Five Ways to Lower Your Tax Bill
25 February, 2021
We all know that paying taxes is an unavoidable reality, but few are aware that there are subtle ways to reduce your tax bills each year. There is no reason to give in to the system and simply take your tax documents to your accountant and deal with whatever bill you end up with. Being proactive about your income and how you distribute it to reduce your tax bill is a real possibility.
It's important to know that you are not taxed on your net income, but your taxable income. Reducing the amount of income that falls into the taxable bracket is how you can reduce your tax burden. People who pay attention to and take advantage of write-offs when they do their taxes benefit from getting a tax bill that isn't overwhelming.
If you dread seeing how much you owe in taxes every year, there are other avenues for you to explore when it comes to paying less during tax season. Much like your day-to-day saving strategies, it's all a matter of making a plan for your income and where it's going to help you most. Let's take a look at a few smart ways to lower your tax bill.
Max Out 401 K
One of the easiest and most beneficial ways to reduce your taxable income is to maximize your 401K contributions. If you need to stash money away, there is no better place than in your retirement plan, where it can be used for the future. You can funnel up to USD 19,500 into your 401K account and reduce your overall taxable income. If you are over 50, you qualify to add an additional USD 6,500 to reach your maximum for the year.
A rewarding way to reduce your taxable income is to simply give it away. Charitable donations qualify as deductions on your net income. Not only cash donations qualify for a deduction. If you choose to donate clothing, books, or a vehicle, you can take a deduction for the value of your donation as long as you get a valid receipt.
Adjust your W-4
Your W-4 is the form you submit to your employer that instructs them on handling your payroll deductions. It's up to you to decide how much taxes you would like to have withheld during each pay period. To avoid a bigger tax bill at the end of the year, you can go to your employer and ask them to increase your salary deductions.
You can save money on your tax bill and start saving money for your child's college tuition at the same time. Many parents choose to open and contribute to a 529 savings plan that is designed to help save for college. Your contributions through the year can be deducted from your taxable income and create a nest egg for your child's tuition costs. You can put as much as USD 15,000 per year in your 529 accounts without having to pay any fees.
If your coverage for yourself or your family in a high-deductible health care plan, you may be able to save on your tax bill by opening an HSA (Health Savings Account). These accounts allow for tax-free contributions up to USD 3,600 and hold no fee for withdrawals as long as it is used to pay medical bills.
Tax time can be stressful if you are worried about getting a huge bill at the end of the year. By taking advantage of some of these smart money moves, you can help bring your tax bill down and save money.
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