Let’s face it: No one likes paying taxes.
When you start to think about how much of your hard-earned money goes toward them, it can get frustrating—particularly when it comes time to file your taxes, and you see the yearly totals.
While there’s no way to avoid taxes altogether, there are ways to legally reduce how much you pay. Below are a few tips and tricks for keeping more money in your pocket.
Raise your 401(k) contribution
Everyone knows the importance of saving for retirement, but many people don’t think about the tax advantages that contributing to a 401(k) can provide. Contributions get taken out of your paycheck (pretax) and directly deposited into the 401(k) account.
This lowers your taxable income, meaning you keep more money. The more you contribute, the more you lower your taxable income—and the more you save long term.
Keep track of medical bills
If your medical and dental bills for the year equal more than 7.5 percent of your adjusted gross income (AGI), they can be used as a deduction on your taxes. But this means you have to itemize your deductions, which is not always the best option.
If you do plan on deducting medical expenses, make sure you have a detailed record of all your expenses for yourself, your spouse, and your children, if applicable.
Take advantage of a flexible spending account
Speaking of medical expenses, if your employer offers the option of contributing to a health care flexible spending account (FSA), you should be using it. These contributions aren’t subject to employment or federal income taxes, and you can choose at the start of the year how much you would like to put into the account per paycheck.
Look at it this way: If you’re going to be paying for medical expenses anyway, you might as well do it on non-taxed money and reduce your taxable income.
Maximize tax deductions and tax credits
In addition to medical expenses, other tax deductions to consider are mortgage interest, charitable contributions, and more. Here is a list of five common deductions people often skip.
Examples of tax credits include the first-time home-buyer credit, and the child and dependent care credit.
In the know While tax deductions reduce your taxable income, tax credits reduce the actual dollar amount of taxes you owe.
Sell investments for a loss
This might sound crazy, but if you have a diversified investment portfolio, as you should, you are bound to have a few losers. The good news is you can lessen the blow by using the losses to offset your capital gains.
If your losses on investments are more than your gains, you can deduct the losses from your ordinary income and carry the rest to the next year. This will alleviate your tax burden for the given year.
The bottom line
Paying taxes is a reality we all face and for good reason. But that doesn’t mean you can’t take advantage of every (legal) deduction, credit, and strategy available to you to reduce how much of your money goes to taxes each year. For additional tips and suggestions, speak with an accountant or financial advisor.