11 ways to cut your tax bills this year
If you attain wealth, you will inevitably have to pay taxes on it. That’s how our financial system works. The government collects taxes for each individual year, with January 1st being the “cutoff” between two years. The best time to start talking with the IRS tax relief specialists is as soon as the new tax year starts. There are numerous ways to cut your tax bills this year, including various plans, credits, as well as contributions. In this article, we are going to explain these ways in greater detail so you may “protect” your income and your wealth from over-taxation.
The importance of starting early
You should start planning your tax strategy immediately after the new tax year begins. The reason why you want to do so is the fact that you will be able to maximize your tax drag if you start planning early. While you may think that your investment strategy might be what is most important, your tax strategy is as important (even more so in some cases). You have numerous legal ways to minimize your tax burden and some of them require you to act early in the tax year.
Furthermore, the tax “world” is not all black and white. There are many so-called tax experts that will do nothing more than make you waste your hard-earned money. By starting early, you will have more time to get relevant information and protect yourself from common IRS tax scams. You will also be able to maximize your allowances and minimize the amount of tax you need to pay throughout the tax year. With that in mind, let’s take a look at some of the best options that you have at your disposal.
11 ways to cut your tax bills this year
Taxes are really complicated, there’s no doubting that. There are so many acronyms and terms that they can make your head spin all on their own. But it is in your best interest to start learning them sooner rather than later. For example, many people simply do not know what tax allowances are available to them and let the tax year pass without using them. If you want to boost your tax refund amount, you need to use everything that you are entitled to. If you don’t use your allowances before the next tax year rolls over, they are “lost” and you can’t get them again. You can, however, get those same tax allowances but for the next tax year.
Here are some of the best ways to cut your tax bills this year:
- College plans
- HSA (Health Savings Account) contributions
- EITC (Earned Income Tax Credit)
- Medical expenses
- Business deductions
- IRA (Individual Retirement Account) contribution
- Funding the FSA (Flexible Savings Account)
- FSA dependent care subsidies
- Charitable contributions
Do note that, depending on your situation, you might have additional tax relief options. For example, if you are dabbling in the stock market, you may be able to deduct your losses from stock sales. This will help offset any tax on capital gains you might get throughout the year. There is a limit, of course, and it is up to $3,000 for joint filers and $1,500 for single filers. You may also want to acquaint yourself with the different types of taxes in the USA, as knowing the distinction can help you plan your tax strategy for the year. Where you live is also important, as tax rules vary between states and even between communities.
As mentioned previously, it is always good to start your research as early as you can. Another example is the deductions that you can get for a home office and the fact that you can rent out your home for business meetings and get some tax breaks.
But for now, let’s take a look at how the top 11 options can provide you with a smaller tax for the year.
The first option you have is the W-4 form. This is one of the ways to cut your tax bills and it takes shape of a form that you provide to your employer, on which you will state how much tax will be withheld from each paycheck that you earn. While this may sound not the be that useful at the first glance, it is very useful in two scenarios. First, if your current tax year came with a large tax bill, you can withhold more money and make it easier for you to pay the taxes in due time.
On the other side, if you experience a large tax refund for the previous tax year, you may choose to withhold less. The beauty of the W-4 form is that it is highly flexible, meaning that you can change it at any time. While doing this will not give you a “break” from taxes, it can make them much more manageable throughout the year.
College savings plans
A contribution to a college savings plan will usually reduce your overall tax amount. Note that you can’t reduce your federal taxes by utilizing this option, but your state taxes will be influenced. You may also want to take a look at federal taxes vs. state taxes vs. local taxes while you are considering this option. The most common college savings plan is the 529 plan, which is a savings account that the state itself operates. In some cases, this plan can be operated by the educational institution instead.
Another thing to note is that this contribution to a 529 plan is usually counted as a “gift”. Meaning that if you utilize any other contributions that count as gifts, they all add up together to a limit. For the tax year 2022, this limit is $16,000. You always need to verify whether your contributions will apply to this limit, as everything above that will not apply to your tax return.
If you happen to be in a possession of a high-deductible health care plan, you may be able to shave off some of your taxes by contributing to an HSA (Health Savings Account). HSA is an account that is exempt from taxes and you can utilize it to pay for any medical expenses you may incur.
The contributions to this account are completely tax-deductible. Furthermore, the withdrawals are also tax-free, provided that you’ve used the money for qualifying medical expenses. There are some limits to the contributions, though. In 2022, the limit is $3,650 for the individual coverage contribution. This limit changes from year to year but the changes are usually not drastic. For example, the limit was $3,600 in 2021. For family high-deductible coverage, this limit is doubled and is $7,300 (2022). Additionally, if you are over 55 years of age, you can contribute another $1,000 to your HSA.
