These 11 Tips Could Decrease Your Tax Bill for Years to Come
(DailyDig.com) – Whether filing with tax software or hiring a tax specialist this year, American taxpayers should know that the standard deduction isn’t the only way to lower tax bills. For many Americans, there are other strategies to use for lowering your tax bill not just for this year, but for next year, too. Understanding these strategies can even help taxpayers get a better refund.
11 Tips for Lowering Your Tax Bill
1. Update Your W-4
A W-4 is a form employees submit each year to their employer to adjust how much tax should be withheld from each paycheck. By altering the W-4, employees can possibly lower their future tax bills by raising the withholding, resulting in less money owed at the end of the year. In other words, paying more in taxes for each paycheck will lower the tax owed at the end of the year.
2. Learn About Deductions
Taxpayers should learn about all of the deductions they qualify for. For example, independent contractors who work from home can qualify for the home office tax credit. In addition to the standard deduction, taxpayers may be able to itemize deductions or apply for deductions related to medical expenses.
3. Try the EITC
The EITC (earned income tax credit) is another way to lower a tax bill. Taxpayers may qualify for this credit if they earned less than $57,000 in 2021. Factors such as income, marital status, and dependents will affect eligibility for this credit.
4. Contribute to Your 401(k)
The less taxable income taxpayers have, the fewer taxes they will have to pay. One of the most popular ways to lower tax bills is to divert some income from paychecks to a 401(k) account. In 2021, taxpayers were able to divert up to $19,500 into a retirement account and save on that money when filing their taxes.
5. College Savings
Having a college savings account, such as a 529 plan, can also lower a tax bill. Although states may have gift tax consequences taxpayers will have to pay, a college savings account can divert up to $15,000 in 2021 that won’t count as taxable income.
6. FSA Fund
Putting more money into a Flexible Spending Account (FSA) fund each year is another way to lower taxable income. An employer’s flexible spending account can be used to divert up to $2,750 on the 2021 tax return, all of which must be used for medical and dental expenses.
7. Use Your HSA
Taxpayers can also use health savings accounts to lower tax bills since an HSA is tax-exempt. This is ideal for those who have high-deductible healthcare plans. Taxpayers can start HSAs at a bank if their employer doesn’t offer one.
8. Charitable Deductions
In 2021, taxpayers can deduct up to $300 for charity without needing to itemize contributions. If taxpayers have a receipt or a canceled check for the charitable contribution, then they can claim this deduction.
9. Claim Your Stimulus
The stimulus checks from the government during the pandemic may also play a role in lowering a tax bill. If taxpayers did not receive the third stimulus check, then they will be able to claim the Recovery Rebate Credit on 2021 tax filings. This can significantly lower the amount of owed taxes or even boost tax returns.
10. Medical Expenses
Taxpayers can also find deductions in medical expenses, particularly in costly expenses that are paid out of pocket or that aren’t covered by healthcare deductibles. Most filers can claim up to 7.5% of their AGI each tax year for medical expenses, but they will need to have the receipts to back up the claim.
11. Thoughtful Timing
The timing for big purchases and mortgage payments can also affect how much Americans can deduct each year. If possible, making mortgage payments for January as early as December 31 can qualify that payment for this year’s deductions.
There are many ways taxpayers can lower a tax bill, such as by diverting some of income into retirement or savings accounts or taking advantage of deductions. Overall, lowering taxable income lowers a tax bill. Ask a tax specialist for more guidance on strategies to lower tax bills.
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