As many taxpayers know, tax season can be plain and simply stressful. On the contrary, you can significantly reduce your tax bill with the right strategies. Unfortunately, many taxpayers miss out on opportunities to minimize their tax liability due to lack of knowledge or not getting the right help. But by being proactive and informed, you can take advantage of various deductions and credits. Additionally, understanding the latest tax laws and regulations can make a substantial difference in your savings. Here are seven effective ways to save money on taxes and keep more in your pocket. Implementing these tips will help you navigate tax season with confidence and ease.
1. Maximize Retirement Contributions
One of the best ways to reduce your taxable income is by contributing to retirement accounts. Contributions to traditional IRAs and 401(k) plans are often tax-deductible, which can lower your taxable income for the year. For example, if you earn $60,000 annually and contribute $6,000 of it to a traditional IRA account, your taxable income will be reduced to $54,000. This year, the contribution limit for a 401(k) is $23,000 (or $30,000 if you are 50 or older), and for an IRA, it’s $7,000 (or $8,000 if you are 50 or older).
2. Take Advantage of Tax Credits
If you don’t like committing to retirement contributions to lower taxes, using tax credits would be your best bet. Tax credits can directly reduce your tax liability, dollar for dollar. Some can cover your tax bill entirely, with some leaving money left over via a refund in the process. Some of the most valuable tax credits include:
- Earned Income Tax Credit (EITC): Available to low-to-moderate-income workers, this credit can be worth up to $6,660 for a family with three or more qualifying children.
- Child Tax Credit: Up to $2,000 per qualifying child under 17, with $1,400 being refundable if the credit exceeds your tax liability.
- Education Credits: The American Opportunity Tax Credit (AOTC) offers up to $2,500 per eligible student for the first four years of higher education, and the Lifetime Learning Credit (LLC) can provide up to $2,000 per year for qualified education expenses.
I would strongly recommend taking the time to ensure you meet the eligibility requirements beforehand. Moreover, there is a chance you might owe more than you think, or it could be the other way around. For example, if you qualify for the AOTC, you could receive a substantial refund even if you owe no taxes. Like I said, make sure to do some research to see if you qualify.
3. Deduct Charitable Contributions
If you donate to your church or a cause you care about, you’re in luck when tax season rolls around. Charitable donations can reduce your taxable income if you itemize your deductions, which helps you save money on taxes. Keep a record of all your contributions, including cash donations and the fair market value of any donated goods.
Let’s say you donate clothes or household items to a qualified charity like Goodwill. In exchange, they can provide a deduction based on the item’s value. Ensure the charity or church you donate to is a qualified organization. It’s highly advised to get a receipt for any donations over $250. If you want to save a little more, consider donating appreciated assets like stocks. This way, it keeps you from paying capital gains taxes while still receiving a deduction for the full market value.
4. Health Savings Accounts (HSAs)
If you have a high-deductible health plan, you can contribute to a Health Savings Account (HSA). Contributions to an HSA are tax-deductible, and the funds can be used tax-free for qualified medical expenses. For 2024, the contribution limit is $4,150 for individuals and $8,300 for families. Plus, there’s an additional $1,000 catch-up contribution allowed for those 55 and older. For example, if you contribute $3,000 to your HSA and have $1,000 in medical expenses, you can use your HSA funds tax-free to cover these costs. This not only saves you money on taxes but also provides a way to pay for healthcare expenses.
5. Home Office Deductions
If you work from home and meet certain criteria, you may be eligible for the home office deduction. You can deduct expenses related to the portion of your home used exclusively for business purposes, such as rent, mortgage interest, utilities, and insurance. Use the simplified method, which allows a deduction of $5 per square foot of home used for business (up to 300 square feet), or calculate actual expenses to determine the most beneficial deduction for you. For example, if your home office occupies 200 square feet, you can claim a $1,000 deduction using the simplified method.
6. Tax Losses
This concept might come new to many. In simple terms, it involves selling investments that have declined in value to offset capital gains from other investments. Consequently, it helps reduce your overall taxable income by offsetting it with the losses you accumulated from your investments. Let’s say you have $5,000 in capital gains from the sale of stocks but also have $5,000 in losses from other investments, these losses can offset the gains, resulting in no taxable gain. Additionally, you can also use up to $3,000 of capital losses to offset ordinary income each year, with any remaining losses carried forward to future years. This can be particularly useful during market downturns to minimize tax liabilities.
7. Tax Withholdings
Reviewing and adjusting your tax withholding can prevent overpaying or underpaying taxes throughout the year. Use the IRS Withholding Calculator to determine the correct amount to withhold from your paycheck. By doing this, you can avoid a large tax bill or a substantial refund, both of which mean you haven’t optimized your tax payments. For example, if you received a $2,000 refund last year, you might consider adjusting your W-4 to have less tax withheld, providing more money in your paycheck throughout the year.
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