How To Pay Less Taxes
Most Americans are comfortable with paying their fair share of the tax burden, but how do you legally pay less taxes? There are several methods you may use to put some dollars back in your wallet at tax time. Lowering your tax burden doesn’t need to take as many creative steps as you might think, and some simple steps could allow you to save drastically on next year’s tax bill.
- Increase your dependents. This one is a double edged sword. Although you will receive another dependent credit and may qualify for child tax credits, anyone who is a parent will tell you the costs of food and clothing may outweigh the tax savings.
- Save into retirement plans. 401k plans at work allow you to make pre-tax contributions, meaning that you won’t show income on this money until withdrawn. This move can help you secure your retirement down the road and also save you money today by helping you pay less taxes. If a plan isn't available at work, open an IRA and deduct the contribution on your taxes. If you're over age 50, you qualify for a catch-up additional contribution. Because contributions amounts change often, check the IRS web site for details on this year's contribution limits. (reference 4)
- Negotiate bonuses. If you’re lucky enough to receive a bonus this year, ask if you can either split the bonus into two parts, one in December and the other in January, or receive the bonus in the calendar year you expect to earn less money. This will reduce your taxable income each year, which in turn reduces your tax bill.
- Claim tax credits you qualify to receive. If you’ve purchased energy efficient home upgrades or attended college, among others, you may qualify for tax credits. Tax credits reduce your tax dollar for dollar, making them more valuable than tax deductions when looking for ways to pay less tax. Adding insulation, roofs, a water heater, and efficient windows or doors are only a few of the items which qualify for home upgrade tax credits. (reference 1) The American Opportunity Tax Credit provides up to $2,500 of tax relief for qualifying students. (reference 2) If you’re in the market for a new car, hybrid and fuel-efficient vehicles provide a large tax credit that may at least partially offset the increased cost of many of these cars. (reference 1)
- Look for itemized deduction opportunities. If you don’t itemize deductions, it may make financial sense to at least walk through the itemized deduction form to see if you qualify, especially if you have large medical bills or give substantial amounts of cash or goods to charity. Deduct local and state taxes paid. In most states, license plate costs are a deductible state tax. Cleaning out the garage and donating to a charity could save you money on your taxes also. Keep receipts of your donations and verify the worth of donated items by checking eBay or thrift shop prices of similar items. The IRS has tightened charitable donation rules in recent years. (reference 3)