Planning, putting money aside, and investing can reduce your tax obligation.
Taxes are an unavoidable aspect of life for the majority of wage earners. Taxpayers are aware that April 15 (or April 18 for 2022) always comes around. Even so, it’s simple to go into tax season unprepared and end up with a huge tax burden. But filers can lessen their burden and keep more of their hard-earned money by making a few wise financial decisions throughout the year.
Invest for retirement
One of the best strategies to lower income tax obligations and save money for your post-work future is to invest for retirement. Individuals with yearly incomes below the IRS’s ceilings can typically contribute to a regular IRA, and qualified workers may have access to a 401(k) through their workplace.
Individual taxable earnings can be reduced in a given year by pre-tax contributions to these accounts, enabling savers to pay the least amount of taxes now while still enjoying tax-deferred growth until retirement. The best part is that because these tax write-offs don’t require itemization, individuals can reduce their income while still qualifying for the standard deduction.
Take advantage of healthcare expenses
Health insurance companies frequently charge deductibles and copays in order to pass some healthcare costs on to consumers, despite the high cost of premiums. Fortunately, there are options available from the IRS to ease the burden.
Using high-deductible healthcare plans and opening a health savings account are two ways to lower income taxes. Earners can contribute up to $3,650 for individuals and $7,300 for families (plus $1,000 for those over 55) in tax-free funds to these tax-exempt accounts. Additionally growing, the funds can be withdrawn tax-free for qualified medical and dental costs.
Additionally, some firms provide flexible spending accounts (FSAs), which will enable employees to contribute up to $2,850 for approved medical, dental, and related over-the-counter purchases starting in 2022. Employers may allow savers to roll over the savings annually or may force them to use the donated cash within a 12-month period depending on the plan.
The federal government also allows tax filers to write off medical expenses that total more than 7.5% of a person’s gross adjusted income in a particular tax year if they have greater medical bills.
Check for tax credits
By lowering the amount of income subject to taxation, deductions lighten the load on taxpayers. Credits, on the other hand, lower tax bills dollar for dollar. If a credit brings a tax bill down to zero, the IRS may refund the balance of the credit, even to taxpayers who are not required to pay federal income taxes.
The earned income tax credit is one particular credit that many individuals might not be aware of. For workers who made less than $57,000 in 2021, the IRS will calculate this credit depending on income and family size to provide refunds that could amount up to $6,728.
Watch out for business deductions
Depending on the type of business they run, small business owners, side hustlers, and freelancers may be eligible for a variety of tax deductions and credits. Several typical deductions include:
- mileage or other travel costs incurred for business purposes.
- Fees for the website, membership, and subscription.
- Phone and internet bills (proportional to business use).
- supplies for technology and the workplace.
- Fees for advertising.
- and even the cost of insurance.
Additionally, self-employed people are permitted to deduct 50% of the Federal Insurance Contributions Act levy, which is used to fund the Social Security and Medicare programs. Again, itemization is not required by the IRS for this deduction to be claimed.
All income earners must pay taxes, but this does not mean that filers should pay more than is necessary. Planning ahead, studying tax laws, itemizing receipts, and setting aside money for retirement and medical costs make it simple to minimize tax obligations.