7 legal ways to reduce your tax bill
No matter your age, income level, or tax bracket, you'd probably love to see your IRS burden shrink. While paying taxes is unavoidable, there are some things you can do to lower your IRS bill. Here are several perfectly legal options to look at.
Each year, the IRS makes a host of tax credits and deductions available to filers. Knowing which ones you're eligible for could save you serious money. If you own a home and you itemize on your taxes, you can deduct the interest you pay on your mortgage as well as your property taxes. If you're paying off student debt, you may be eligible to deduct the interest on your loan. Depending on your costs, you may also be able to deduct a portion of your medical expenses.
Meanwhile, if you're a lower earner, you may be eligible for the Earned Income Tax Credit. If you have children, you could get a nice tax break with the Child Tax Credit, plus snag a separate credit to recoup some of your child care costs. Be sure to read up on the deductions and credits that you may be entitled to so you don't miss out.
Though Roth retirement plans offer many benefits, they don't offer an immediate tax break. But traditional IRAs and 401(k) plans are a different story. The more money you put into one of these accounts, the more you stand to save. For the current year, deductible IRA contributions max out at $6,000 for savers under 50, and $7,000 for those 50 and over. For 401(k)s, these limits currently sit at $19,500 and $26,000, respectively.
With a health savings account (HSA), you can set aside pre-tax funds and carry them forward indefinitely to cover both near- and long-term medical bills. To qualify for an HSA, you'll need to be enrolled in a high-deductible health insurance plan, but from there, you'll be able to contribute up to $3,600 this year if you're under 55 and have self-only coverage. If you're under 55 with family coverage, that limit rises to $7,200. And if you're 55 or older, you can put in an extra $1,000 on top of the limit that already applies to you. Like a traditional IRA or 401(k), the money you put into an HSA is income the IRS can't tax you on.
If you're not able to participate in an HSA, a flexible spending account (FSA) is a good bet. FSAs aren't as, well, flexible as HSAs because you'll only be given a year to use up your account balance or otherwise risk forfeiting it. But you don't need to be on a high-deductible health plan to enroll in an FSA. This year, FSA contributions max out at $2,750 for healthcare spending. There's also another type of FSA called a dependent care FSA that lets you set aside up to $5,000 for child care costs. If you pay to have your kids looked after so you can work, it makes sense to sign up for that as well.
As long as you donate money to a registered charity, you can claim a deduction on your taxes for the amount you give away. But it's not just cash donations that are tax-deductible. You can also donate goods and deduct their fair market value, which is the amount they'd be worth at the time of your donation. You can even donate stocks to charity if you so choose. Most tax years, only those who itemize on their returns can deduct charitable donations, but there are special provisions in place that allow you to deduct $300 for charitable contributions in 2020 and 2021.
If you have stocks your portfolio that are underperforming, selling them at a loss could slash your tax bill. Capital losses can be used to cancel out capital gains, which are taxable. If your net investment loss exceeds your gains, you can use it to offset some of your ordinary income (up to $3,000 in a single tax year).
If you're self-employed, you may incur certain expenses in the course of earning a living. For example, if you have to drive to visit clients, you can write off mileage on your vehicle. If you need to buy equipment or supplies, those costs are deductible, too. Keep detailed records so you know exactly what expenses to claim. If you own a business, you may want to apply for a small business credit card so you can put all of your work-related expenses on it and have an easy way to differentiate between those and personal expenses. If you're self-employed but don't own a business, you can instead designate one credit card for work-related expenses to make tracking easier.
Though you may not be able to get out of paying taxes completely, the good news is that there are plenty of ways you can owe the IRS less. It could also help to consult with a tax professional if you're tired of sky-high tax bills. Someone who knows the tax code inside and out may be able to identify savings measures you wouldn't think of on your own.
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