Receiving an unexpected tax bill will definitely ruin your day. Let’s try to avoid that, right? Yes, there are ways to avoid a bad day, tax-wise anyways. This is why you should go through these 11 tips, so that you can cut your tax bills. However, you will need to itemize, instead of taking the standard deduction, to be able to maximize the benefits of these tips. It might take more effort out of you, but you will be saving yourself some money. This article will give you 11 tips that can cut your tax bill this year (you can thank us later).
Can You Cut Your Tax Bill?
Yes, it is possible to cut your tax bill. You might not believe it, but you can. With 11 tips, you may be able to reduce your tax bill and save money.
Tweak Your W-4
The W-4 is a form that you provide to your employer. It gives instructions to your employer on how much tax is held back from each paycheck. If you receive a big tax bill this year, then you should prepare yourself for next year. Try raising your withholding from your W-4. That way, you will owe less when you come to file your next tax return. On the other hand, you might be able to get a huge refund from your tax bill. If you get a huge refund, then you should perform the opposite with your W-4. You should reduce your withholding and you could live on less of your paycheck for the year to come. The best thing is that you can change your W-4 form any time.
Stash Money In Your 401(K)
If you have less taxable income, then this means less tax. 401(k)s are a great way for you to reduce your tax bills. The Internal Revenue Service does not tax what you send over directly from your pay check into a 401(k). In 2021, you can now funnel up to $19,500 each year into an account. If you are 50 years old and older, you can contribute to an extra $6,500 in 2021. For retirement accounts, employers usually sponsor them. Although, there is always the option that self-employed people open their own 401(k)s. If your employer partially or fully matches your contribution, then you have free money!
Think About Contributing To An Individual Retirement Account
There are two main types of individual retirement accounts: Roth Individual Retirement Accounts and Traditional Individual Retirement Accounts. You may be able to deduct contributions, when it comes to a traditional Individual Retirement Account. There are limits when it comes to how much you can put in an Individual Retirement Account. For 2021, the limit is $6,000 per year and $7,000 for individuals who are 50 years old and older. However, there is a deadline when it comes to funding your IRA for the previous tax year. The deadline is until the tax-filing deadline, which gives you extra time.
Save Your Way To Your Kid’s College
If you are planning on sending off your kid to college any time soon, then you should start setting aside money for their tuition. One of the most popular options is for you to contribute to a 529 plan. A 529 plan is a savings account that the state or an educational institution operates. You will not be able to deduct these contributions on your federal income taxes. However, you could deduct your contributions on your state return, only in the case that you are putting the contributions into your state’s 529 plan. You should keep in mind that there are gift tax consequences, but only if your contributions and other gifts to a specific proceed surpass $15,000.
Fund Your Flexible Spending Account
The Internal Revenue Service allows you to funnel tax-free dollars straight from your paycheck to your Flexible Spending Account each year. If your boss provides a Flexible Spending Account, you might want to take advantage of this strategy. In 2021, the limit to fund your Flexible Spending Account is $2,750. During the year (not the tax year, the regular kind), you will need to use the money for any medical and\or dental expenses. There is a possibility that you can use the money to purchase everyday items that are medically relevant. If you are lucky and your boss likes you, then you can carry money to the next year.
Subsidize Your Dependent Care Flexible Spending Account
This Flexible Spending Account works differently, but you can reduce your tax bill with this type of FSA. However, you can only reduce your tax bill, in the case that your employer offers it. The Internal Revenue Service allows you to exclude up to $5,000 of your income, which you can send over to a Dependent Care FSA account. This means that you will avoid paying taxes on the money you send over. If you are a parent with kids under the age of 13 years old, then this is a huge win. Before and after-school care, day care, preschool, and elder care can be covered by the Dependent Care Flexible Spending Account. You should check with your employer and see how you can benefit from the Dependent Care FSA.
Contribute to Funding a Health Savings Account
If you have a very high-deductible health care plan, then there is a way to lighten your tax load. You can reduce your tax bill through contributions to a Health Savings Account. A Health-Savings Account is an account that you can use to pay for medical expenses and it is tax-exempted. All of your contributions to a Health-Savings Account are tax-deductible and the withdrawals are tax-free too! But, you have to use them for valid medical expenses. For this year, the limit for coverage is $3,600. If you have family high-deductible coverage, you can contribute $7,200 this year. The good thing is that you can put an extra $1,000 in your Health Savings Account, but that is only if you are 55 years old or older.
There is a possibility that your employer can offer a Health-Savings Account. But, you can also do it yourself at any bank or financial institution.
Find Out If You Qualify For The Earned Income Tax Credit (EITC)
It could get a little complicated with the Earned Tax Credit. If you earned less than $57,000, the Earned Income Tax Credit could be a good option for you. There are several factors that determine if you are qualified for an Earned Income Tax Credit. These factors include: your income, marital status, and how many children you have. In 2021, you might be able to qualify for an Earned Income Tax Credit up to $7,000.
A tax credit is a matched dollar reduction in your actual tax bill; this is different to a tax deduction. A tax reduction reduces how much of your income gets taxed.
Show Some Goodwill and Give Back to Your Community
It is time to give back to the community. You should do it for yourself and your community. (Reducing your tax bill is just a bonus!) Charitable contributions are deductible and you don’t have to provide cash donations.Instead, if you decide to donate clothes, food, or other items, then you can still lower your tax bill. All you have to do is give the charitable donations to a legit charity and get a receipt. There are many tax software programs that have modules that estimate the value of each donation you make. You should keep a list of all of the things you donate; it could lead to big deductions.
Record and Track All of Your Medical Expenses
If you have recently been in the hospital or paid for any medical expenses, then you should keep the receipts. Typically, you can deduct valid medical expenses, if they are more than 7.5% of your adjusted gross income for the specific tax year. This means that you can receive a deduction, as long as you meet the conditions of your medical expenses reaching more than 7.5% of your adjusted gross income. This is why it is best to keep all of your medical expense receipts with you, as proof of your medical costs.
Make Sure You Get The Timing Right
You should know that there is a big difference between acting on December 31st and doing it one day later, tax-wise. If you have an expense coming up that is tax-deductible, then you should consider whether or not you can pay for it this year or wait for next year. One of the most important things about taxes is timing. You should keep that in mind next time you file your taxes.