According to data from the Bureau of Labor Statistics, the average American shells out over $500,000 in taxes throughout their lifetime. That’s a lot of money!
The good news is that no matter what your situation is, there are various ways most taxpayers can lower their taxable income. Keep reading to learn about five tips that can help you save money on taxes.
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1. Save for Retirement
One of the easiest ways to save money on taxes is by contributing to retirement accounts. Almost anyone can take advantage of this strategy.
Contributions to traditional 401(k) and IRA accounts are deducted from taxable income, which reduces the amount of federal tax you owe. If you’ve been wondering how to save money on taxes with IRA, it’s as simple as making a contribution!
There are also Roth retirement accounts that you can contribute to with after-tax dollars. While you won’t save money on your taxes now, money in the account grows tax-free and can be withdrawn tax-free once you hit retirement.
2. Contribute to Your HSA
Another place where you can contribute pre-tax dollars is a Health Savings Account. If you have an eligible high-deductible medical plan, you can contribute to an HSA up until the tax deadline.
Contributions to an HSA grow tax-deferred and can be withdrawn tax-free for qualified medical expenses. Balances left at the end of the year will roll over indefinitely.
3. Save for College
If you have kids, it might make sense to contribute to a 529 plan. You can use these funds to pay for qualified educational expenses.
Contributions made to a 529 plan aren’t tax-deductible federally but may be tax-deductible at the state level depending on where you live. The earnings and distributions aren’t taxed as long as they’re used for qualified expenses.
4. Donate to Charities
Contributions to charitable organizations are deductible, even if it’s not in cash. Clothes, food, toys, and household items donated to qualified charities can provide big tax savings.
The amount you can deduct varies by year. For 2021, you can deduct up to $300 per person without having to itemize.
5. Find a Great Tax Advisor
A tax advisor is a great asset and should be a trusted member of your wealth strategy team. Ideally, you should choose a CPA who will take the time to get to know you and understand your goals. The best tax advisors have proven strategies to reduce taxes.
A tax advisor will make sure you’re maximizing deductions by reviewing your financial transactions and expenses. They can also help with negotiating a payment plan if needed.
Ready to Save Money on Taxes?
Now that you know these five tips, are you ready put them to good use to save money on taxes? From saving for retirement to hiring a tax advisor, these tips will help you keep some extra change in your pocket this tax season.
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