4 Effective Strategies to Reduce Your Income Taxes
Planning, saving and investing can minimize your tax liability.
For most income earners, taxes are an inevitable part of life. As such, taxpayers know that April 15 (or April 18 for 2022) comes around every year. Still, it's easy to enter tax season unprepared — and get surprised by a bloated tax bill. But by planning ahead and making a few strategic money moves throughout the year, filers can reduce their burden and hold onto more of their hard-earned cash.
1. Invest for retirement
Investing for retirement is one of the best ways to reduce income tax burdens while also saving for your post-work future. Those individuals whose annual earnings fall below IRS limits can generally contribute to a traditional individual retirement account (IRA), and eligible employees may have access to a 401(k) through their employer.
Pre-tax contributions to these accounts can lower individual taxable incomes in a given year, allowing savers to minimize their current tax bill and enjoy tax-deferred growth until retirement. Best of all, these tax write-offs don't require itemization, which means earners can lower their income and still take the standard deduction.
2. Take advantage of healthcare expenses
Despite the high cost of premiums, health-insurance carriers often charge deductibles and copays to pass some healthcare costs onto consumers. Fortunately, the IRS offers ways to reduce the financial strain.
One method to reduce income taxes is to take advantage of high-deductible healthcare plans and open a health savings account. These tax-exempt accounts allow earners to contribute up to $3,650 for individuals or $7,300 for families (plus $1,000 for those over 55) in tax-free dollars. The money also grows and can be withdrawn tax-free to pay for eligible medical and dental expenses.
Some employers also operate FSAs, or flexible spending accounts, which (in 2022) allow employees to contribute up to $2,850 for qualified medical, dental and related over-the-counter expenses. Depending on the plan, employers may permit savers to roll the funds over every year or require them to use contributed funds within a 12-month timeframe.
For those with higher medical costs, the federal government also permits tax filers to deduct medical expenses exceeding 7.5% of a person's gross adjusted income in a given tax year.
Related: Handle Tax Season Yourself This Year
3. Check for tax credits
Deductions lower taxpayers' burdens by reducing the income eligible for taxation. By contrast, credits cut tax bills dollar-for-dollar — and if the credit reduces a tax bill below zero, the IRS may refund the remaining credit, even for taxpayers who don't have to pay federal income taxes.
One particular credit many taxpayers may be unaware of is the earned income tax credit. The IRS calculates this credit based on income and family size to issue refunds, which could total up to $6,728 for earners who made less than $57,000 in 2021.
4. Watch out for business deductions
Small-business owners, sidehustlers and freelancers may qualify for dozens of potential deductions and tax credits, depending on the business they run. A few common deductions include:
- Business-related vehicle mileage or travel expenses.
- Website, membership and subscription fees.
- Internet and phone bills (proportional to business use).
- Office and technological supplies.
- Advertising fees.
- And even insurance premiums.
Self-employed individuals are also allowed to write off 50% of the Federal Insurance Contributions Act tax that pays for Social Security and Medicare programs. And once again, the IRS doesn't require itemization to claim this deduction.
Paying taxes is an inevitability that all income earners face, but that doesn't mean filers should pay more than necessary. Planning ahead, studying tax codes, itemizing receipts and saving for retirement and healthcare expenses make it easy to keep tax bills to a minimum.
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