(ModernSurvival.org) – Many Americans are under the false impression that standard deductions are the only way to lower their tax bills. For many, however, this simply isn’t true. There are various strategies an American taxpayer can use not just to lower their tax bill this year but for the year to come. Regardless of how you intend to do your taxes — through a software program or by hiring a tax specialist — these strategies can help you get a better refund.
Tips to Lower Your Tax Bill
1. Update Your W-4
Employees in the United States submit a W-4 to their employer each year to adjust how much tax should be withheld from their paychecks. By changing your tax withholdings to higher per paycheck, you can lower the amount of money owed to the government at the end of the year. For many taxpayers, losing out on a bit of money each payday is easier to handle than coughing up a large sum come tax time.
2. Explore Deductions
Learning about what deductions you may qualify for is a great way to lower your tax bill. For example, if you happen to be an independent contractor working from home, you likely qualify for the home office tax credit. Itemized deductions and deductions based on medical expenses are other options worth exploring as well.
3. Earned Income Tax Credit (EITC)
The EITC is yet another way to lower the amount of taxes you have to pay. To qualify for this credit, you must have an earned income of less than $59,187 in 2022. Other factors, such as marital status, dependents, and investment income, will also affect your eligibility.
4. 401(k) Contributions
The less taxable income you have, the fewer taxes you’ll have to pay. Diverting income from your paychecks to a 401(k) is a fantastic way to lower your tax bills. In 2022, taxpayers could divert $20,500 into a retirement account and save that money when filing their taxes.
5. College Savings Account
Another option to lower your tax bill is to invest in a college savings account, such as a 529 plan. Individual states may have gift tax consequences, but a college savings account can divert up to $16,000 ($32,000 if filing jointly with your spouse), which won’t count as taxable income in 2022.
6. Flexible Spending Account (FSA)
Investing money into an FSA fund each year is another way to lower your taxable income. In 2022 the maximum amount you could put into an FSA fund was $2,850. Note that this money can only be used for medical and dental expenses.
7. Utilize an HSA
As a taxpayer, you can utilize a health savings account (HSA) to lower your tax bills as they are tax-exempt. This is especially useful for those who have high-deductible healthcare plans. You can start one at a bank if your employer doesn’t offer an HSA.
8. Medical Expenses
Costly medical expenses paid out of pocket or not covered by healthcare deductibles may help lower your tax bill. Most taxpayers can claim up to 7.5% of their adjusted gross income (AGI) each tax period for medical expenses, but they must have receipts to prove their claims.
9. Timing Purchases and Payments
The timing of mortgage payments and big purchases can impact how much you can deduct each year. For example, making a mortgage payment for January of the next year in December of the current tax year can qualify that payment for the current year’s deductions.
There are multiple ways to lower your tax bill, from strategic investments to taking advantage of deductions. Remember that lowering your taxable income will, in turn, lower the amount you owe on taxes. Ask a professional tax expert for additional guidance on lowering your tax bills.
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