13 ways you can pay less taxes, too

13 ways you can pay less taxes, too
13 ways you can pay less taxes, too

According to a New York Times bombshell, President Donald Trump paid just $750 in federal income taxes in both 2016 and 2017, and paid the IRS no income tax in 10 of the previous 15 years.

“FAKE NEWS!” the president tweeted early Monday morning, hours after the news broke. But during a debate with Hillary Clinton in 2016, Trump didn’t deny paying no federal income tax some years. He said that made him “smart.”

You may not be able to reduce your tax bill to $0, but chances are there are steps you can take to pay less taxes, without running the risk you’ll be audited.

Here are some of the easiest ways you can cut your tax bill, for 2020 and for many years to come.

1. Contribute to a 401(k), 403(b) or 457 retirement plan

<cite>designer491 / Shutterstock</cite>
designer491 / Shutterstock

A great way to start saving on your taxes is to make contributions to a pretax retirement account through work, like a 401(k), a 403(b) or a 457 plan.

Putting money into one of those accounts will help reduce your taxable income — which will then reduce the amount owed to the IRS.

For 2020, the maximum contribution limit for the plans is $19,500, and anyone 50 or older can make an additional catch-up contribution of $6,500.

Employers typically sponsor 401(k), 403(b), and 457 plans, but if you’re self-employed you can open your own 401(k) with even higher contribution limits. For 2020, you can put in $57,000 if you’re under 50, and $63,500 if you’re 50 or older.

Need help with your retirement strategy? It’s easier than ever to get financial planning advice, which is even available online now.

2. Contribute to an IRA

Making contributions to an individual retirement account (IRA) is another good option if you want to reduce the amount you pay in taxes.

There are two main types of IRAs: traditional IRAs and Roth IRAs.

Contributions to traditional IRAs are tax-deductible if you meet certain criteria. You need to be earning income, which can include rental income but not investment income. And, there are limits on what you can contribute and deduct: $6,000 if you’re younger than 50, $7,000 if you’re 50 or older. Those are the limits for the 2020 tax year.

If you have a 401(k) or other retirement plan through work, you may not be eligible to deduct contributions to a traditional IRA if your income tops IRS thresholds.

Roth IRA contributions are not tax-deductible, but if you’re 59½ or older, withdrawals from those accounts are tax-free.

If you don’t have an IRA, there’s an app that makes starting one a cinch — using just your spare change.

3. See if you’re eligible for the earned income tax credit

<cite>Kzenon / Shutterstock</cite>
Kzenon / Shutterstock

The earned income tax credit (EITC) is a benefit for working families and individuals who earn a low to moderate annual income, usually between $41,000 and $56,000. If you qualify, you could save thousands of dollars this tax season, depending on your marital status and how many kids you have.

For the 2020 tax year — that is, the taxes you’ll pay in 2021 — the maximum amount of the credit is:

  • $6,660 with three or more qualifying children.

  • $5,920 with two qualifying children.

  • $3,584 with one qualifying child.

  • $538 with no qualifying children.

The earned income tax credit is what’s known as a refundable tax credit, and the larger your family, the more money you’ll get back. You might even score a refund that exceeds what you paid in taxes. If you’ve got a big family, the EITC is definitely worth looking into.

4. Take out a mortgage

Buying a home is a monumental life decision, but if you’ve been thinking about taking the plunge into homeownership by taking out a mortgage, it might help you save a bundle on your taxes.

If you itemize deductions, both mortgage interest and property taxes can be written off, and interest on home equity loans or lines of credit also can be deducted if the loan is used to acquire or improve your home.

You can deduct all of the interest you pay on a mortgage of up to $750,000, or up to $375,000 if you’re married and file separately from your spouse.

It’s also possible to deduct up to $10,000 of your state and local taxes, including property tax. That limit decreases to $5,000 for married couples who file separately.

5. Leverage your student loan

<cite>Jacob Lund / Shutterstock</cite>
Jacob Lund / Shutterstock

Still paying off student loans? You might be able to leverage that debt into tax savings. You can deduct up to $2,500 in interest paid on student loans each year, as long as you earn less than $70,000.

If your modified adjusted gross income (your taxable income with some deductions added back) is between $70,000 and $85,000 — or $140,000 and $170,000 if you file jointly with your spouse — you’re currently eligible for just a partial deduction.

If your modified adjusted gross income exceeds $85,000 for a single return or $170,000 for a joint return, or if you’re married and you and your spouse file separately — no matter your income — you won’t be able to claim any student loan deduction.

6. Save for your kids’ (or your own) college tuition

Putting away money for your kids’ tuition is not only a smart parenting move, but it also can help you get a decent tax break if you do it through a 529 college savings plan.

While you can’t deduct 529 contributions on your federal income taxes, money put into a state-sponsored 529 plan may be deductible from your state taxes, depending on where you live.

More than 30 states currently allow deductions for 529 contributions, so check out this handy map to see if yours is one of them.

Even if you don’t have kids of your own, you can open a 529 plan for a grandchild, niece or nephew, or even a family friend. You also can open a 529 for yourself if you think you might want to go back to school at some point.

