Some Smart Tax Reduction Strategies That Work - Tax Professionals Member Article By Taxes Made EZ Inc
Posted by Taxes Made EZ Inc

Some Smart Tax Reduction Strategies That Work

Some Smart Tax Reduction Strategies That Work

An unexpected tax bill can ruin anyone's day. To help you avoid this unpleasant surprise, here are some simple steps that many people can take to reduce their taxes. In many cases, you have to dig deeper instead of taking the standard deduction to use these strategies, but the extra effort can be worth it.


Tweak your W-4

W-4 is a form you provide to your employer that tells you how much tax to deduct from each paycheck.

  • If you received a high tax this year and don't want another surprise next year, increase tax withholding to pay less when you file taxes.

  • If you have received a large refund, do the reverse and reduce the withholding tax; otherwise, you could live needlessly on less than your full year's salary.

  • You can change your W-4 at any time.


Put money in 401(k)

Less taxable income means less tax, and 401(k) is a popular way to reduce taxes. The IRS does not charge what you need to transfer directly from your paycheck to a 401(k).

  • For 2021, you could have channeled up to $19,500 per year into a single account. For 2022, it will increase to $20,500.

  • If you are 50 or older, you can contribute an additional $6,500 in 2021 and 2022.

  • Employers often sponsor these retirement accounts, although self-employed people can open their own 401(k). And if your employer matches some or all of your contribution, you'll receive free money to get started.


Contribute to an IRA

There are two main types of personal retirement accounts: Roth IRAs and traditional IRAs.

You can deduct contributions to a traditional IRA. However, the amount you can deduct depends on whether an occupational pension plan covers you or your spouse and how much you earn.

  • For 2021 and 2022, the limits are $6,000 per year or $7,000 for people aged 50 and over.

  • For the 2021 tax year, you may not be able to deduct your contributions if you are covered by an occupational pension plan if you are married on a joint declaration, and your adjusted gross income is $125,000 or more. By 2022, that number will increase to $129,000. There are also limits to the amount you can invest in an IRA:

  • You have until the tax deadline to fund your IRA from the previous year, giving you more time to take advantage of this strategy.


Save For College

Saving money for John's tuition can also save you a few dollars on your tax bill. A popular option is to contribute to a 529 plan and a savings account administered by a state or educational institution. You cannot deduct your federal income tax contributions, but you can deduct them on your state return if you invest money in your state's 529 plan. Also, keep in mind that there may be tax consequences for donations if your contributions plus any other donations to a particular recipient exceed $15,000 for 2021 and $16,000 for 2022.


Fund your FSA (Flexible Spending Account)

The IRS lets you funnel non-taxable dollars directly from your paycheck to the FSA every year, so if your employer offers a flexible spending account, you can take advantage of it to lower your tax bill.

• For 2021, the limit was $2,750. For 2022, it rises to $2,850.

• You will need to use the money for medical and dental bills over the calendar year, but you can also use it for everyday items such as bandages, pregnancy test kits, and pull-tabs. 

• Some employers may allow you to transfer money next year.


Subsidize your dependent care Flexible Spending Account

This one-way FSA is another affordable way to lower your tax bill if your employer offers it.

  • For the 2021 tax year, the IRS will allow you to exclude up to $10,500 of your salary that your employer redirects to an FSA for dependent care, meaning you avoid paying taxes on this money. This could be a big win for parents with kids under 13 (14 for 2021 due to special coronavirus rules) as they are often allowed before and after school, kindergarten, kindergarten, and fields.

  • Elderly care may also be included.

  • What is covered may vary from employer to employer, so check your plan documents.


Shake your HSA

If you have a high-deductible health plan, you can ease your tax burden by contributing to a health savings account, a tax-free account that you can use to pay your medical bills.

  • Contributions to the HSA are tax-deductible, and withdrawals are tax-exempt as long as they are used for eligible medical expenses.

  • For 2021, if you had significant deductible health coverage just for you, you could have contributed up to $3,600. For 2022, the contribution limit for individual coverage is $3,650.

  • If you are 55 or older, you can add $1,000 to the HSA.

  • If you have high-deductible family coverage, your contribution limit was $7,200 in 2021 and $7,300 in 2022.

  • Your employer may offer you an HSA, but you can also open an account with a bank or other financial institution.


Check that you are eligible for Earned Income Tax Credit (EITC)

The rules can be complicated, but it's worth considering an earned income tax credit if you earned less than $57,000 in 2021.

Depending on your income, filing status, and the number of children you have, you may be eligible for a tax credit of up to $7,000.

A tax credit is a dollar-for-dollar reduction in the actual tax bill, as opposed to a tax deduction, which simply reduces the amount of taxable income. 


Donate

Charitable contributions are tax-deductible and don't even have to be cash. For example, if you donate clothes, food, old sports equipment, or household items, these things can reduce your tax if you go to a genuine charity and receive a receipt.

For the 2021 tax year, you can deduct $300 per person (spouse can deduct up to $600) from the tax return without details.

Many tax software packages include forms that estimate the value of each item you donate, so make a list before you leave that big bag to Goodwill; it can be added to significant deductions.


Track your medical expenses

Keep those receipts if you were hospitalized or received other expensive medical or dental treatment.

  • In general, you can deduct eligible medical expenses that exceed 7.5% of adjusted gross income for that fiscal year.

  • So, for example, if your adjusted gross income is $40,000, anything above the first $3,000 of your medical bills, 7.5% AGI, may be tax-deductible. If you paid $10,000 in medical expenses, $7,000 could be deductible in this example.


Sell whatever is weighing down your portfolio.

Knowing that you get a tax deduction might make it a little easier to get rid of some of those bad choices straining your wallet.

  • You can deduct losses on sales of shares, which can offset any taxable capital gains you may have. The limit on these fees is $3,000 or $1,500 for couples filing separately.

  • Another note: never let tax evasion replace smart investments. Only sell a stock if it isn't working for your portfolio. Don't do this just to get a tax deduction because if you decide to redeem your shares within 30 days, the IRS can recoup your deduction.


Last Words

There's a big difference between doing something on December 31 and doing it the next day from a tax perspective. If you know that a future expense will be deductible, ask yourself if you can pay it this year rather than next year. 


FOR MORE INFORMATION ON HOW TAXES MADE EZ, INC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.

Taxes Made EZ Inc
Contact Member