A How to Pay Less Taxes Guide That Everyone Will Appreciate
When learning how to pay less taxes, the key is finding legal ways that will lower your taxable income. Many people can get away with paying fewer taxes if they are smart about claiming credits and deductions, but there will be more opportunities for business owners and those who are self-employed. Deductions and tax credits can change regularly but there are still different ways to pay less when you use the right tax management tools.
How to Pay Less Taxes through a Retirement Account
Retirement accounts are one of the top ways to pay less and they also serve another purpose: helping your fund your later years. Contributions to IRA and 401k accounts can be deducted from your taxable income and help you reduce the amount of tax you owe. The funds in your retirement account will grow tax free until your retirement, which means that if you start early, these accounts really are important for retirement living. You usually have time to fund these accounts before the filing deadline for taxes so just because you haven’t put in money yet doesn’t mean you can’t.
Use a Health Savings Account
If you have a high deductible medical plan then contributing to a health savings account can help you lower your taxes. Contributions to these accounts give you an immediate tax deduction. The money grows tax-deferred and can be withdrawn tax-free for a qualified medical expense. Balances that are left at the end of the year can also roll over, just like your money in a retirement account.
Update Your W-4 and Use Tax Projections
As an individual, you can update your W-4 and do some different calculations to see what is best for you. If you have been receiving big refund checks when you do your taxes then it may make sense to adjust your W-4 so that you have fewer taxes deducted from your paycheck. This may reduce your refund but can allow you to have more money for other projects.
When you are getting a large refund, you are overpaying taxes so don’t give the government a loan when you are able to use your money more efficiently. If you are paying a lot in taxes, you can adjust your W-4 so that you get more taken out of your taxes so you can pay throughout the year and not just have a huge chunk due come tax time.
Your Side Hustle Can Claim Business Deductions
Those that are self-employed, whether it’s through a part-time side hustle or full-time job, can be eligible for many different tax deductions. This means that even if you are just freelancing on the side for some extra income, you can get tax savings. Some business deductions that are available include business-related vehicle mileage, advertising, shipping, percentage of home Internet charges, memberships and dues, business-related travel, and expenses used to run your business. If you are paying for your own dental or health insurance, premiums may also be deductible.
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The key to claiming business deductions is to keep proper records. Many people can lose deductions because they don’t have the right documentation. You need to keep mileage logs, receipts, and other records that can be produced in the event of an audit.
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You are also able to combine a vacation with a business trip and reduce some of your vacation costs by deducting a percentage of expenses that were spent for only business purposes. This may include part of the hotel and airfare. You will likely need to speak with a tax professional in order to make this calculation.
Many business owners are hesitant to take many deductions because it can be seen as a red flag by the IRS. This means the fear can prevent you from paying less in your taxes. Even if you do have to pay some extra money to handle an audit, the savings from taking some more aggressive tax deductions will likely more than cover your costs.
Use a Home Office Deduction
If you have a side business or work for yourself then you can use the home office deduction. This deduction allows you to deduct some of your home expenses using Schedule C. There are some different requirements in order to qualify for this deduction.
To qualify, space must be used exclusively and regularly for business purposes. For example, if you have an extra bedroom that is used exclusively for the home office and it constitutes 1/6 of the living space then you are able to deduct 1/6 of utility and rent fees.
Deduct Self-Employment Taxes
When you are self-employed, you don’t have the benefit of your employer splitting the cost of taxes. You are instead responsible for the entire amount. In order to compensate for this extra expense, the government lets you deduct 50% of the amount paid from income taxes. You won’t have to itemize this claim on your tax deduction.
Find Credits for Higher Education
The government has valuable tax credits in order to help offset the cost of higher education. You can use the American Opportunity Tax Credit for the first four years of college, which can provide a maximum of $2,500 per year per student. Since this is a credit instead of a deduction the amount will be deducted from what tax you owe.
If this exceeds the amount of taxes you owe, you may get some of it refunded. There is also the Lifetime Learning Credit, designed for adults to boost training and education. This credit can pay for education and college expenses that can help improve your job skills.
Earned Income Tax Credit
Even if you don’t have to pay federal income taxes, you may still be eligible for a refund from the government. This credit is calculated with a formula that takes into account your family size and income. The income limits range so you would have to see if you qualify.
Itemize Your State Sales Tax
Taxpayers can itemize their deductions to include either their state income taxes or state sales tax on a Schedule A form. The state sales tax break can be a good option if you live in a state that doesn’t have income taxes.
You can use a table given by the IRS to claim a sales tax deduction but you should also remember to add on sales tax from major purchases, such as a boat or a car. The federal deduction will be capped at $10,000.
Make Charitable Contributions
Charitable donations with checks, cash, payroll deductions, or donations of clothing and goods are deductible. These deductions can often be overlooked and add up. A lot of people tend to forget contributions not made in cash. However, in order for you to claim a deduction, you should get a receipt for all donations.
Lowering Capital Gains Tax
If you are an investor, when you calculate the cost basis after you sell a financial asset you should also add in all the reinvested dividends. This will increase the cost basis and then reduce your capital gain when you sell the investment.
- Selling Your Home
If you sell your home, you can also end up paying a capital gains tax if your home value has risen. However, you can exempt up to $250,000 as a single taxpayer for the home’s appreciation. Keep in mind that the IRS only allows the exemption to be claimed once every two years.
- Renovating Your Home
You can reduce how much you owe if you also made any home improvements or renovations.
