As the end of the year approaches, it’s time to start thinking about ways to reduce your tax liability. Luckily, there are plenty of legal strategies you can use to lower your taxes and keep more of your hard-earned money. In this article, we’ll explore some of the top ways to get tax relief every year.
Table of Contents
- Take advantage of tax deductions
- Make the most of tax credits
- Contribute to tax-advantaged accounts
- Use tax-loss harvesting to offset gains
- Consider charitable donations
- Keep good records
- Hire a tax professional
Paying taxes is a necessary evil, but it doesn’t have to be overwhelming. By taking advantage of tax relief strategies, you can reduce your tax burden and keep more of your hard-earned money. In this article, we’ll explore some of the top ways to get tax relief every year.
Take advantage of tax deductions
Tax deductions are one of the most popular ways to reduce your tax liability. They reduce your taxable income, which in turn lowers the amount of tax you owe. There are three types of tax deductions: standard deductions, itemized deductions, and above-the-line deductions.
- Standard deduction
The standard deduction is a fixed amount that taxpayers can subtract from their taxable income. For the 2022 tax year, the standard deduction is $12,950 for single filers and $25,900 for married filing jointly.
- Itemized deductions
Itemized deductions are expenses that can be deducted from your taxable income, but only if they exceed the standard deduction. Some common itemized deductions include:
- State and local taxes
- Mortgage interest
- Charitable donations
- Medical expenses
Above-the-line deductions are expenses that can be deducted from your taxable income regardless of whether you itemize your deductions or take the standard deduction. Some common above-the-line deductions include:
- Educator expenses
- Student loan interest
- IRA contributions
- Self-employment taxes
Make the most of tax credits
Tax credits are another way to reduce your tax liability. Unlike deductions, which reduce your taxable income, tax credits are applied directly to the amount of tax you owe. There are several tax credits available to taxpayers, including:
Child tax credit
The child tax credit is a credit worth up to $2,000 per child under the age of 17. To qualify, your child must have a valid Social Security number and live with you for more than half the year.
Earned income tax credit
The earned income tax credit is a credit designed to help low- to moderate-income workers. The amount of the credit depends on your income and the number of children you have.
Education tax credits
There are two education tax credits available to taxpayers: the American opportunity credit and the lifetime learning credit. Both credits can be used to offset the cost of tuition and other education-related expenses.
Contribute to tax-advantaged accounts
Contributing to tax-advantaged accounts is another way to reduce your tax liability. These accounts offer tax benefits that can help you save money on your taxes. Some popular tax-advantaged accounts include:
A 401(k) plan is a tax-advantaged retirement account offered by many employers. Contributions to a 401(k) plan are made pre-tax, which means that they lower your taxable income. Additionally, any investment gains within the account are tax-free until you withdraw them.
Individual retirement accounts (IRAs) are another popular tax-advantaged retirement account. There are two types of IRAs: traditional IRAs and Roth IRAs. With a traditional IRA, contributions are made pre-tax, while with a Roth IRA, contributions are made after-tax but withdrawals are tax-free.
Health savings accounts (HSAs)
A health savings account (HSA) is a tax-advantaged account that can be used to pay for medical expenses. Contributions to an HSA are tax-deductible, and any investment gains within the account are tax-free. Additionally, withdrawals from the account are tax-free as long as they are used to pay for qualified medical expenses.
Use tax-loss harvesting to offset gains
Tax-loss harvesting is a strategy used to offset capital gains by selling losing investments. By selling investments that have lost value, you can offset gains from other investments and lower your overall tax liability.
Consider charitable donations
Charitable donations are another way to reduce your tax liability while also doing good. When you make a donation to a qualified charitable organization, you can deduct the value of the donation from your taxable income. Be sure to keep good records of your donations and get receipts from the charity to ensure that you can claim the deduction.
Keep good records
Keeping good records is important when it comes to taxes. By tracking your expenses, deductions, and credits throughout the year, you can ensure that you don’t miss out on any tax breaks. Additionally, good record-keeping can help you avoid audits and other tax-related headaches.
Hire a tax professional
If you’re feeling overwhelmed by taxes, consider hiring a tax professional to help you navigate the process. A tax professional can help you identify tax breaks you may have missed, ensure that you’re taking advantage of all available deductions and credits, and file your taxes accurately and on time.
Reducing your tax liability can be a complex and daunting task, but by taking advantage of the strategies outlined in this article, you can lower your taxes and keep more of your hard-earned money. From tax deductions and credits to tax-advantaged accounts and charitable donations, there are plenty of ways to reduce your tax burden. By keeping good records and seeking professional help when necessary, you can ensure that you’re taking advantage of all available tax breaks.
Can I still claim the standard deduction if I have itemized deductions that are less than the standard deduction amount?
Yes, you can always choose to take the standard deduction instead of itemizing your deductions.
Are all charitable donations tax-deductible?
No, only donations made to qualified charitable organizations are tax-deductible.
Can I contribute to both a 401(k) and an IRA?
Yes, you can contribute to both a 401(k) and an IRA, but there are limits to how much you can contribute to each account.
What is the deadline for making IRA contributions?
The deadline for making IRA contributions for a given tax year is typically April 15th of the following year.
Do I need to hire a tax professional to file my taxes?
No, you can file your taxes on your own using tax preparation software or paper forms, but a tax professional can help ensure that you’re taking advantage of all available tax breaks and filing your taxes accurately and on time.