How to reduce your tax bill next year
If you could find a legal way to reduce your tax bill, would you do it? Most people prefer to pay the government as little as possible. Here are seven ideas that could help you reduce your tax bill. Not all of them will apply to you. But pick out the ones that do and see how much you can save.
IMPORTANT
You should verify all tips with a qualified tax advisor.
1. Standard deduction vs. itemizing
Most Americans take the standard deduction. According to the IRS’s website, 87.3% of those filing in the 2018 tax year did so.
And you can see why. By the 2022 tax year, the standard deduction stood at $12,950 for an individual taxpayer and $25,900 for a married couple filing together. By the way, those deductions may vary in certain circumstances, and you can use an online IRS tool to determine yours.
For most taxpayers, taking the standard deduction is a no-brainer. Because the deductions they could itemize wouldn’t be as much.
But, if you’re a borderline case, you should keep your deductions under constant review. And be ready to itemize them if that would reduce your tax bill by a worthwhile amount.
Don’t forget to allow for any extra fees you’d pay to your tax preparation professional or the extra admin headache if you prepare your returns yourself.
2. Adjust your W-4
Your IRS form W-4 tells your employer how much tax to withhold from each of your paychecks. If too much tax is withheld, you’ll be in line for a tax refund each year. Who doesn’t love getting that “free” money each spring?
But what you’re doing is giving Uncle Sam an interest-free loan. Why would you want to do that when you could be earning interest on it yourself?
Instead, ask your boss or HR department to adjust your W-4 so it withholds the correct amount of tax each payday. Then use the extra money in each paycheck to improve your financial circumstances. You might boost your savings, pay down high-interest debt or even invest on the stock market.
Of course, this doesn’t actually reduce your tax bill and it means you won’t get as big a tax refund in the future. However, it lets you use your money more effectively.
3. Fully utilize tax havens to cut your tax bill
We’re not talking about the Cayman Islands or Bermuda. You probably have your own tax havens here at home.
For example, you can pay up to $20,500 ($34,000 if married and filing jointly) into your 401(k) – more if you’re over 50. And that portion of your income won’t be taxable.
And there are other accounts you can top up while reducing your tax bill, including your traditional IRA. However, note that contributions to Roth IRAs remain taxable. That’s because you won’t pay tax on the money you take out of a Roth IRA when you retire.
4. Reduce your tax bill by claiming your credits
You can claim tax credits even if you take the standard deduction. The IRS lists several categories, each of which may have several programs:
- Family and dependent credits
- Income and savings credits
- Homeowner credits
- Health care credits
- Education credits
Any of those can reduce your tax bill.
Many parents find setting up 529 plans beneficial. Your contributions aren’t free of tax for federal taxes, though eligible benefits (and interest earned) are. However, some states allow you to deduct some of those contributions.
5. Give to charities
Many of us are happy to donate to charities without any tax breaks. And that’s just as well because only those who itemize their deductions can use donations to reduce their tax bill.
If you itemize and donate, you can deduct your contributions and not just monetary ones. You may be able to deduct some travel and other expenses, though you can’t claim for your time.
Just make sure that the object of your generosity is a qualified nonprofit. If you’re donating items, say to a food bank, request a receipt.
6. Reduce your tax bill with your stock losses
Let’s hope you haven’t made any losses on your stocks. But, even during good times, some sectors do better than others, depending on the economic environment. So a balanced portfolio may well contain some loss-making stocks.
You can sell those and offset your capital losses against any capital gains you’ve made. You can count only up to $3,000 ($1,500 if married and filing separately) of excess losses to offset ordinary income in a current tax year. Generally, you can carry forward any losses over $3,000 to future years.
Note that the IRS will stop you rigging this game by selling a stock to claim the loss and then rebuying it (or a substantially similar one) within 30 days.
7. Reduce your tax bill with health savings
Ask your employer whether your company has a health flexible spending account (FSA) or a health savings account (HSA). These accounts help you pay out-of-pocket health expenses, such as co-pays and prescriptions, if you’re in a high deductible health plan (HDHP).
With an FSA, you can channel, tax free, up to $2,850 a year into that account out of your paychecks. And, with an HSA, you can contribute more: $3,650 as an individual or up to $7,200 if you have a dependent family. You can also add $1,000 to all those figures if you’re over 50.
All of those contributions come directly out of your paycheck, before tax is deducted. So, making those should reduce your tax bill.
You have to spend all or almost all the money in your account on qualifying medical or related expenses during the tax year. You may be able to carry forward up to $500 to the following year. But check that’s the case with your employer.
Hope our tips helped reduce your tax bill
We haven’t listed every possible way to reduce your tax bill. If you’re self-employed or own your own business, you likely have many other opportunities to pay less to the IRS.
For most taxpayers, our quick hits might result in some worthwhile savings.
Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.