- Using Stocks for Charity
Another way to avoid a capital gains tax is by using stocks in order to make charitable gifts. You are able to move these stocks that had large gains into a donor advised fund. Not only is this exempt from a capital gains tax but it can also be deducted if you choose to itemize.
Purchase a Home
Even with changes to the tax code, purchasing a home can still be a great strategy to lower taxes. Selling a primary home that has appreciated can mean capital gains but these can be tax deductible. Purchasing a real estate investment property is another strategy.
Thanks to depreciation, a large portion of rental income is usually greatly reduced but with advanced tax planning strategies, you can consider rental properties vehicles for long-term wealth creation without a huge tax impact.
Get Deductions If You Are a Military Member
Military members can find different ways to learn how to pay less taxes. This also includes military reserves, such as those in the National Guard. If you are traveling more than 100 miles away from home and need to stay overnight then you are able to deduct travel expenses that are reimbursed, such as lodging, meals, and transportation. If you are on active duty then you are able to deduct costs associated with moving to a new change of station that is permanent.
Understand Tax Brackets
Knowing how to use tax brackets is also another way to learn how to pay less taxes. There are different tax brackets and the more you earn, usually, the more taxes you pay. Ensuring that you are able to keep most of your income in a lower tax bracket can help you keep more money in your pocket. You will pay a specified tax rate for every dollar you make that goes within that bracket.
For example, you pay 10% on the dollar for every dollar you make between $0 and $9,700. Between that and $39,475, you pay 12%. However, just because you made $10,000, which is only a little higher than the first tax bracket, it doesn’t mean that you will have to pay the higher rate.
There are different ways to lower your tax bracket and shift up your income.
Using Life Insurance to Your Advantage
This tip is designed for those who have already maxed out other retirement accounts. It is also built on top of permanent life insurance, which will cost you money. The cost of insurance can be small compared to a large savings. This strategy essentially will allow you to have unlimited growth and contributions and be all tax-free if it is handled properly, which may require you to consult with a financial advisor.
Be Organized
Being organized is going to help you take advantage of these strategies and deductions. You don’t just want to deal with your taxes once a year in April. Be sure to dedicate a box or folder to tax-related documents and then keep using it all year long for your deductible expenses, 1099 forms, and other IRS forms that come in the mail.
This way, when it’s time to start preparing for your taxes, you have the information you need for your tax preparer and you will have documented proof if you do have to deal with an audit. You should be keeping records for a minimum of three years and if you want to be even safer, you should keep them up to seven.
Don’t Forget to Utilize Local and State Tax Breaks
Your state and local taxes will also add up so you want to look for ways to learn how to pay less taxes for the state and local level as well. Recent federal tax reform laws did eliminate a lot of miscellaneous deductions, but many states still do allow you to claim these deductions. There could also be a lower threshold for claiming some of these deductions that you wouldn’t normally meet.
For example, in New Jersey, taxpayers can deduct medical expenses that exceed just 2% of their adjusted gross income. However, on the federal tax forms, medical expenses need to be more than 7% of your income. This means that you can save a lot on your local taxes, depending on where you live. Tax savings won’t just be limited to income taxes either.
In New York City, you may have a parking tax for rented spaces but residents may wave half the fee when they request an exemption. Regardless of where you live, you should always check with taxing authorities to see the deductions that can be available to you. Without research, you will never know how to pay less taxes.
Use the Right Filing Status
This can seem like something so minor but it’s really important and if you use the wrong status, it can be costly. Just because you are single, it doesn’t necessarily mean you should be using a single status.
For example, if you are a single parent or support another dependent then you may be able to use the head of a household status, which will offer you some tax breaks. While it may make sense for married couples to file jointly, it can also be advantageous to file separately. Run some numbers to see which is going to allow you to save the most money.
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Have a Tax-Friendly Social Security Strategy
Social Security is important to many retirees but there are some tax rules about it. Social Security benefits may be taxed, although the rules can be a bit tricky. If you have a lot of non-Social Security sources then your benefits have a better chance of getting taxed at a higher rate.
Non-Social Security Sources
These can include self-employment income, dividend income, wages, and interest. One way to avoid a higher tax bracket is by drawing income from other sources, such as 401ks, early in retirement, especially if you are working, and then delay collecting Social Security.
How to Pay Less Taxes by Working with a Professional
If you are serious about learning how to pay less taxes, it can be beneficial to work with a tax professional and use their tax preparation services.
It’s much easier for a tax professional to find deductions you may have missed since this is what they do for a living. It will also save you time, which can mean saving your money. Making a mistake on your return can actually be very costly, whether it’s an IRS letter or missed deductions. A tax professional will help you eliminate errors and ensure your returns are prepared correctly.
Smart Savings
Your tax professional will not only save you money on the current year’s return but he or she can also look at past returns to see if deductions were missed and amend them for you.
Tax professionals can help you with tax planning and the best strategies to make smart tax savings throughout the year. This way, you can time major purchases so that they meet your tax goals. With your tax professional’s knowledge, you can learn how to pay less taxes and create financial growth and stability.
Keeping up with the tax code is another important step. It may be impossible for you to keep up with the tax code since it changes every year. It’s the job of tax professionals to keep up with the code and this is a big benefit to you.
Finally,
When it comes to learning how to pay less taxes, know that not every strategy is going to work for you and the tips and strategies aren’t meant to overwhelm you. Not every tip is going to be relevant to you and your personal finances. As income grows, you want to be aware of different tax saving options and how to pay less taxes so you can mitigate taxes over time. Using a financial advisor and a tax professional can help you, especially as you make more money.