According to Benjamin Franklin, “In this world nothing can be said to be certain, except death and taxes.” This same idea has been expressed by many others. Taxes and death.
But while there’s very little you can do to escape death, there are a number of easy and legal options when it comes to lowering your taxes in the US. From credits to deductions, it just takes a little effort (and ideally, the assistance of a professional tax accountant).
This one is really a no-brainer. You should be planning for your retirement anyway, but the contributions you make to your IRA or 401(K) are tax deductible. The IRS sets a maximum limit each year (currently $17,500 for your 401(K), and that number gets bumped to $23,000 if you’re over the age of 50), and you should make every effort to contribute the maximum amount allowed. Why? Aside from the obvious (saving as much as possible for your golden years), your taxable income is reduced by whatever amount you contribute. The more you contribute, the lower your income for the year, and the more you save on taxes.
The IRS offers plenty of tax credits (a sum deducted from your amount owing) based on various criteria. You won’t qualify for all of them, but you will be eligible for many if you just go looking. Credits are designed to either a) make it easier on low or moderate income earners, or b) as an incentive to do or buy something that is beneficial in the long-term.
Tax credits you might be eligible for include: purchasing a hybrid car, making energy-efficient improvements to your home, saving or paying for your child(ren)’s education, and child care costs. Check out the list of IRS Credits and Deductions for a more comprehensive list.
Two popular examples include the Lifetime Learning Credit (earn 20% of tuition payments up to a maximum of $2000 if you paid for you, your spouse, or your dependent to attend an eligible institution) and the American Opportunity Tax Credit (up to $2500 on the first $4000 of tuition for you or your dependent. You can apply for it in each of first 4 years). As with all tax credits, you must meet certain criteria in order to apply (usually tied to income level among other things).
Another useful credit to investigate is the Earned Income Tax Credit (earn as much as $6000 for low to moderate earners, depending on your specific situation).
A tax deduction (a reduction in the amount of taxable income during the year) works in much the same way. As an individual, you can take either the standard deduction (a set amount available to everyone and adjusted each year), or opt for itemized (much more personal) deductions. If you’re going the itemized deduction route (which can work in your favour), it is HIGHLY RECOMMENDED that you work with a professional tax advisor or accountant. The IRS can and often does scrutinize tax deductions, and you could get in a lot of trouble should you try and take too many or those that don’t apply to you (consequently, at a minimum, the deduction will be rejected, and at worst, you could face an audit).
Deductions include mortgage interest payments (owning a home and paying it off can really help your tax bottom line), charitable donations, and gifting money to your children (essentially up to $13,000). There are many others. Again, check out the IRS Credits and Deductions for more information.
Business deductions can also help here. Credits and Deductions for Businesses provides detailed information and eligibility. As a business owner, there are various options open to you (just tread carefully with deductions). Your home office, for example, could be a tax deduction ($5 per square foot, up to a maximum of 300 square feet).
Reduce Your Tax Rate
American tax rates can vary a great deal, ranging from 0% to nearly 40%. There are workarounds and options available to help you lower whatever rate applies to you.
Getting married and filing as a couple can be beneficial here, as can earning most of your income from long-term investments, as they are taxed at the much lower capital gains tax rate.
Saving on your taxes isn’t shady or underhanded. Just the opposite...many credits and deductions are there to help you and encourage you to take steps, renovate, save, and plan for your future. You just need to know how to use them. Speak to a professional to fully explore your options.