(k) is not counted toward your taxable income. That means that the income that you’re taxed on is lower, effectively lowering your tax bill. Additionally, when you dedicate a portion of your income to your retirement planning, that money can go into that account tax-free (you won’t pay taxes on that money until you withdraw it). This means that you’re able to save money than you would if taxes were deducted first. If your employer does not offer a 401(k) plan, there are plenty of other retirement savings options that you can invest in to take advantage of this strategy.
If your medical coverage gives you the option to open a health savings account (HSA), you can save money on taxes by contributing to this account. This is because you can allocate funds from your income into this account and deduct that amount from your taxable income on your tax bill. Additionally, you can then use the money in your HSA (tax-free) to pay for certain medical expenses.
2-Maximizing Deductions, Credits, & Exemptions
Tax deductions and credits are incentives that can save you on your tax bill. Deductions are subtracted from what’s tallied in your taxable income. Tax credits, on the other hand, are subtracted from your final bill total. Some examples of popular tax deductions and credits that you may be able to to claim include:
- Mortgage interest on your home
- Medical expenses
- Charitable donations
There are also tax exemptions that you may qualify for. Tax exemptions are allotted in certain circumstances and may allow you to exclude a certain portion of your income from being factored into your taxes. Some examples of tax exemptions are:
- Child tax credit
- Residential energy credit
- Education credit
3-Writing off Business Expenses
In addition to your personal deductions and credits, you may be able to write off certain expenses if you are self-employed. For example, if you freelance from home, you may be able to deduct home-office expenses, including a portion of your rent. Other business expenses you may be able to write off include:
- Insurance policies
- Continuing education and trainings
- Meals and entertainment for clients
- Advertising costs
- Mileage and gas
Just make sure you brush up on what the IRS qualifies as self-employed.
4-Hiring a Professional
And last but not least, hiring a tax professional to file on your behalf could help you reduce your tax bill. While this might seem counter intuitive because you are paying more to have your taxes done, you could actually save more than you spend on their services.
Tax experts are well-versed in all the savings strategies, meaning that they can analyze your assets, expenses, and lifestyle factors to find deductions and credits that you may not have even known about. Plus, they’ll make sure you get everything filed correctly and on-time, helping you avoid additional penalties and fees.
One of the easiest ways to rack up your tax bill is by filing your refund late or paying late. One way to ensure that you don’t have to pay a penny extra to the government is making sure that you have reminders for completing and paying your taxes. If you can file and pay early, even better.