Are you frustrated with paying high taxes yearly yet want to find ways to lower your tax liability without breaking any laws? This article will highlight seven easy strategies to reduce tax liability and put more cash in your pockets, from taking advantage of tax deductions to investing in tax-efficient accounts. We will offer practical tips and strategies you can implement right away.
Keep reading to discover how to reduce tax costs and improve economic chances!
Assess Your Withholding Tables And Tax Amounts Charged
Reassessing your tax withholding can help lower your tax liabilities. Referring back to the W-4 form from your first job can show your employer exactly how much tax should be deducted from each paycheque, as withholding tax payments are taken out automatically from it.
Claim more allowances, and you will save money, which means more spending throughout the year. Tax season might force you to return some funds, but even then, you could qualify for a refund!
Rechecking your withholdings now, if they have not been reviewed recently, could save tax time when filing taxes next year.
Save in a 401(k)
Employer-sponsored 401(k) plans reduce today’s tax liabilities as retirement savings plans. They allow contributors to invest pretax dollars, lowering the current tax obligation and future costs.
Your contributions to a 401(k) will be taxed once retirement is reached – which allows your funds to grow tax-free over time! Rollovers and employer-matching retirement contributions can further add to the benefits of owning one of these accounts.
Consult with your employer if an Individual Retirement Account doesn’t exist, and explore creating one if necessary.
Establish a Health Savings Account.
Contributions made before or after tax may qualify to lower your tax liability further; pre and post-tax donations could help cover dental, vision, and healthcare costs.
Contribution limit to an HSA may be deducted from your taxes and will grow tax-free as it’s used solely to cover medical expenses. Withdrawals also qualify for this treatment and won’t incur taxes upon departure.
HSAs provide an ideal way to save on healthcare costs while lowering taxes.
Certain expenses qualify for tax breaks.
Diverse deductions offer taxpayers opportunities to reduce their tax obligations. Here are four such methods. Standard deductions are available to all taxpayers regardless of filing status in the 2020 tax year, from joint filers up to $24,800, totaling $12,400-24,5800, respectively.
Tax returns can be itemized to claim deductions for mortgage interest, state and local taxes, and charitable donations.
Self-employed individuals can claim tax deductions for expenses associated with their businesses, such as office supplies, travel costs, and materials used.
Contributions made during an active year to retirement accounts such as 401(k)s or IRAs may qualify as tax-deductible deductions from your taxable income. Take advantage of tax deductions to lower your tax liability and decrease your overall tax bill.
Use flexible spending accounts (FSAs)
Flexible spending accounts (FSAs) offer an effective solution to decrease taxable income and can significantly lower a person’s tax bill.
FSAs (Flexible Spending Accounts) allow you to deduct specific child and medical care costs before deducting taxes, effectively decreasing taxable earnings and income. An FSA deducts money from each paycheck before taxes, thus reducing the portion of your salary paid toward taxes.
FSAs fall into two categories.
Health Care FSAs and Dependent Care FSAs
Health Care FSAs may cover medical costs like co-pays, deductibles, and dental and vision expenses.
An FSA allows you to cover the costs associated with childcare for children aged 2-13 with up to 13 years left until adulthood.
Your Health Care FSA allows you to make contributions of up to $2,500 annually and $5,000 toward dependent care costs.
Enhance the Flex Spending account before year-end to reduce 2017 tax liability and minimize 2017 taxes owed.
Look over this list to discover ways you can lower your income taxes.
Make charitable contributions
Contributing to charitable organizations may help lower your tax bill and provide multiple options, each with specific federal tax implications.
Donating items to a charity and deducting their fair market value are tax-deductible itemized deductions. Items eligible for deduction include clothing, furniture, appliances, and vehicles.
Donating appreciated stocks and mutual funds to charity will help reduce your income tax credit. By giving back through charitable giving, you can lower both taxes due and income earned each month.
Donations made through donor-advised funds or foundations may offer significant tax advantages; consult with a tax professional adviser to maximize tax advantages when giving.
Roth IRAs offer excellent investment potential.
Investment in a Roth IRA can help lower your taxable income. Contribute up until an annual limit after tax, with assets growing tax-free while providing for tax-free withdrawals at retirement time.
Roth IRA contributions cannot be tax-deducted like traditional IRA contributions can, but will grow tax-free until withdrawal time. Your money may grow tax-free as it accumulates, yet it will no longer remain tax-exempt when withdrawing it from a Roth.
Roth IRAs may provide an effective means of lowering taxable income. Talk to your financial advisor so they can help determine if this option suits you.