We are all looking to save a little bit of money in all areas of our lives. There are a lot of valid ways to keep more of your money in your pocket. Be sure to take advantage of the following strategies before, during, and after you file your taxes. Here are some ways to save money on taxes:
1. Contribute to a Traditional IRA
You might already have a retirement savings account such as a 401(k) or a 457(b), but you can still open a traditional IRA. You just need to have earned taxable income and you need to be younger than 70 ½. With this being said, some of you might be wondering what a traditional IRA is. It is similar to a company-sponsored plan. However, a traditional IRA is an individual retirement account and the funds you contribute towards this account do not count toward your taxable income. The only exception to this is a Roth IRA where contributions are taxed today but grow tax-free after the fact.
This brings up the question: how much can I contribute to a traditional IRA? You can contribute up to $6,000 or $7,000 if you are over the age of 50. You have until the day taxes are due to max out your contribution for the last year, so you have until May 17th, 2021 to make your 2020 IRA contribution. One important thing to remember is that if you or your partner is covered by an employer-sponsored retirement plan, you might not be able to deduct your full IRA contribution or any contribution if your income is above a certain amount. Your eligibility depends on if you are filing jointly or separately and if you’re covered by a retirement plan at work.
2. Reduce your taxable income
You are going to have a taxable income whether you like it or not because you need money to live on. However, there are ways to reduce your taxable income and still earn a living. The easiest way is to contribute to a tax-deferred retirement savings plan like a 401(k). Money that you give to your 401(k) doesn’t count toward your taxable income for the year that you make the contribution, but they will be taxed when you withdraw it later. This means that you will get a tax break now and also contribute to a fund that will set you up for retirement in the future.
3. Put your children through college
If you have kids, you are probably already stressed about the cost of what college is going to be. Even if you are able to secure scholarships or financial aid, college can be a lot of money. There are ways to get ahead now, however. A 529 plan is an investment plan for educational savings. You can use it to pay for your kid’s college tuition or even your own education or your spouse’s.
The tax benefits will vary by state and the contributions can’t be deducted on your federal return, but a deduction is a deduction. More than thirty states offer full or partial tax deductions or credits on 529 contributions and the funds can grow tax-free. They also won’t be taxed when you withdraw the money as long as they are used for educational expenses. These expenses can include college tuition, books, fees, and computers. Sometimes room and board count as well. You can also take out up to $10,000 per year to pay for tuition or religious K-12 schools. However, if you try to use the money on something else you will be subject to regular income tax on the withdrawal and an additional 10% penalty.
4. Contribute to a Health Savings Account
IRAs are available and applicable to almost everyone, but there are also other investment accounts that can get you a tax break. A Health Savings Account (HSA), is a tax-exempt option if your health care plan has a high deductible. On top of your contributions being deductible, your withdrawals aren’t taxed either as long as they are used for medical expenses that fall within the qualifications. You can give up to $3,500 to an HSA if you have individual coverage and up to $7,000 if your high-deductible health care covers your family. You can also leave funds in the account indefinitely since they aren’t subject to required minimum distributions. However, if you have Medicare coverage, you might not be eligible to make HSA contributions because you will have coverage outside of your high-deductible health care plan.
5. Give your money away
The money you give to charity is tax-deductible and can be a great way to lower overall tax liability if you itemize your deductions. The process of itemizing your deductions takes time, but not everyone has enough deductions to exceed the standard deduction of $12,200 for single filers and $24,400 for joint filers.
It might be easiest to write a check to your favorite charity, but you can also itemize your trash bags of donations as deductions if you keep the receipt. This means that you would have to keep track of the estimated value of all of the items you give away, but there are tax software tools that can help you. TurboTax’s ItsDeductible module can keep a list of your donations from the last year and help you make estimates. The food you give to a local food bank and out-of-pocket expenses from volunteering can also count as deductions.
6. Take advantage of tax credits
In some cases, credits are given to taxpayers like those continuing their education or returning to school. One type is the American Opportunity or Lifetime Learning credits. You can qualify for this depending on your enrollment status and how you have paid for your education. There is also the earned income tax credit if you aren’t making a lot of money. The credit you receive depends on your level of income, your marital status, and how many dependents you have. These credits don’t just decrease the amount you have to pay in income taxes. They also count as an actual reduction of your total tax bill and if the tax credit is refundable, you will get a refund if your tax credits surpass what you owe.
7. Know what your deductions are
You should know which expenses are tax-deductible when filing your taxes. Major medical bills are deductible if you have spent more than 10% of your adjusted gross income on qualified medical expenses. Your student loan debt interest can be deductible up to $2,500 depending on how much income you make. This also qualifies as an “above-the-line” deduction which means you can take it even if you choose the standard deduction. Mortgage interest and local property taxes can also be deductible. They can be eligible for partial deductions or if you are a first-time buyer, you might be able to make withdrawals from your IRA without penalty. Charitable donations are deductible as seen above.
Lastly, business-related deductions like the cost of your home office space if you are a freelancer can be deductible. You might also be able to deduct things such as travel expenses and even entertainment and meals if you work as a freelancer.
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