7. Write off medical expenses

<cite>takasu / Shutterstock</cite>
takasu / Shutterstock

If you had any major medical expenses in the past year, you may be able to turn them into savings on your taxes. Any qualified medical or dental expenses that are more than 7.5% of your adjusted gross income for the 2020 tax year can be deducted.

That means if you have $50,000 in taxable income this year, then anything beyond $3,750 in qualified medical expenses is deductible. So if you have $10,000 in unreimbursed health care costs, you’ll be able to write off $6,250 of that.

In order to claim this deduction you’ll need to itemize, and it may not make sense to do so if your itemized deductions add up to less than the standard deduction — which is much larger than it used to be.

If you buy your own health insurance and are used to dealing with hefty out-of-pocket costs, it may be time to shop for a new plan.

8. Add to a flexible spending account

If your employer offers a flexible spending account (FSA) as part of your benefits package, contributing to it can help save some money on your taxes.

A FSA is a special tax-free account you can put money into to cover out-of-pocket health care expenses — things like prescription medications, medical supplies, or care for a disabled relative.

The money you put into an FSA is taken out of your paycheck pretax, which lowers your taxable income and your tax bill. The contribution limit is $2,750 for the 2020 tax year.

Although many FSAs are structured so you lose unspent funds at the end of the year, some employers may let you carry over up to $500 to the following year. It’s a good idea to look into what your company’s FSA policy before deciding how much to contribute.

9. Add to a health savings account

<cite>Michail Petrov / Shutterstock</cite>
Michail Petrov / Shutterstock

Making contributions to a health savings account (HSA) is an easy way to reduce your taxable income if your employer offers a health plan with a high deductible.

HSAs are tax-exempt accounts that can be used to pay health care expenses. As long as your medical expenses qualify, your HSA contributions are tax-deductible, and withdrawals from your account are tax-free.

If your company health plan has a deductible of $1,400 or more for an individual or $2,800 or more for a family, you’re likely eligible to contribute to a health savings account.

For 2020 you can contribute up to $3,550 to a self-only HSA, and $7,100 to a family account.

10. Keep your donation receipts

Chances are good that if you made a donation to an IRS-recognized charity in the past year, you can claim it on your taxes — so make sure to save those receipts. Donations of cash, checks, payroll deductions, and clothing and other goods all are deductible.

For cash donations under $250, you’ll need a bank record such as a canceled check or a credit card statement showing the charity’s name, the date, and the amount you contributed.

Cash donations of $250 or more will require a written acknowledgment from the organization that includes its name, the amount contributed, and a confirmation that you received no goods or services in exchange for your gift.

Property donations valued at less than $250 require a receipt, and those donations valued at more than $250 require a written acknowledgment from the organization. If your property donation is worth more than $5,000, you’ll need both a written acknowledgment from the organization and an appraisal of the item.

11. Take advantage of self-employment deductions

<cite>Vasin Lee / Shutterstock</cite>
Vasin Lee / Shutterstock

If you’re self-employed or have a side hustle in addition to your regular job, you’ll want to explore the many tax benefits available when you work for yourself.

Perhaps the biggest is the home office deduction, which allows you to write off the percentage of your living space you use to operate your business.

In 2013 the IRS instituted a simplified option for claiming the home office deduction: You can deduct $5 for every square foot of your home that you use for business, up to a maximum of 300 square feet.

Other things you may be eligible to deduct if you’re self-employed include internet charges, website fees, office supplies, and business-related travel expenses.

Note that if you’re self-employed, you must pay Social Security and Medicare taxes of 15.3% on your net earnings up to $137,700 in 2020. But you can deduct half of your Social Security tax on your 1040 form.

12. Choose whether to deduct state sales taxes or state income taxes

You can deduct state and local sales taxes or you can deduct state and local income taxes — but you can’t deduct both.

Depending on which state you live in, the choice may be an easy one. If you reside in one of the nine states without an income tax, then you’re obviously going to take a state sales tax deduction.

Likewise, if you live in one of the five states that don’t have a statewide sales tax — Alaska, Delaware, Montana, New Hampshire, and Oregon — you’ll no doubt be deducting your state income tax.

But if your home state has both sales taxes and income taxes, you’ll need to calculate which one makes the most sense to deduct.

You’ll probably want to take the sales tax deduction if you made big purchases over the last year. But if you got a new job or big raise that pushed you into a higher tax bracket, the income tax deduction is likely a better bet.

The deduction you picked last year might not be the better choice now, so it’s worth taking time each tax season to decide which makes the most sense.

13. Get expert help with your taxes

<cite>pattarawat / Shutterstock</cite>
pattarawat / Shutterstock

You have no shortage of opportunities to save money on your taxes. The best way to ensure that you’re paying the lowest amount possible is to hire a tax expert. Some tax software providers, including H&R Block, can hook you up with a tax pro if you’d prefer to work with one.

Especially if you’re self-employed, a tax expert can help you navigate the complicated ins and outs of filing your taxes and identify any potential deductions you may be missing.

Getting professional help with your taxes not only will save you the stress of doing them on your own, but it could save you a nice chunk of change. Who doesn’t want that?

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