Here’s several ways on how to save money on taxes for earnings that won’t get you in trouble with Uncle Sam come tax time.
The exact tax benefits vary by state — more than 30 states offer full or partial tax deduction or credits on 529 contributions.
Here are a few tax credits you may qualify for:
It might be too late to make some of these moves for the 2021 tax season but think about making some changes soon for the 2022 tax season. One thing you can do now, though, is max out your contributions to a traditional IRA. You have until April 15, 2022, to do this for the ‘21 filing.
This type of retirement account is different to a Roth IRA, where contributions are taxed today but then grow tax-free thereafter.
1. Contribute to a 401(k)
Lowering your taxable income is one of the best ways to pay less in taxes. Less income earned means less money you pay to the government.
Looking for a way to pay less in taxes … and get that warm, fuzzy feeling? Charitable contributions are tax-deductible, and they can be a great way to lower your overall tax liability if you itemize your deductions.
If you decide to donate more than 0 or want to itemize other types of donations like those bagged Goodwill items, you’ll need to itemize.
Home mortgage interest and local property taxes: These may both be eligible for partial deductions, though you’ll need to itemize your tax return.
2. Contribute to a Traditional IRA
It might seem intuitive to keep your withholdings as low as possible to keep more of your paycheck. However, if you find you owe taxes in April, you might want to go in and tweak your withholding claim so you don’t run into the same problem each tax season.
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Student loan debt interest: Depending on your modified adjusted gross income (MAGI), you may be able to deduct up to ,500. This is an “above-the-line” deduction, which means you can take it even if you opt for the standard deduction.
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American Opportunity or Lifetime Learning Credits: Depending on your enrollment status, AGI, and how you’ve paid for educational expenses, you may be entitled to the American Opportunity or Lifetime Learning Credits. (Check out this quick quiz from the IRS, which will tell you if you’re qualified in just 10 minutes.)
3. Contribute to a Health Savings Account
The easiest way to reduce your taxable income is to contribute to tax-deferred retirement accounts, like your company’s 401(k) plan or some other type of workplace retirement plan.
Money you contribute to a 401(k) is pre-tax money, so it doesn’t count toward your taxable income for the year you make the contribution, though you will be taxed when you make withdrawals later.
In certain scenarios, the IRS extends credits to eligible taxpayers. Tax credits count as an actual reduction of your total tax bill. If the tax credit is refundable, you’ll get a refund if your tax credits exceed what you owe.
4. Don’t Forget Your FSA or Dependent Care Expenses
You may already know that certain expenses are tax-deductible. But which ones, exactly?
Just like that company-sponsored retirement plan we were talking about, the funds you contribute to your Traditional IRA don’t count toward your taxable income.
A flexible spending account (FSA) is similar to an HSA in that you’re allowed to contribute pre-tax dollars from your paycheck each year. Yes, it means you can reduce your taxable income, therefore paying less in taxes.
The tax form W-4 is one you give to your employer specifying how much of your wages should be withheld for taxes.
Keep in mind you’ll have to use up the money during the calendar year on qualifying expenses for you and qualifying dependents.
5. Put Your Kids Through College
Major medical bills: In general, if you’ve spent more than 7.5% of your adjusted gross income (AGI) on qualified medical expenses, you may be able to write them off if you itemize your deductions.
In 2022, you can contribute up to ,650 to an HSA if you have individual coverage, and up to ,300 if your HDHP covers a family.
An important caveat: If you or your spouse is covered by an employer-sponsored retirement plan, you may not be able to deduct your full IRA contribution or any contribution at all if your income is above a certain amount — head to the IRS website for full details on these phase-out limits.
For instance, if you would have owed 0 and claim ,000 in tax credits, not only will your payment be waived — you’ll also receive a 0 tax refund.
6. Give It Away
Business-related deductions: If you’re a freelancer or you work from home, you should also look into business-related deductions, like the cost of your home office space.
A Health Savings Account (HSA), is a great tax-exempt option if you have a high deductive health health plan (HDHP). Your contributions to an HSA are made with pre-tax income (aka you’re not taxed) and neither are your withdrawals, as long as they’re used to pay medical expenses that are qualified.
For 2022, you can contribute up to ,500 for those under 50, and up to ,000 those 50 and above. This doesn’t include the amount your employer contributes to your plan.
While we’re still working on the whole immortality thing, we have found some ways to reduce that pesky bill from Uncle Sam each April after filing a tax return.
7. Know Your Deductions
The limit in 2021 was ,750 and went up to ,850 in 2022.
Have dependents — aka children or elderly members of your household you’re taking care of? If your employer offers a dependent care FSA account, you can contribute up to ,500 in pre-tax dollars to go towards expenses such as day care, after-school care and preschool.
You have until April 15, 2022, to max out your IRA contribution for the 2021 calendar year.
You might also be able to deduct certain supplies, travel expenses, and even meals and entertainment.
According to U.S. News & World Report, average costs range from ,338 to ,185 per year (yikes!). To help with these costs and hopefully help you save money on taxes, consider opening a 529 savings plan.
For 2022, you can contribute up to ,000 to an IRA, or ,000 if you’re over the age of 50.
8. Take Advantage of Tax Credits
This account is an investment vehicle specifically built for educational savings. You can use it to pay for your kids’ college tuition or even to send yourself or your spouse to school.
Why not save money on childcare and on your tax bill at the same time?
You could be eligible for up to ,000 in federal income tax credits, though the exact amount depends on your income, marital status and number of qualified dependents. For details, check out the IRS’ Earned Income Tax Credit fact sheet.
Don’t worry, we’re not talking about tax evasion, but there are some totally legit ways to keep more of your hard-earned dollars in your pocket.
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They say it because it’s true: The only certain things in life are death and taxes.
9. Adjust Your Withholdings
Make sure to track the estimated value of your contributions. Plus, you’ll have to have enough deductions to supersede the standard deduction to qualify — which is a fairly hefty ,550 for single filers and ,100 for joint filers for the 2021 tax year.
The IRS, in an effort to encourage charitable donations, will allow you to claim up to 0 per person (or up to 0 if you’re married filing jointly) if you’re taking the standard deduction. The caveat is that these need to be cash contributions.
You can leave funds in your HSA indefinitely since they’re not subject to required minimum distributions. (And if you’re like most of us, you’ll have more health care-related costs as you get older, anyway.) <!–
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If you’ve got kids, chances are you’re already gritting your teeth thinking about paying for college.