Key Takeaways
Claiming tax deductions and credits is the easiest way to lower your federal income tax bill. Business owners may be able to reduce taxes by changing how they receive compensation. Workers who freelance or have side gigs may be eligible for business deductions, such as those for a home office or business travel. State and local governments may offer their own deductions and credits that can save taxpayers money.
Taxes are an inevitable part of life, but most people would probably rather not hand over a portion of their hard-earned money to the government.
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Fortunately, there's a number of legal ways to lower the amount you pay the taxman each year. These include credits, deductions and advanced investment strategies.
Some tax savings are available only to small business owners or the self-employed, while other options are based on your income level.
The tax code can and does change frequently, but here’s a look at how to pay less taxes based on current law.
Retirement account contributions are one of the easiest ways to save on taxes, and it’s a strategy that almost everyone can use.
“That’s an excellent opportunity to reduce taxable income,” Craig Ferrantino, president of Craig James Financial Services in Melville, New York, says.
You can deduct contributions to traditional 401(k)s and IRAs from your taxable income and reduce the amount of federal tax you owe. These funds also grow tax-free until retirement.
There are also Roth IRA accounts, which are funded with after-tax dollars. While you don’t get a tax deduction, money in the account grows tax-free and can be withdrawn tax-free in retirement.
While contributions to workplace 401(k) accounts must be made by the end of the calendar year, tax-deductible contributions can be made to traditional IRAs up until the tax-filing deadline.
If you have an eligible high-deductible medical plan, contributing to a health savings account is another way to lower taxable income.
“That’s money that never gets taxed if you spend it on medical (expenses),” says Tatiana Tsoir, a CPA and business and finance coach.
Contributions to these accounts offer an immediate tax deduction, grow tax-deferred and can be withdrawn tax-free for qualified medical expenses. Any balance left at the end of the year rolls over indefinitely, similar to assets in a retirement account.
If you don’t have a high-deductible health insurance plan, you can still pay for medical expenses with tax-free dollars if your employer offers flexible spending accounts.
FSAs are funded with payroll deductions, which can be used to pay for expenses ranging from insurance co-pays to dental cleanings to over-the-counter medication.
Many employers offer FSAs for both health and dependent care. In both cases, there are limits to how much you can deposit, and money may be forfeited if not used by the end of the year.
Self-employed individuals (full time or part time) are eligible for scores of tax deductions, and Tsoir encourages people to start side gigs so they can take advantage of them. That means your freelance projects or time spent as a ride-share driver could land you considerable tax savings.
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Some of the business deductions available include business-related vehicle mileage, shipping, advertising, website fees, percentage of home internet charges used for business,........