How can I reduce my tax burden?
The easiest way to reduce your tax bill is to reduce your taxable income by utilizing tax deductions.
If you itemize deductions, you must file the long Form 1040 and Schedule A. But the extra hassle is worth it if it reduces your tax bill.
There are some excellent resources on the IRS website to help you understand how tax deductions and credits can impact your final tax bill. For example, if you have a tax burden of $1,000 and are eligible to receive a tax credit of $150, your overall tax bill could decrease to $850. That means you will walk away with $150 more in your pocket at the end of tax season.
Just investing a few hours each Spring to keep yourself up-to-date on tax laws and do some annual tax planning could save you a lot of money over the year. In fact, you could minimize your tax burden and serve your finances well if you keep taxes on the forefront of your financial thinking throughout the entire year.
12 tips to reduce your tax burden
- A top tax-reduction tool is using retirement account contributions. These contributions serve two purposes. Most contributions to retirement accounts (except the Roth individual retirement account) allows you to deduct the amount you paid into the retirement account from your taxable income, thereby reducing your total taxable income. Plus, the funds you contribute to your retirement account can grow tax-free until you retire.
- If you have a High-deductible health plan (HDHP), you are eligible contribute to a health savings account (HSA). These contributions grow tax-free like a retirement account and can roll over indefinitely.
- If you own your own business, you can combine a vacation and business travel to reduce your vacation costs. You can deduct the percent of the expenses spent on business from the total cost of the trip, including airfare and part of your hotel bill.
- If you work at home for yourself or have a side hustle, plan to take the home office deduction.Taking this deduction allows you to deduct the percent of your home that is used for your business (on Schedule C, 1040). If there is an area of your home that is used exclusively as a home office, you can deduct a percentage of rent and utility fees for your home office. If your home office is 1/5th the size of your home, you can deduct 1/5th of the expenses associated with that space (such as rent and utilities).
- Individuals that are self-employed, part time or full time are eligible for numerous tax deductions. Examples include vehicle mileage, advertising, and website costs, publications, and membership dues. All supplies for the office, and a percentage of internet charges and any business expenses, dues, memberships, business-related travel, office supplies and any expenses to run your business.
- Those who are self-employed and pay 100 percent of their Social Security taxes can deduct 50 percent of the taxes paid (15.3 percent). You can get this deduction even without itemizing.
- Vehicle expenses that aren’t reimbursed are often forgotten. If you travel to other offices or drive to other locations these mileage costs can be deducted.
- For low and moderate income working families, the Earned Income Tax Credit lowers the total tax bill that is owed.
- The state sales tax break gives people that itemize the opportunity to either deduct state income or state sales taxes paid. This can be a great benefit.
- If you are an investor: When calculating the cost basis after selling a financial asset, make sure to add in all of the reinvested dividends. The cost basis is increased and reduces your capital gain when you sell.
- Donations to the United Way and other charity organizations made with payroll deduction, checks, cash, or donations of goods or clothing are all deductible. These deductions add up and should not be overlooked. Don’t forget to include the cash you give to the Salvation Army during the holidays and the money you place in the collection plate at church.
- If you’re looking for a job in the same field, you can deduct all expenses related to your job hunt as miscellaneous expenses if you itemize (they must pass a 2 percent threshold). You can deduct these expenses even if you were not able to find a new job.
It is wise not to count on a tax preparer to know each deduction for which you are eligible. Be a smart consumer and know all the tax benefits you are eligible for. Every additional deduction you claim can decrease your tax burden and increase your income.