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Nobody wants to pay Uncle Sam any more than necessary. But you also don’t want to end up on the receiving end of an IRS audit — or worse. Luckily, there are plenty of perfectly legitimate ways to make sure you don’t pay more than your fair share of income tax. Here’s the quick scoop on ways to save both in April and year-round.0:60 Pull out your old returns
Take a trip down memory lane to visit those ghosts of tax returns past. Sure, it’ll bring back memories of late nights in mid-April spent frantically trying to get everything together. But without looking at your returns for past years, you won’t know where to begin to look for ways to save. So go find those files!
0:52 Make the most of your income
The easiest way to pay no tax is not to earn any income, but we’ll assume that you don’t find that a very appetizing strategy. You can, however, pick investments where you’ll either pay no tax or qualify for reduced rates. Know the nuances and you can save yourself some serious money.
0:43 Use your tax shelters — legally!
The tax laws give everyone some great ways to cut taxes by saving toward many different important financial goals. Retirement accounts, such as traditional IRAs and 401(k) plans, let you defer paying tax on part of your income for decades, until you use that money after you retire, as well as lower your taxable income for the year by the amount you contribute. Other accounts, like Roth IRAs and 529 plans, let you save toward retirement or college expenses without ever having to pay tax on the income your investments generate. Using these shelters wisely can add up to thousands in tax savings.
0:29 Be smart about deductions
Everyone gets a standard deduction, but that doesn’t mean you should take it. Millions of people give up potential tax savings simply because they don’t keep records or take the time to itemize their deductions. Especially for homeowners and those with high medical bills, missing out on itemized deductions is hazardous for your financial health. And if you do go with the standard deduction, don’t just assume that you should take it on both your state and federal returns, or you could be leaving money on the table.
0:21 Get extra credit
No, we’re not talking about applying for that ultra-titanium credit card. The tax laws give taxpayers incentives on all sorts of different things, from raising a child and paying for educational expenses to making foreign investments. These credits are free for the taking, but you have to know they’re available to take advantage.
0:09 Think about next year
There’s only so much you can do to cut your tax bill for a particular year if you wait until the last minute to prepare your return. With some advance planning, you can get a head start on next year’s taxes and take the opportunity to do some things you may have missed out on in past years. Things like checking your withholding and monitoring your income can help put you in better shape next time around.
With all this planning, your taxes are filed, and it’s not even April 13 yet! Give yourself a well-deserved pat on the back — and then keep up the good work this year and next.
Got another minute?
For more on the basics of saving on taxes, learn more on:
- How to figure out your tax bracket.
- How to avoid tax scams.
- How to get organised for the IRS.