Taxes are an annual chore. But trying to dodge the IRS may lead to all kinds of horrible things that will wreck your life — financial and otherwise. Still, tax-savvy filers take advantage of some things that may be able to lessen your tax burden.
Here's a list of 100% legal ways to potentially lower what you owe on taxes.
Check your withholding
Your paycheck withholding is determined by how you filled out your W-4 for your employer. If you got hit with a big bill from the IRS, it’s time to increase your withholding. The opposite holds true as well. If you usually get a ton of money back, you need to reduce your withholdings.
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Contribute to an IRA
Deductions are a great way to reduce your taxable income. IRA contributions are one such deduction, but be aware that contributions to Roth IRAs are not deductible.
There are a handful of other caveats as well. Deductions are limited if you have a retirement plan at work. Singles making $83,000 or more can’t take a deduction. Those making between $73,000 and $83,000 can take a partial deduction. For married couples filing jointly, those numbers change to $136,000 or more and between $116,000 and $136,000, respectively.
There are also limits on how much you can contribute to both traditional and Roth IRAs. For 2023, it’s $6,500 (or $7,500 if you're 50 or older).
Pro tip: When you do receive a refund, don’t spend it all. Here are some smart things to do with your tax refund.
Deduct dental and medical expenses
Regardless of why you needed to see a dentist or a doctor, taxpayers can deduct what they spent. That includes diagnoses, cures, prevention, and treatment. And it includes your physical well-being as well as your mental health.
Keep in mind the visit has to have been for you, your spouse, or your dependents, and you paid for it yourself with no reimbursements. In addition, you can only deduct the amount that goes over 7.5% of your AGI.
Deduct local and state taxes
Wild, but true: Some taxes are deductible. The IRS lists four kinds: state, local, and foreign income taxes; state and local general sales taxes; state and local real estate taxes; and state and local personal property taxes.
The maximum deduction is $10,000.
Fund a health savings account
The tax benefits of an HSA are immediate. Money that goes into it is deductible (and doesn’t require you to itemize), it grows tax-free, and funds you withdraw aren’t taxed as long as they’re used for medical expenses. Even contributions to your HSA made by someone else can be excluded from your income. Plus, the money in the account rolls over if you change employers.
Contributions are limited: $3,850 for self-only high-deductible health plans and $7,750 for family coverage.
Giving to charity saves you money when you file your return. Some charitable deductions, including little things over the course of the year, can be overlooked. So keep records of clothing you donated, food you bought to donate to your local food pantry, and even the gas in your car ($.14 cents per mile) if you were driving for volunteer work.
Max out your 401(k) contributions
Contributing to your 401(k) is another excellent way to reduce your taxable income, and it’s also one of the best ways to save for retirement. Those contributions are limited, however. For 2023, the limit is $22,500. If you’re 50 and over, you can kick in an extra $7,500.
Military personnel can take unique deductions
If you’re a member of the armed forces and you had to move, you can take a deduction for qualified moving expenses if you haven’t been reimbursed by the government.
There are some stipulations. It has to be a permanent change of station under military order. This would be a move from your home to your first post, a move from one permanent post to another, or your last post to your home. Meals are not covered, but household items, lodging, personal effects, storage, and travel are.
Put money in your FSA
Similar to HSAs, flexible spending accounts let you put tax-free money into an account to use on qualified out-of-pocket medical expenses. There are limits, of course. Contributions top out at $3,050 per year, per employer. A spouse can also add $3,050 into an FSA from their employer.
Save for college
Saving for a college education not only makes tremendous financial sense for the future, it can also save you money come tax time — albeit only for state taxes. Qualified tuition programs (section 529 plans) operated by your state can give you a tax break if you put money into it.
Student loan interest can be deducted
Paying for coveted higher education gets expensive fast. According to Forbes, students have racked up around $1.75 trillion in loan debt.
The good news is you can claim a deduction for the interest they paid on student loans. It doesn’t matter if the loan was for yourself, your spouse, or your dependent. There’s a yearly $2,500 cap, but it applies to all student loans, federal and private.
Take stock losses
If you’ve got some stocks that are damaging your portfolio, sell them at a loss. You can use this to offset any capital gains taxes.
If your losses are greater than your gains, you can deduct them, though there is a limit: either $3,000 ($1,500 if married filing separately) or the total net loss on your 1040. If you lost more than that, you can carry the excess over into later years.
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Use that home-office deduction
If you regularly use part of your home, or another building on your property, solely for business, you can claim the home-office deduction. The rate is $5 per square foot of the home used for business and tops out at $1,500. There is no home-office deduction for employees.
Write off gambling losses
Gambling winnings are taxable and gambling losses are deductible. You’ll have to keep records of everything, of course, and itemize your deductions. Additionally, your gambling deduction — filed under "Other Itemized Deductions” — can’t be greater than your reported gambling income.
While you can’t escape your tax obligations — lest you find yourself in the federal government’s financial crosshairs — you can significantly knock down what you owe the IRS.
Lowering your tax burden doesn’t only keep more money in your bank account instead of the government’s. These are also excellent financial moves for your life.
Dealing with the ins and outs of taxes can get tricky. Hiring a professional is almost always the best bet, but if you decide to tackle it on your own, be sure to use the best tax software.
Easy Tax Relief Benefits
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