4 Tips to Lower Your Tax Bill
Published on 2/27/2020
April 15 is right around the corner. If you haven't started preparing your taxes, use this time to try to discover ways you can pay fewer taxes. To save money, try these four tips.
1. Make the most of deductions.
There are many deductions you can use to your advantage that you may not be aware of. Above-the-line deductions such as alimony payments, self-employment taxes, IRA contributions, school supplies and student-loan interest paid are just a few. Regular below-the-line deductions can be quite valuable, too. They include donations to charities and qualifying medical expenses, among many other things. Do your homework and save.
2. Make the most of tax credits.
Tax credits are more valuable than deductions because they shrink your taxable income on a dollar-for-dollar basis. For example, while a $1,000 deduction can save you $250 if you're in the 25% tax bracket, a $1,000 tax credit can shrink your tax bill by $1,000. Tax credits are available for all kinds of things, such as education expenses, energy-efficient home improvements, the adoption of children, the care of children and dependents, and much more. A particularly compelling credit, if you earn relatively little, is the Earned Income Tax Credit. It can be worth thousands of dollars to those who qualify.
3. Make the most of being self-employed.
Self-employed people get some tax breaks, too. If you use a part of your home as a home office, you may be able to deduct expenses related to it, such a percentage of your mortgage or rent payment, utilities, repairs, insurance and depreciation. If you use your car for your business, you can also deduct mileage. Self-employed people have many other deductions such as contributing to SEP IRAs, which sport higher contribution limits than regular IRAs.
4. Hire a tax pro.
Finally, one of the best ways to shrink your tax bill is to hire a competent tax professional to prepare your return. These folks know the tax code far better than you do, and they almost always pay for themselves, by reducing your tax bill or increasing your refund in an amount that is higher than their fee. Don't just hire anyone – find tax preparers through their professional organization, the National Association of Enrolled Agents. You can find a searchable database that includes specialty and location searches at naea.org.