Money Girl helps you understand how tax deductions work, plus smart strategies to reduce your taxes.
4 Strategies to Pay Less in Taxes
In addition to using tax credits and deductions to pay less in taxes, here are 4 additional tips to keep more of your hard-earned money:
Tax Tip #1: Adjust Your Withholding
If you look forward to celebrating a big tax refund each year, it may actually be hurting your finances. Consider this: When you file a tax return, you’re really just settling up with the government.
If you didn’t pay enough during the previous year through payroll deductions or quarterly estimated payments (if you’re self-employed), then you have to pay the difference on tax day. But if you overpaid during the previous year, you get a tax refund for the excess. So a tax refund is simply an indication that you handed over way too much money to the government.
I don’t know about you, but I’d rather use my own money instead of giving it to Uncle Sam as an interest-free loan. You should have kept that money and put it to work earning a nice return in a savings or retirement account.
By receiving a higher paycheck—instead of waiting over a year to get a tax refund—you have more control of your money every month. To increase your net pay, complete Form W-4 and submit it to your employer any time during the year. If you need help, ask your employer or use the Withholding Calculator at irs.gov.
Tax Tip #2: Contribute to a Retirement Account
You know that you should be saving for retirement. Plus, the fact that retirement contributions lower your tax bill is an added bonus!
No matter if you use a retirement plan at work, an account for the self-employed, or a traditional IRA, the money you put in is never taxed until you make withdrawals in the future.
See also: How Much Money Do You Need to Retire?
Tax Tip #3: Contribute to a Health Spending Account
Health spending accounts allow you to pay for certain medical expenses with tax-free money. Two of the most popular are Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs).
An FSA can be set up by an employer for workers who elect to set aside a portion of their earnings to pay for qualified medical expenses on a pre-tax basis. These have a “use it or lose it” rule because you typically forfeit funds not used by the end of the plan year.
On the other hand, an HSA can be used by anyone who has a qualifying high-deductible health plan, even if you’re self-employed, unemployed, or retired. Your contributions aren’t taxed, as long as you spend them on qualified medical expenses. Plus, they roll over and accumulate year to year if you don’t spend them.
If you’re eligible for either one of these tax-advantaged accounts, be sure to take advantage of the opportunity to spend pre-tax money. For complete information, take a look at IRS Publication 969.
Tax Tip #4: Hire a Professional
In many cases, spending a little money on a tax professional is the best way to save. Their job is to stay up-to-date on tax laws that are always changing. So he or she may find additional tax credits or deductions, help you stay organized, and strategize on whether you should speed up or postpose certain expenses.
See also: Tips for Choosing a Tax Pro
And one final quick and dirty tip is that the IRS ends up with millions of dollars that it tries to refund to taxpayers, but can’t reach them. If you moved last year, complete Form 8822 to change your address and make sure that your money follows you to your new home.
From tax credits to health spending accounts, there are many ways to reduce your taxes.
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