You can get an HSA via your employer or you can start your own account with certain financial institutions (usually a bank).
EITC (Earned Income Tax Credit)
If you’ve earned less than $57,000 in the tax year 2021, EITC might present another one of the ways to cut your tax bills, and a chance to lower their tax burden. This particular credit can get you up to &6,728 in savings, depending on your circumstances (marriage status, number of children, income level, etc.). This tax credit is a “true” reduction of your tax burden, it is not a deduction.
A tax deduction reduces the amount of taxable income, where this tax credit is more akin to “actual money”. To illustrate the point, let’s say that you get a tax credit of $6,000 and your tax burden for the year 2022 was $5,000. The IRS will actually refund the leftover to you! Sometimes, utilizing this line of credit may prevent you from needing to enter any of the IRS debt forgiveness programs, as the refunds can be considerably high. It is definitely worth your while to check if you are eligible or not.
Not everyone is eligible for EITC, of course, but even non-married taxpayers may be eligible in certain situations. Families with children are eligible for higher credits, of course.
Another way to cut your tax bills is by deducting qualified medical expenses. These expenses need to surpass a certain threshold to be tax-deductible, which is 7.5% of your AGI (Adjusted Gross Income) But how does it work in practice? For example, let’s say that your AGI is $50,000. This means that all medical expenses up to $3,750 are not tax-deductible. But any qualified medical expenses above that number are completely deductible. If you happen to need $20,000 to pay for your medical bills, you will be able to get a tax deduction of $16,250.
Needless to say, these expenses are not something that you want to plan for. But if you were in the hospital or been a recipient of otherwise costly medical care, you may be able to cut your tax bills by a significant amount.
You can also create a “side gig” for yourself and qualify for business deductions. This is one of the great ways to cut your tax bills, as the IRS has a very positive outlook on self-employed taxpayers, whether they are employed full-time or part-time, and offers them a host of tax deduction options. The most common business deductions include any mileage driven for business purposes, shipping, memberships, travel that is business-related, etc. You can even deduct a percentage of your home internet bill, as you will be using the internet for your business! There are numerous opportunities here and a savvy taxpayer looks to take advantage of them all!
When it comes to Individual Retirement Accounts, the first thing to note is that there are two types: Traditional IRAs and Roth IRAs. The amount of tax deductions that you can get by contributions to a traditional IRA varies on your income and whether you (or your spouse) already have a retirement plan provided by your employer.
For example, you can’t deduct any contributions if you are already covered by the retirement plan at the place you work, you are married and filing jointly, and your AGI is more than $129,000.
Even if you do qualify for deductible contributions, there are some limits to them as well. The limit for the tax year of 2022 is $6,000 for the entire year for everyone under 50 and $7,000 for 50 and above.
Contributing to your 401(k) plan is another excellent way of reducing your tax lien. The less taxable income you have, the less tax burden you incur. If you divert some of your income directly into the 401(k), the IRS will not tax that portion. As with any other tax deduction, there are limits. In the tax year of 2022, you can’t “funnel” more than $20,500 into your 401(k). If you happen to be 50 or older, you are allowed to make extra contributions up to $6,500.
You usually get a 401(k) via your employer, but you can also apply for one if you are self-employed. In some cases, employers will also match your contributions, essentially providing you with “free money”.
Funding the FSA
Another option at your disposal is to fund your FSA (Flexible Spending Account) if you happen to have one. The money that you deposit to the account is completely tax-free and it will lower your overall tax bill. You can divert up to $2,850 per year. It may not sound like much but every little bit counts!
You will have the use the money from the FSA for dental and medical expenses but there are other ways that you can utilize it, as well. For example, you may be able to procure some items that qualify as medical expenses (e.g. bandages, breast pumps, acupuncture, etc.).
FSA dependent care subsidies
You can also reduce your tax bill by diverting a portion of your paychecks to a dependent care FSA account. This money will be absolutely tax-free, as well. You can use the money for a variety of purposes that involve taking care of the dependent. Examples include preschool and day camps, before-and-after school care, and may even include eldercare.
However, the coverage varies between employers, and you might not be able to get the plan that you want. It is best to check the documentation before making any choices.
Lastly, you can make a charitable contribution to reduce your tax burden. These deductions do not even need to be in cash! You can donate your old clothes, food, household items, etc. Of course, all of which need to be in good condition.
Donating to charity is one of the most common ways to cut your tax bills, but the tax deduction is not as large as one that comes with some other options. For 2022, you can deduct up to $300 per person (joint filers can deduct up to $600). The main benefit is that you can make these deductions without itemizing.
If you want to fully understand the tax system, find the best tax relief options, and work with the best tax relief companies, you can find all the information you might need within the Consumer Opinion Guide. We are there to help you retain more of your hard-earned money!