One of the surest things in life is the fact that if you work, you have to pay taxes. Because not paying your income taxes isn’t an option, most taxpayers will look for ways to reduce their tax bills. There are definitely opportunities for saving via tax deductions and tax credits, but these options can change from year to year depending on changes in tax laws made.
In this article, we’ll discuss 5 strategies to pay less in tax season that can help you effectively save money.
1. Pay Your Student Loans
Paying your student off should already be a priority, however, during tax season it should be even more so. This is because the interest that you pay on your student loans can benefit you with your tax responsibility. Each year, you can deduct up to $2,500 worth of interest paid on the corresponding year; this is considered an “above the line” deduction.
Unfortunately, this option is not available to higher-income earners. If your individual income is between $65,000-$80,000, or if your joint income is between $135,000 and $165,000, you cannot deduct the interest paid.
2. Contribute to Your 401k Plan
The taxes you owe are based on your taxable income - the more you earn, the more taxes you typically owe. You are able to reduce your taxable income, however, when you contribute pre-tax income to your 401k retirement savings plan. Doing this will lower your taxable income for the year; you won’t have to make any tax payments on the money in your 401k until you begin to withdraw money from the account in retirement.
Keep in mind that you are limited in how much money you can contribute to your 401k per year. For those under 50, you are limited to no more than $19,000 in contributions to your 401k. For those over 50, you can contribute up to $25,000 per year.
3. Ensure Your Filing Status is Correct
You might be surprised how many people are overpaying in taxes due to a filing with the wrong status. The status you choose to file with determines which deductions you can take and which tax bracket you fall under. To understand the differences in your choices to help you make the right decision, below is information on the filing statuses you can choose from:
- Head of Household - For those that are unmarried and who pay more than half of household expenses for themselves and a dependent, this may be the correct option to choose.
- Single - This is the status to choose for unmarried taxpayers with no dependents.
- Married Filing Jointly - This is the status that can be chosen for married taxpayers.
- Married Filing Separately - This option is for spouses that prefer to file taxes separately.
- Qualifying Widow(er) with Dependent Child - When a taxpayer has a dependent and has lost their spouse, they can file using this status.
4. Purchase a Home
Purchasing a home is a big financial undertaking, however, it does come with tax benefits. Essentially, the mortgage interest and property taxes that you pay on your home are tax-deductible, which can save you money. The amounts you can deduct are capped, however. Interest deductions cannot be taken on mortgage debt over $375,000 if single, and $750,000 if married. Property tax deductions are also capped at no more than $10,000, $5,000 for couples filing separately.
Making charitable donations are not only wonderful in that they help those in need, but they can also mean tax deductions that you can take. You will need to have verifiable documentation of your donation such as receipts, bank statements, canceled checks, credit card statements, completed forms, or written acknowledgment. Be sure to check IRS requirements for each type of donation.