How to Pay Less Taxes
Posted by Frank Gogol in Taxes | Updated on August 26, 2022
Paying taxes is one of the most unpleasant things ever. You struggle every month to pay for essential things such as utilities and food and, on top of that, you should also worry about filing your taxes. Therefore, you probably started thinking about ways to lower the amount you pay in taxes, so you’re left with more money at the end of the day. So, let’s find out how to pay less taxes.
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Is It Possible to Lower What You Pay in Taxes?
All taxpayers want to pay fewer taxes. Some people may even think this is not possible, but luckily, if you take the right steps, you can lower the amount you pay in taxes. You need more careful tax planning, and your tax burden can decrease a lot. Don’t worry – even people with high income can try these methods and make sure they don’t pay too much in taxes anymore.
12 Ways to Legally Lower Your Taxes
Yes, lowering your taxes is possible. Nobody likes paying a lot in taxes, let alone having to deal with unexpected tax bills that ruin all of their plans. If you are in this category, as well, you must do something to decrease the tax payments.
To help you get there, here are some things you can do to cut your tax bills and save some money in return.
1. Adjust Your W-4
Employees have to give their employer a form known as the W-4. On this form, there will be information about taxes and how much the taxpayer will pay in taxes. To be more specific, the form contains instructions on the amount of money that can be withheld from every paycheck to go towards tax payments.
Adjusting your W-4 can help you pay fewer taxes, and the great thing is that you can do this at any time. If you have a big tax bill this year and you want it to be less outstanding next year, you should raise the withholding on your W-4. By doing this, you will owe less money when you have to file your tax return.
Meanwhile, you should reduce your withholding if you get a big return. Not doing it will make you get less money from your paycheck in moments when you may really need those extra pennies.
2. Contribute to Your 401(k)
You get taxed based on your income and how big it is, so higher incomes will have to pay more tax. Luckily, you can reduce the taxable income every year by contributing to your 401(k). The amount you stash in your 401(k) directly isn’t taxed by the IRS.
2020 and 2021 are years when you can contribute up to $19,500 into your account. If you reached the age of 50, you have the opportunity to stash an additional $6,500 for 2020 and 2021.
On top of that, the retirement accounts are sponsored by employers, but someone who is self-employed can still open their 401(k) if they want to.
3. Open an IRA
Opening an IRA account can help you reduce your taxes as well. It’s possible whether you settle for a traditional IRA or a Roth IRA. And while you can deduct money to a traditional IRA account, the amount you can deduct will depend a lot on whether your spouse also has a retirement plan, as well as how much you earn.
You may not be able to deduct the contributions for the 2020 tax year if you have a retirement plan at work, or if you’re married and you file jointly. The same applies if you only had a modified adjusted gross income of $124,000 or higher. The amount rises to $125,000 for 2021.
Keep in mind that IRAs have their own limits in terms of how much you can contribute to them too. 2020 and 2021 have a limit of $6,000 per year, while people 50 or older have a $7,000 limit. Also, you can fund your IRA for the previous tax year until the deadline comes for filing your taxes.
4. Create a College Fund
Saving money for a junior’s college tuition through a college fund is also a great way to pay fewer taxes. You might want to consider contributing to a 529 plan. Although you may not be allowed to deduct contributions on federal income taxes, you might have the chance to state your return in case you save towards your 529 plan. However, if your contributions or other gifts to the beneficiary are higher than $15,000, you will deal with tax consequences.
5. Add Money to Your FSA
Money that is free of tax can be funded into your FSA annually, which lets you lower your tax bill too. You can contribute up to $2,750 in 2020 and 2021. The money can be used for medical expenses.
6. Subsidize Dependent Care FSA
If your employer offers a dependent care FSA, this is another way to reduce your tax bill. There will be up to $5,000 that will be excluded by the IRS from the pay that your employer diverts into a Dependent Care FSA. So, you will not have to pay taxes on that amount.
7. Contribute to Your HSA
An HSA will also allow you to pay fewer taxes by contributing money to an account that can help you pay for your medical expenses. HSA contributions are tax-deductible and withdrawals don’t come with any taxes if you use them for medical expenses.
8. Take Advantage of Earned Income Tax Credit
Consider looking into the Earned Income Tax Credit if you earned less than $57,000. You may be eligible for a tax credit of up to $7,000 for 2020 and 2021, all based on your marital status, how many kids you have, and income. The tax credit reduces your tax bill, so you won’t be taxed for your entire income anymore.
9. Write of Philanthropy
Make some charitable contributions, as they are deductible. Also, you don’t necessarily have to give money. You can also donate food, clothes, and old items, and they will lower your tax bill.
10. Track Your Medical Expenses
Always keep the receipts if you were in the hospital and had a very pricey medical bill. The medical expenses can be deducted if they are more than 7.5% of your adjusted gross income for that particular tax year.
11. Sell Off Under-Performing Stocks
Any under-performing stocks should be sold, and if you get a tax deduction, it may make it much easier to do so. Deduct the losses on stock sales and sell the stocks if they don’t work well for your portfolio. Just make sure you don’t sell your stock for the tax break alone because the IRS will take back your deduction instantly if you buy your stock back.
12. Time Your Large Purchases to Be Write-Offs
Ensure that you always time the large purchases accordingly. If you think you have a deductible upcoming expense, then look into whether you’ll be able to pay for it this year instead of leaving it for the next year. That way, you can get some additional mortgage interest worth deducting the next year.
- Why Was No Federal Income Tax Withheld From My Paycheck?
- Why Do I Owe Taxes?
- Why Do I Owe State Taxes?
- Are You Exempt from Federal Withholding?
- How to File Taxes With No Income
- Can You File Taxes Without a W2?
- H1B Taxes: Everything You Need to Know
Paying fewer taxes is possible if you know how to use the right, legal ways for this. Consider some of the methods above, see which one works for you, and put it into practice to lower your taxes, and save some money in the meantime.
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