How can I get my taxes reduced?
If you are in the process of filing your taxes, you may be wondering how you can get your taxes reduced. Or, you might have just paid a hefty tax bill for last year, and you want to reduce your taxes for the next tax season.
Exactly how much do you pay in taxes each year? If you work for an employer, you may not really even know how much you pay in taxes. In fact, taxes could very well be the largest expense you pay throughout the year.
Because taxes take up such a large portion of your income, you need to know how you can reduce your taxes. The good news is that there are plenty of ways to reduce your taxes, and the IRS encourages you to take advantage of them.
Adjust Your Withholding
That’s right. Give less of your money to Uncle Sam throughout the year so that you can put that money to work for you instead of the IRS. Did you know that many people have too much money withheld from their paychecks every month? Not sure if you are one of them? Do you usually receive a large refund every year? If yes, then you would be one of them.
Consider this: When you file your tax return, you are essentially balancing the books with the government. If your payroll deductions did not cover your tax bill, then you pay the IRS. If you overpaid the IRS throughout the year, then you get the check.
So now, if you receive a refund because your payroll deductions were too high, that just means that you let the government borrow your money (interest free) for a year.
Imagine what opportunities you are losing with the money you are loaning to the government throughout the year. You could use that money to pay bills, add to a retirement account to gain interest, or even put it in a savings account so you can make the interest on it.
Lowering your withholdings puts you in control of your income instead of Uncle Sam. Plus, handing over the excess to the government throughout the year doesn’t actually lower your tax bill one penny. It only gives you a pay cut. So, go ahead and give yourself a pay raise so you can start doing something productive with your hard-earned money.
You can adjust your withholding amount by submitting a W-4 to your employer. The changes should take effect immediately (but are not retroactive).
Use Tax Credits
Tax credits are powerful. They are one of the best ways to lower your tax bill because tax credits can lower your tax bill dollar for dollar. Using tax credits are just like using coupons at the grocery store (except they will not double).
Here are some tax credits you may be eligible for
- Child Tax Credit
- Earned Income Credit
- Child and Dependent Care Credit
- Lifetime Learning Credit
- Credit for the Elderly or the Disabled
- Retirement Savings Contribution Credit
- American Opportunity Tax Credit
- Residential Energy Efficient Property Credit
- Nonbusiness Energy Property Credit
Unlike tax credits, tax deductions do not reduce your tax bill dollar for dollar. Instead, tax deductions reduce your taxable income. This results in a percentage of the tax deduction being removed from your tax bill. Charitable contributions, interest on student loans and some IRA contributions are qualified tax deductions. For example, claiming a $5,000 deduction on an income of $50,000 would reduce your taxable income to $45,000. That means instead of paying taxes on $50,000, you would only owe taxes on $45,000.
Contribute to Tax-Deferred Retirement Accounts
Some retirement accounts allow you to contribute funds tax-free. Traditional IRAs, 401(k)s from an employer and Keoghs (for the self-employed) are all tax-deferred retirement accounts. Even though you can contribute to these accounts tax-free, any money you withdraw will be taxed at the rate of taxes at the time.
Health Spending Accounts (HSAs)
HSAs allow you to contribute money tax-free to be used for specific expenses (such as health care, or child care). Sometimes using one of these accounts requires a high-deductible health plan. Some of these accounts must be emptied annually or you will lose the funds in them, while some of the accounts will allow you to roll the funds over to the next year. Contributing to one of these accounts is a great way to cover health and childcare costs tax-free.
Hopefully, these tips will help you lower your tax bill. If you have a large tax burden this year and need relief right away, our experienced tax attorney in Atlanta is available to guide you through the steps necessary to negotiate with the IRS. You may be eligible for an Offer in Compromise, payment options, or other benefits.