Around 45 percent of American taxpayers think that they pay too much tax.
They may be right!
Often, you don’t need to be paying as much as you do. Paying tax isn’t just about how much you earn. There are a bunch of tips and tricks to reduce the weight of your tax bill.
Check out our guide below to learn more about ways to save on taxes.
1.Give Your Money Away
Donations to charity are deductible.You can take advantage of the opportunity to reduce your tax by bundling gifts to charity.
For example, if you intend to give $100 each year to a charity, give $500 at once for five years. Then, the total sum of $500 can be deducted from your tax bill this year.
You don’t have to donate cash either.
If you have dropped off a bunch of clothes, old CDs and kitchenware to a charity, this can also come off your tax bill. You can use a tax software program to estimate the value of each item you donated.
2.Save Money for Your Kid’s College Fund
You can also get an income tax reduction when you contribute to a 529 plan. This is a state-run savings account.
Paying for your kid to go to college can be extremely expensive. The more money to put away when your kid is in diapers, the better!
This allows you to put money away for your kid’s college fund. However, you’re also now able to save up to $10,000 for a student for elementary and secondary schools as well.
3.Speak with a Financial Advisor
No, you can’t deduct financial and tax advice from your tax bill any longer. And yet, you can still learn from the expertise and advice they give you.
Taxes are extremely complicated. There are many clever ways to reduce your tax bill with the support of a professional.
Sure, you could learn everything there is to know about taxes yourself. But, lowering your tax debt is much easier with an expert advisor.
Furthermore, if you’re a business owner, you can still deduct the expenses involved in hiring a tax advisor.
4.Put Money in Your 401(k)
This is a pretty common way to reduce your tax bill. You don’t get taxed on anything you divert from your paycheck to your 401(k).
Your 401(k) is a retirement savings account sponsored by your employer. Therefore, the more you put into this savings account, the more your employer will contribute too.
You can put up to $19,000 per year into your 401(k). If you’re over 50 years old, you can put an additional $6,000 as well.
5.Funnel Money into Your IRA
Another retirement account. It gets a little complicated regarding whether you can reduce your tax bill by putting money into your IRA.
If your gross income is more than $123,000, then this won’t work. Nor will it be able to lower your tax bill if you’re already covered by a retirement plan by your employer.
Moreover, there are also limits to how much you can invest in your IRA. That’s $6,000 per year for people under 50 years old. You can put an extra $1,000 if you’re more than 50.
6.Keep Track of Medical Expenses
Medical expenses are also deductible on your tax bills. What counts as medical expenses? Pretty much anything. Your visit to the doctor, monthly prescriptions, and health insurance costs.
The medical expenses need to be less than 7.5 percent of your adjusted gross income. If you have high medical expenses this year, thankfully you won’t have to pay tax on most of it.
Just ensure that you can always keep track of your receipts. If you cannot prove that you spent this money on medical expenses, it won’t help you reduce your tax bill.
7.Get Rid of Your Bad Stocks
Do you own any stocks or investments which aren’t making you any money? This is the time to get rid of them!
You can include any losses you’ve made from your tax bill. This can help you offset any gains you’ve made on other stocks.
However, the sky is not the limit here. You’re only permitted to deduct it from your taxes if the offset if $3,000 or less.
Selling your losing stocks could help you to make greater the gains of your growth stocks. However, don’t let your desire to reduce your taxes lose sight of a wise investment.
8.Time is Everything
When it comes to taxes, time is crucially important. You can save a lot of money by moving money on the last day of the year or waiting another day.
For example, if you have a mortgage payment to pay in January, paying it a month early could give you an extra month’s worth of mortgage interest which can be deducted.
9.Spend Money to Save Money
If you’re a business owner that needs to buy used equipment or a new vehicle, you may want to do this to deduct your tax bill.
It sounds strange. But, tax reforms have resulted in the bonus depreciation for items to be favorable to many businesses.
10.Move Across the Border
You probably shouldn’t pack up and leave your home simply to pay less tax. However, if you were considering moving anyway, it’s worth keeping in mind the potential tax benefits.
You may currently live in a state with higher property and income tax rates. Therefore, by moving to a more favorable state, you could save a lot of money.
You could even move to another country with an even more appealing tax regime. Fancy moving to a Caribbean island?
Ways to Save on Taxes
Now you know that you don’t simply have to accept the taxes you pay.
There are many ways to save on taxes. This allows you to keep more money in your pocket for the important things.
Are you planning a vacation abroad? Check out our blog post to planning your trip on a budget.