How To Reduce Taxes

If you’re looking to learn how to reduce your taxes, you’ve come to the right place. Lowering your tax bite is a more simple process than many imagine because it involves reviewing the 1040 tax return. By examining ways of lowering each line item on the return you’ll soon find yourself with many opportunities to save money on your taxes.

1. Examine how you receive employment income. If you’re lucky enough to qualify for a bonus, negotiate whether to receive it this year or next, picking the year with the lower tax bite. If both years appear to have similar tax status, ask to split the bonus and pay half this year and half next. Shelter income by maximizing your retirement plan at work, such as a 401k or 403b plan. Because these plans offer pre-tax contributions, you won’t show income on this money this year, reducing your taxes. If a plan isn’t available, explore opening up a Traditional IRA and deducting the contribution. Investors over age 50 may contribute additional amounts to 401k, 403b, and IRA plans called catch-up contributions.(reference 1)
2. Explore energy tax credits. If you’re in the market for a new vehicle or working on the house, energy efficiency might reduce your tax bill. The Department of Energy lists many tax credits for insulation, water heaters, windows, doors, and other efficient home improvement items, as well as tax incentives for plug-in, gas and electric hybrid, and electric 2 or 3 wheel vehicles. Although tax efficient items may be more expensive, the tax reduction might make the item worth the additional price tag. (reference 2)
3. Look for education or educator opportunities. Students who qualify for the American Opportunity tax credit may receive up to $2,500 in tax savings to help defray college costs. (reference 3) Educators are allowed to deduct up to $250 in unreimbursed classroom expenses on their tax return.
4. Investigate itemized deductions. If you have a mortgage, itemized deductions are usually a no-brainer. Many people miss opportunities to deduct high medical costs, state and local taxes such as license plate fees, and charitable contributions of cash, services, or items. Detail your contributions carefully and keep receipts. If your donations are more than $500 you’ll need to fill out form 8283 with your tax return. Very large donations may require additional paperwork. (reference 4)