Looking to save as much money as possible on your taxes this year? These 4 tips can help you lower your tax bill and keep more of your hard-earned money.
You’ve worked too hard this year, putting in long hours and maybe even spending literal blood, sweat, and tears. You deserve to keep as much of your money as possible.
Currently, the federal income tax brackets range anywhere from 10% to 37%. However, with a little bit of effort, you can take advantage of these perfectly legal deductions and credits and end up paying less to the IRS.
Deductions vs Credits
Before we dive into our list, let’s cover the difference between a deduction and a credit when it comes to taxes. Both serve the purpose of reducing your tax burden, but they come at it from different angles.
A tax deduction decreases your taxable income.
While your actual income may be one amount, after deductions the amount of your income the IRS taxes you on could be significantly lower. Since your tax bracket is based on your taxable income, anything you can do to legally make that number as small as possible is in your best interest.
There are 3 types of deductions:
- Standard deduction. For 2021, the IRS has adjusted standard deductions for inflation. The new amounts are:
- Single or Married Filing Separately: $12,550
- Head of Household: $18,800
- Married Filing Jointly: $25,100
- Itemized deduction. There is no limit on how much you can deduct if you itemize. It was eliminated by the Tax Cut and Jobs Act. You cannot choose to itemize deductions and take the standard deduction, so you’ll only want to select this option if your deductions will exceed your standard amount above.
Be sure to keep good records in case the IRS decides to audit your return, especially if you gave a charitable gift above $250 or had medical expenses. Also, you can “bunch” categories of deductions together to help put your amount above the standard limit. (For example, if you pay your property taxes in January and again in December of the same year those combined amounts count together towards your “local tax” deduction.)
Itemized deductions include things like:
- Charitable giving
- Home mortgage interest
- Qualified medical expenses
- State and local taxes
- Above-the-line deductions. These are categories of deductions that the IRS will allow regardless of whether you choose to take the standard deduction or itemize. (The Balance goes into these in more detail in their article on “What Are Above-The-Line Deductions?”) Some examples include:
- Self-employment tax deductions
- Early-withdrawal penalties
- Retirement contributions
- HSA contributions
- Student loans
- Educator Expenses
A tax credit is subtracted from your tax liability.
Generally speaking, credits reduce your tax burden much more than deductions because they are a dollar-for-dollar reduction in your taxes. Where a deduction reduces the amount of income you will be taxed on, a credit reduces your total taxes. In some cases, credits are considered “refundable”…meaning that even if your tax burden is zero, applying those credits could result in your getting money back from the government.
For example, if your tax bill ends up being $5,000 and you qualify for $5,000 in tax credits, your net tax for that year would be $0. If your net tax ended up being $2,000 and you received $3,000 in credits, you would get a $1,000 refund.
Ways to Maximize Deductions and Credits to Lower Taxes
- Take every credit available.
- Be generous.
- Add to your retirement account. Because your 401(k) and 403(b) contributions are taken from your paycheck before taxes, they lower your taxable income before you ever begin your year-end tax return. For 2021 you can contribute up to $19,500 to an employer-sponsored plan. This amount will rise to $20,500 for 2022.
If you invest money into an IRA, the limit is $6,000 and will stay the same in 2022.
People over age 50 can take advantage of “catch-up contributions” as well. They are allowed to contribute an additional $6,500 to employer-sponsored plans and $1,000 to IRAs.
Highlights of these changes for 2022 are available in detail from the IRS website.
- Fund an HSA. If you have a high-deductible health insurance plan, you can create a Health Savings Account (HSA) on your own or through your employer if they offer the option. It will lower your taxable income, and withdrawing from it is tax-exempt as long as you use it for medical expenses.
- If you are the only one on your insurance plan, you can contribute $3.600 in 2021 and $3.650 in 2022.
- If your family is on your plan, you can contribute $7,200 in 2021 and $7,300 in 2022.
- People 55 and over can contribute an extra $1,000.
There’s a lot more available!
Here are 2 valuable resources from the IRS:
Make sure you don’t miss out! Partner with a good tax pro.
When you file your taxes this year, don’t leave money on the table. By working with an experienced tax professional who can help you find all of the deductions and credits you qualify for, you can significantly (and legally) reduce your taxes!
CRS CPA has been providing valuable Tax Services and helping clients keep more of their money for over 40 years! We understand how important maximizing deductions and credits is to you, and we have the skills to find savings other firms might miss.
Schedule a call today to get started on lowering your taxes!