Are you looking to cut your tax bill this year? Here are a few tips that can help.
Earned Income Tax Credit (EITC)
Although the regulations are complicated, if you make less than $57,000, the earned income tax credit may be worth investigating.
In 2020 and 2021, you may be eligible for a tax credit of up to $7,000 depending on your income, marital status, and number of children.
A tax credit decreases your real tax bill dollar for dollar, as opposed to a tax deduction, which just reduces how much of your income is taxed. It's actually found money because, depending on the credit, if a credit lowers your tax bill below zero, the IRS may refund some or all of the money to you.
Save More in a 401k
The lesser the income, the lesser the tax. It is good to know that the IRS doesn't tax the amount diverted from your paycheck into your 401(k). This strategy can help you reduce your tax since the income is reduced. In this year you can move up to $19,000 per year into a 401(k). Unless you're self-employed, a 401(K) can be funded by your employer.
Utilize Special Savings Accounts
You can choose to contribute to special savings accounts, such as a Flexible Spending Account (FSA) or Health Savings Account (HSA).
Fund an FSA to also reduce the amount of tax you pay. Pay up to $2,750 directly into an FSA for dental and medical use. Medical kits and related items are eligible items you can acquire with the FSA saved funds. In some cases, you may be able to carry saved funds to another year.
A health savings account can lighten your tax burden if you pay a certain amount into this tax-exempt account. Savings in the HSA allows you to pay for medical expenses without any tax charge. As long as you have the HSA funds for medical expenses it's tax-free.
In 2021 you can save up to $3600 as a single and $7200 for family coverage. Individuals who are 55 years or older can save $1,000 more in their HSA accounts.
Give Money to Charity
Take deductions based on what you give as charitable gifts. While you may choose to give cash, other items are welcomed-- clothes, food, and other items are gifts you can give away. Simply use an online calculator to get the value of the gifts to inform you of the amount of deduction you can take.
Use an Individual Retirement Account (IRA)
You can use either a Traditional IRA or Roth IRA to take advantage of a variety of different tax benefits.
In the traditional IRA, you can take advantage of the pre-tax contribution to save for a later time. The saved amount only gets taxed at the time of withdrawal. Before the withdrawal period, you'd have lowered your tax bracket during the saving period.
The Roth IRA doesn't have any effect on your tax bracket for periods you divert funds into it. However, when you retire the saved funds can be withdrawn tax-free.
Start a College Savings
You can start 529 savings for educational purposes. If you have kids, a 529 plan allows you to contribute to their education. The 529 funds are not taxed so far; it's used for qualified educational expenses in the name of the account's beneficiary. Prepaid college tuition plans enable long-term contributions no matter the age of the child.
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