Reducing taxable income can put thousands of dollars in your pocket long-term. Confronting taxes with an aggressive tax saving strategy can help you to achieve your financial goals.
However, since the Tax Cuts and Jobs Act (TCJA) radically altered the tax system, including increasing the standard deduction and removing itemization for most, it can be difficult to adapt. Current Federal tax brackets now range from 10% to 37%.
To start, taxpayers need to understand the new tax regime and focus on where reductions can be made.
Figuring out how to reduce taxable income revolves around the changes introduced by the TCJA.
The TCJA was passed in 2017 by the Trump Administration and is set to remain in effect until 2025.
Its main aim was to reduce itemization tax returns and increase the standard deduction from the 2018 tax season. These increases will continue in line with inflation.
The standard deduction was increased from:
The other major change was the elimination of restrictions on most itemized deductions. All but the wealthiest taxpayers are expected to take the standard deduction. Due to the TCJA, the Tax Policy Center estimates the number of households itemizing deductions accounted for just 10% of all tax filings.
There are some exceptions to this rule. Many state and local taxes can continue to be itemized to reduce taxable income. However, there is a cap of $10,000 in place.
When people talk about how to pay less taxes, they assume it must involve some sort of special tax avoidance scheme. This is far from the case. If you’re wondering how to avoid paying taxes, there are plenty of options accessible to everyone.
The simplest of all tax saving strategies is to maximize retirement savings. Holders of 401(k) and 403(b) accounts can contribute up to $19,500 in 2021 to reduce their taxable incomes.
For taxpayers without an employer-sponsored retirement plan, making contributions to an Individual Retirement Account (IRA) can also reduce taxable income. However, the maximum contribution is $6,000 in 2021.
Senior citizens aged 70 or over can now contribute to a traditional IRA due to a change in the law. There are currently no age limits for contributions, and taxpayers beyond age 70 can contribute up to $7,000 per year.
For the self-employed thinking about how to lower taxable income, the easiest way is to deduct business expenses.
The IRS has a long list of different deductions business owners can make. All professional expenses can be deducted, but there are also deductions available on home offices and self-employment tax.
Business owners who make major purchases before the end of the tax year can significantly alter their tax liabilities.
This is why major corporations often invest in new equipment and facilities whenever they have a bumper year. It’s one of the most effective strategies on how to reduce taxable income.
Another option for how to avoid taxes is to invest in a health savings account. For those eligible for a high-deductible medical plan, contributing to a health savings account can save thousands on federal taxes.
All contributions to health savings accounts provide an immediate tax deduction. They also grow tax-deferred and may be withdrawn without paying any tax if the money is used to pay for a qualified medical expense.
The remaining balances can be rolled over to the following year indefinitely in the same way as a retirement account.
FSAs are designed to help taxpayers cover medical expenses not covered by other healthcare plans, such as prescription eyeglasses.
Most FSA contributions don’t count as tax deductions because most accounts are funded via salary deferrals. Direct contributions, on the other hand, are tax-deductible because they are funded via pretax dollars.
The 2020 contribution limit was $3,600, with average increases in the cap of $50 per year.
Even if you don’t have any Federal tax liabilities, claiming the EITC is one of the best things you can do when searching for ways on how to not pay taxes.
The EITC is a refundable tax credit worth $6,600 in 2020. For taxpayers on lower incomes, the EITC could provide you with a refund from the Federal government.
Income limits range from $15,820 for individual filters with no children to $56,844 for joint filers with children.
How to save tax is a hot topic every IRS filing season. If you’re wondering how to reduce taxable income and keep more of your money, these tips will save you thousands of dollars in taxes every year.
However, a professional could save you far more on your taxes. Connect with a professional accountant to ensure you’re claiming every deduction you’re eligible for.
Discover how to keep more of your money away from Uncle Sam this tax filing season. Contact Porte Brown, one of the top accounting firms in Chicago, for access to tailored tax-saving strategies.
Get in touch today and find out how we can help you meet your objectives.