Pay less in taxes!
As a tax preparer I get asked almost daily, “how do I pay less in taxes"? I typically find myself saying the same things to everyone. There are some ways to reduce the amount of taxes that you pay, but many include spending or transferring money of some sort. The government isn’t just going to reduce your taxes because we check off a specific box on your return or because you think you should pay less in taxes. While there are no tricks or cheats that will help you pay less in taxes there are a few things that you can do that will reduce your tax liability legally.
Open an IRA. Individual Retirement Accounts are probably one of the top recommended ways to reduce your taxable income and in turn reduce the amount of taxes you will pay. If you’re wondering exactly how contributing to an IRA will help you pay less in taxes, here is a quick rundown. If you contribute to an IRA (up to $5500 for people under 50 years old and $6500 for people 50 and older) the IRS allows for you to reduce your taxable income by the amount you contributed to your IRA. Basically if your taxable income is $50,000 and you contribute $5,500 to an IRA you will only have to pay tax on $44,500. That’s a pretty good savings! There are some other limits to IRAs for people who have higher incomes so you will want to consult a tax professional before making a contribution. Remember you have until April 15th to make a contribution for the previous year, so it’s not too late.
Be generous. Charitable donations are a good way to reduce your tax bill (or increase your refund). If you are someone who itemizes deductions (many homeowners are) it may be time to give your home a good clean out. Go through your home and pack up all of those old clothes that no longer fit and you haven’t worn in years, get those old bikes out of the garage, and I’m sure your kids have some toys that have been sitting in the closet unused. Pack up all of your items and donate them! Not only will it make you feel good helping someone in need but the IRS allows for deductions based on the value of your charitable donations.
Update your home. While the IRS doesn’t allow you to deduct home improvements on your personal residence there are some energy credits that you may qualify for. Have you been considering adding those fancy solar panels your neighbor just put up? Not only will they make you greener and save you money on your electric bill, but you can get a credit of 30% of the cost of those new solar panels. For those of you who don’t know “tax credits” are much better than “tax deductions”. A tax deduction lowers the amount of income you need to pay taxes on, so if you have $50,000 of income and $1,000 of deductions then you have to pay tax on $49,000. However, tax credits work very differently. A credit is an amount that will be added directly to your refund, or reduce your tax liability, so if you were going to get a $1,000 refund and you have $1,000 in credits then you will now get a $2,000 refund. Credits are much better than deductions! There are also credits for some smaller home improvements such as getting new exterior windows and doors, putting on a new roof, or installing a new furnace. Check with your tax professional as there are lifetime limits on some of these credits.
If you’re looking to reduce your tax liability these are a couple of easy ways to help you do so. Always remember to contact your tax professional to ensure you qualify for any of these credits/deductions.