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8 Tax Saving Strategies Most Americans Don’t Know About
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Is it necessary to learn tax-saving strategies? Taxes are one lifelong expense that will always be there and will most likely be the largest expense you have to make. Looking to save money on your tax bill? Most Americans often forget about some of the easiest ways to lower your bill, or better yet, get a refund!
Here are 8 tax-saving strategies that most Americans don’t know about that will reduce your tax bill dramatically!
How to Save Money on Your Tax Bill Every Year
You can lower your tax bill every year by qualifying for tax deductions and tax credits. Tax deductions are qualified expenses that can be deducted from your taxable income to lower your ultimate tax burden. The more deductions you have, the lower your taxable income is.
A tax credit is factored in after your tax bill has been calculated. Tax credits are dollar for dollar credits that are given to you for qualified expenses. If your end tax bill is $10,000 and you qualify for $3,000 in tax credits, then your check to Uncle Sam will be $7,000.
Similar to deductions, the more tax credits you qualify for the more money you will save in taxes. Here are tax saving strategies that can really help you.
1. Contribute to A 401k or IRA
If you’re not contributing to a retirement account already, you should be. Most employers these days offer a 401k, 457 plan, or 403b retirement savings account, and often times will even match your contributions!
If that’s not enough reason for you to contribute, consider the fact that you can deduct your contributions from your taxable income which saves you on your tax bill.
If your employer offers a qualified retirement account, you can contribute up to $19,500 (as of 2020) to your account and deduct that income from your taxable income.
Furthermore, you can make additional retirement contributions by adding to a traditional IRA each year, up to $6,500 per year (as of 2020) which is also deductible from your taxable income.
Tax Savings Opportunity: $19,500 deduction for employer retirement accounts and $6,500 for IRA accounts. This is a total of $26,000 of potential tax deductions per individual (double that for married couples) from your taxable income.
2. Contribute to Your HSA
Those who have a high deductible health insurance plan (a plan with a deductible of at least $1,400 for individuals and $2,800 for families) are eligible to contribute to a Health Savings Account (HSA).
A Health Savings Account is a basic account that allows you to make contributions that are intended to pay for medical expenses. Any unused money at the end of the year can even be rolled over to the next year as additional savings.
Your HSA contributions are also tax-deductible, just like a 401k or IRA. If you qualify for an HSA account, you can contribute up to $3,550 per individual and $7,100 per family each year. Keep in mind that these are just the annual contribution limits each year that qualify for tax deductions.
Your account balances can grow much more over the years depending on how much your medical expenses add up to each year because unused contributions roll over year over year.
Tax Savings Opportunity: Tax deductions of up to $3,550 per individual or $7,100 per family with a high deductible health plan.
3. Track Your Medical Expenses
This is in addition to having a HAS account as discussed from bullet point three above. Those who have qualified medical expenses of more than 7.5% of your adjusted gross income for that tax year can deduct those expenses from their tax bill. If you make $100,000 and have $10,000 in medical expenses that year, then you can deduct $2,500 from your tax bill ($10,000 – $7,500 = $2,500 in deductions).
Tax Savings Opportunity: All medical expenses above 7.5% of your adjusted gross income are tax-deductible.
4. Your Home Office Is Deductible
Your home office could be anything from a dedicated office at your home you use for work or even just a dedicated space in your home set aside for at homework. Whether you’re employed full time with a company office and occasionally work at home, or whether you are a freelance worker who works from home full time, you may be eligible to receive an additional home office deduction.
The home office tax deduction can be done in two ways. The first method is calculated by multiplying your home office square feet and multiply it by $5 (for a maximum of 300 square feet or $1,500 dollars).
The second method takes your actual home office expenses in comparison to your total residence among other expenses to calculate your deduction. The second method is a more difficult method and may require the help of a tax professional.
Tax Savings Opportunity: Up to $1,500 of tax deductions for your residential space used as a home office.
5. Keep on Learning
The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are tax credits for those seeking to further their education. You can only qualify for one of the two, but not both at the same time.
The AOTC credit is for undergraduate coursework and allows you to claim $2,000 in education costs for tuition, books school fees, etc. The LLC is a tax credit for both undergraduate, graduate, and even non-traditional learning. With the LLC, you can claim 20% of the first $10,000 paid in educational expenses related to furthering your career skills, with a maximum credit of $2,000.
Tax Savings Opportunity: Up to $2,000 annually in tax credits for furthering your education.
6. Start A Business
Starting a business opens up a lot of tax savings opportunities, and this goes for both full-time business owners, freelancers and even small side hustle businesses. In short, almost any expense related to the operation of your business can be a tax deduction to your taxable income. This ranges from lunch meetings with clients, holiday client gifts, marketing expenses, travel mileage, and office supplies. If it’s an expense needed to operate your business, it’s an additional deduction for your taxes.
Tax Savings Opportunity: The opportunity to deduct any business expenses related to operating your company. This will vary per business.
7. Give to Charity
Charitable contributions, whether monetary or through materials and goods, are also deductible contributions. If you contribute to your local church, it qualifies as a charitable donation that can be deducted from your taxable income. If you give away your old clothes to the local thrift shop, it’s also an additional donation that can be deducted. The maximum you can deduct for charitable donations is up to 60% of your adjusted gross income.
Tax Savings Opportunity: Charitable donations of up to 60% of your adjusted gross income may be deducted from your tax bill annually.
8. Take Advantage of Capital Gains & Losses
Capital gains are gains on investments, whether short-term or long-term. When you make a profit after selling an investment, the proceeds will be taxed. Investment profits that were purchased and sold within less than 12 months will be taxed at a higher rate than investment profits that are bought and sold within a longer than 12 months period of time.
The first tip of saving on your tax bill is to strive to have your investments be long-term capital gains or gains from investments bought and sold within a longer than 12 month period. If you invest in the stock market and purchase $10,000 at the beginning of the year and sell it for $11,000 more than 12 months later, you will pay fewer taxes on the $1,000 gain.
The second tip is to take advantage of capital losses. If you’re looking for additional deductions to lower your taxable income, you can sell your bad-performing investments for a loss and deduct the amount of loss from your taxable income.
For example, say you have maxed out your deductions and wish to take capital losses to further lower your taxable income. You sold a $20,000 investment for $15,000, or a loss of $5,000. You can then deduct an additional $5,000 from your taxable income.
Tax Savings Opportunity: Pay less taxes by qualifying for long-term capital gains (gains from investments bought and sold in longer than 12-month timeframe), as well as receive additional deductions from investment losses.
How Much You Can Save On Taxes with These Strategies
Using these 8 strategies listed above, you have an opportunity to maximize on a lot of tax deductions, credits, and variable expenses depending on your situation. Here’s a summary of how much you can save from these tax savings strategies:
In short, you can lower your taxable income by $31,050, lower your tax bill by $2,000 and potentially qualify for hundreds of thousands of dollars in deductions and credits from being a small business owner, donating to charity, or having a large amount of medical expenses.
Imagine how helpful these tax-saving strategies are. If you need help in choosing the right tax software for you, consider reading our Best Tax Software Review.
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