No one can escape from paying taxes. But you may be able to get away with paying less.
In 2018, over $1.5 trillion in taxes were collected via individual tax returns. Would you like to pay a little less?
Here are six ways to pay less in taxes.
Contribute to a 401(k) or IRA
The simplest way to save on taxes is to earn less money by saving more into a tax-advantage retirement account. That’s a 401(k) at your job or a personal IRA.
Every dollar you save into these plans is tax-free in the year you save it. It is invested and grows over time, then you are taxed in retirement at your income tax rate at that time, presumably lower than while you were working.
IRAs were created to accommodate people who don’t have access to a 401(k) through their jobs. Recent changes in the tax law mean that many more people in small businesses should be able to use 401(k) plans going forward.
That’s good because the maximum you can save into a 401(k) is higher than an IRA. You can contribute into a 401(k) up to $19,500 for 2020 and 2021, and $26,000 for those age 50 or older.
If you use an IRA, the limit is up to $6,000 in 2020 and 2021 and $7,000 if age 50 or older).
Finally, if you are self-employed you can open a personal 401(k) and access those higher limits.
Use a health savings account
A health savings account, also known as an HSA, is basically like a bank account that is expressly used to pay for medical expenses. You can open a health savings account through an employer, bank, or insurance company.
However, only you control the money in a health savings account. As long as the money you withdraw from a health savings account is used to only pay for medical expenses and treatments, it will never be taxed.
Your contributions to a health savings account may also qualify for a tax deduction. You must have a high-deductible health plan to
Home office deductions
Do you operate a business out of your home with a room dedicated for that purpose? You can qualify for significant tax deductions if space in your home is consistently and exclusively used to operate a home business.
If a home office in your home takes up over 1/5th of the available living space, for instance, then you can deduct 1/5th of your rent and utility payments on your taxes.
If you work from home for a regular employer, sorry, no break for you.
Combine a business and vacation trip
If you conduct business while on vacation, you may be able to deduct various travel expenses. Calculate such deductions carefully with a tax preparer.
Low income? Qualify for the EITC
The Earned Income Tax Credit offers substantial tax breaks to qualifying workers and families. Those who qualify for an EITC are poor, working-class, or generate a moderate income.
With an EITC you can reduce the taxes you may owe and even qualify for a tax refund if you don’t make enough money to pay federal taxes. If you are a single head of household with no children, you qualify for EITC if you make $15,980. You can claim a credit of $543.
If you are a married couple with three children your income can’t exceed $57,414. In this case, a qualifying married couple can gain a $6,728 credit.
Additionally, those who qualify for an EITC can’t generate more than $3,650 in income annually from investments.
Just make less money
In 2020, more than 75.5 million Americans paid zero in federal income taxes. That is the equivalent of 43% of Americans not paying taxes.
If your income is below the legal IRS threshold for a tax deduction then you don’t have to pay federal taxes.
And to be clear, getting out of paying taxes in this circumstance is not a privilege or luxury; tens of millions of Americans don’t pay federal taxes because their income essentially falls under poverty line guidelines.
If you are single and make less than $12,550 annually, then you don’t have to pay federal taxes. The same goes for a married couple or qualifying widower making $25,100 or less.
However, just because you are exempt from federal taxes does not mean you are exempt from local, state, or payroll taxes.