Tax season is coming to a close soon, and folks across the country may be scrambling for ways to save on their tax bills.
About half of taxpayers prepared and filed their taxes on their own in 2022, according to efile.com. Going the DIY route is perfectly acceptable, provided you follow all of the rules and fine print, but it can be easy to miss some ways to reduce your tax bill — intel that only tax pros know.
GOBankingRates reached out to tax pros to gather this intel to help consumers save on their tax bills. These are their top secrets for tax savings.
Take Advantage of Tax Credits
“There are a lot of tax credits out there, and it is essential to get all the money you are owed,” said Levon L. Galstyan, CPA, Oak View Law Group. “Most of the time, credits are better than deductions because they can lower the amount of tax you owe.”
“For instance, say you have a taxable income of $50,000 and tax deductions of $10,000,” Galstyan said. “Because of these deductions, your taxable income goes down to $40,000.
“In your tax bracket, the 12% tax rate would have been applied to that $10,000 of taxable income. Because of your deductions, your tax bill would go down by $1,200. … Since tax credits reduce the amount of tax you owe dollar for dollar, having $10,000 in tax credits would save you $10,000 instead of $1,200 in taxes.”
These are the most common tax credits available:
- The Earned Income Tax Credit
- The Child Tax Credit
- The Child and Dependent Care Credit
- The American Opportunity Tax Credit
If you’re an undergraduate, eagle-eye the American Opportunity Education Credit.
“Generally speaking, the American Opportunity Education Credit is the best route for saving on income taxes via undergraduate education expenses,” said Andrew Griffith, associate professor of accounting at the LaPenta School of Business at Iona University. “Unfortunately, it has a four-calendar-year limit.
“To take advantage of this credit, a bachelor’s degree needs to be completed within those four calendar years. Some of that first year’s benefit is potentially lost because the school year starts with the fall semester. Enrolling and paying for classes starting in January and taking summer classes increases the odds that a taxpayer will receive the maximum benefit from this tax credit.”
Save for Retirement
Another way to cut down on your tax bill that also behooves you in the long run? Saving for retirement.
“Putting money into an IRA can be a fantastic way to reduce your tax bill,” Galstyan said. “Traditional and Roth IRAs are the two most common types of IRA. The biggest distinction is when your contributions are taxed. The most common choice is a company’s 401(k) plan since many employers match what their employees put into their 401(k) plans. Experts say you should put in the maximum amount allowed each year ($20,500 for 2022 or $27,000 for taxpayers 50 and older) or at least the most your employer will match.”
Remember that self-employed people also can take advantage of saving for retirement via SEP-IRAs, SIMPLE IRAs or solo 401(k)s.
“The annual contribution limits for these plans are greater than the annual contribution limits for a traditional or Roth IRA,” Griffith said. “Some careful planning could result in significant retirement savings each year.”
Put Money Into an HSA
Setting money into a Health Savings Account (HSA) before you pay taxes is another way to lower your taxable income.
“You can make HSA contributions until the tax deadline and use the deductions for the current tax year,” Galstyan said.
Deduct Your Health Insurance (If You’re Self-Employed)
“If you’re self-employed, you can get a tax break for the health insurance you pay for yourself, your husband or wife and your dependents,” Galstyan said. “This implies that your medical or long-term care insurance premiums can lower your taxable income by the same amount. You can also get this deduction if you are a partner or a 2% shareholder in an S Corporation, but there are some rules.”
Harvest Investment Losses
Did you know you can lower your tax bill by reporting losses on capital investments? It’s called “loss harvesting.”
“Loss harvesting is a pivotal way to end the year,” Galstyan said. “When you sell your investments and realize a loss, this is what happens. You can use these losses to pay for capital gains taxes dollar for dollar, lowering your overall tax bill.”
Let’s break it down further.
“When you incur more losses than profits, you can utilize up to $3,000 of your excess losses to offset your regular income,” Galstyan said. “The rest of the losses, above $3,000 each year, can be carried forward to the following year.”
One caveat: The wash sale rule. The IRS prohibits buying the same or a “substantially similar” investment within 30 days of the realized loss.
Set Up an Account for Your Children To Save for College
Taxpayers can use up to $10,000 per student per year from a 529 plan to pay for qualified education costs.
“Your 529 plan contributions are not tax-deductible at the federal level but may be tax-deductible at the state level,” Galstyan explained. “Under the 529 program, you can also use a prepaid college tuition plan for an in-state public school that meets specific requirements. This lets you lock in the current tuition rate for your child, no matter how old they are.”
Itemize Your Taxes
Even if you are not self-employed, itemizing your taxes still could benefit you.
“A comprehensive list of medical expenses that the IRS considers deductible includes ambulance rides, the price of a breast pump, programs to help people quit smoking and mileage to and from doctor appointments,” Galstyan said. “To reflect higher [gas] prices, they increased the reimbursement rate for distance traveled in the second half of 2022. You may deduct any cash or material donations made online. If you have many of these costs, itemizing your deductions rather than using the standard deduction may be more financially advantageous.”
Keep in mind that state returns can be subject to different regulations than federal ones.
“For instance, in New Jersey, you can write off your out-of-pocket medical expenses whenever the total of your annual out-of-pocket expenses exceeds 2% of your adjusted gross income,” Galstyan said. “However, on a federal return, this deduction isn’t available until your out-of-pocket expenses exceed 7.5% of your AGI. In other words, even if you can’t deduct medical expenses from your federal taxes, you can do so on your state return.”
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