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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

Tips to Help Reduce the Amount You Pay for Taxes

Tips to Help Reduce the Amount You Pay for Taxes

Every taxpayer needs the means to lower their taxes. Both individuals and business owners look for ways to save each dollar in taxes. Although the government initiated the Tax Cuts and Jobs Act to increase standard deductions, it also eliminated other itemization deductions and personal exemptions. The IRS accepts tax from every dollar, depending on your location and income. 

However, this article contains many ways to lower your taxes to reduce your tax reliability.

Adjust Your Withholding

Withholding money from your paycheck is the simplest form of reducing your tax liability. Exempting some cash from your income will also avoid underpayment penalties. For example, taxpayers with colossal debt with the IRS can file a fresh Form W-4, Employee’s Withholding Certificate, and submit it to your office payroll department. 

If you need help, the IRS tax withholding estimator can complete the form. Your employer will use the new W-4 to set the required withholding tax from your paycheck for the remaining calendar year. However, self-employed taxpayers must make their estimate for the tax year or involve a tax adviser or use a worksheet and attach Form 1040-ES, Estimated tax for Individuals.

Max out Retirement Accounts and Employee Benefits

Taxpayers with retirement accounts can add savings to max it up. Retirement accounts are usually tax-deferred, and easy to lower your tax liabilities while saving money. The government allows taxpayers to keep up to $20,500 as employer-sponsored 401(k) or up to $27,000 for those 50 and older for the 2022 tax year. 

If you lack one, you can donate up to $6,000 or $7,000 to 50 and older taxpayers in your traditional IRA. Plus, you can take a federal income tax deduction from 410(k) or a traditional IRA, and the money is tax-free.

Use a Health Savings Account (HSA)

If you’re a taxpayer with a high-deductible health insurance plan can lower your tax liability with a health saving account (HSA). Similar to 401(k) plans, contributions to an HSA plan are tax-free and allow a deduction from taxable income. 

For example, in 2021, taxpayers were allowed to contribute up to $3,650 for individuals and $7 200 for couples or families to their HSA. in 2022, the maximum increase to $3,650 for individuals and $7,300 for couples or families. In addition, the savings accumulate interest and grow tax-free. Also, you can withdraw from the account to pay qualified medical expenses without paying tax on a single dollar.

Take Credit for Having a Child

Having a child and paying the bills is expensive. The upside is that the IRS imposes two available tax credits to help parents of dependent children deal with the cost. These credits are another way to lower your tax liability. Below are the tax credits.

  1. Child Tax Credit

The IRS fixes the child tax credit at $2,000 for each dependent under 17 at the end of 2022. The child tax credit can cut down your taxes to zero and still refund you up to $1,400. However, it benefits high-income taxpayers affected by modified adjusted gross income (MAGI). 

However, the tax break is available for single filers with over $200,000 in MAGI or joint filers with more than $400,000 in MAGI.

  1. Child and Dependent Care Credit

The child and dependent care credit is another way to lower your taxable income, but only for kids under 13 years or a dependent or spouse that needs help while you’re employed or seeking employment. The credit offers a tax cut back on the number of dependents, the amount used for their upkeep, and your adjusted gross income. However, taxpayers with more than $438,000 cannot enjoy this opportunity.



Jim McClaflin, EA, NTPI Fellow, CTRC
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