Preparing and filing taxes can be stressful for the average consumer. One primary source of this stress is the potential for a big tax bill at the end of the process. No one wants to feel like they’ve given away their hard-earned income – not to mention deal with unexpected costs or the risk of back taxes.
One way to reduce scary tax bills? Taking advantage of tax breaks. From deductions to credits, there are many options for tax reduction out there, and most consumers can find a tax advantage to fit their financial situation. So whether you’re preparing taxes individually or with the help of a tax preparer, don’t hit that “submit” button without exploring your options.
Tax breaks are opportunities for reducing taxes in some way, whether through deductions, credits, or other methods. All of these can help you to save money on your tax bill. Tax breaks are laws set by Congress, and they come with detailed rules. This means you’ll need to meet various eligibility requirements to take advantage of them.
Tax deductions are a familiar tax break option for most taxpayers. Deductions are items you can omit from your taxable income for the year – and a lower taxable income translates to less money out of your pocket. Many different types of deductions are available, depending on your work, home, or family circumstances. Some of the most common deductions include:
While tax deductions reduce taxable income, tax credits work a little differently. A tax credit directly reduces the amount of income tax owed, and they span many different types of expenses.
Credits are often designed as incentives or encouragement for specific behavior. For instance, EV tax credits encourage taxpayers to purchase electric vehicles to benefit the environment. This credit is worth up to $7500, depending upon specific vehicle details (such as the car’s weight and battery capacity). Like most credits, there are requirements to meet before claiming (such as the “final assembly” requirement, which states that clean vehicles must have had their final assembly in North America to be eligible).
There are also various tax credits to help with childcare. The child tax credit is available to those with dependent children under seventeen years of age. The child tax credit 2023 offers up to $2000 per qualifying dependent. Tax benefits for also available to those adopting children, with the Federal Adoption Tax Credit covering up to $14,890 per child.
With just a little digging, the average consumer will likely find many benefits they’re entitled to through credit programs.
Everyone knows how important it is to put money away for retirement. But those contributions aren’t just a benefit for the future; they can help reduce your current tax bill by lowering your taxable income.
The most popular retirement accounts are traditional 401Ks and IRA accounts. Contributions to these can be subtracted from your taxable income, which reduces the amount of federal tax owed. This money will also multiply over time, tax-free. With long and short-term tax benefits, contributing to a retirement account is a no-brainer.
Similarly, contributing to a Health Savings Account or health Flexible Spending Account can help taxpayers save cash by lowering their annual taxable income. These savings accounts let you put aside money for qualified medical expenses, such as doctor’s visits, pharmacy visits, and medical supplies.
These contributions are tax-deductible, and using the account for qualified expenses is tax-free. Contributing to an HSA or FSA is typically reasonably straightforward through your employer, so it’s worth exploring for the lower tax bill.
Another approach to reducing your tax bill? Give money away to causes that are important to you. Contributing cash or goods to qualified organizations can lower your taxable income while supporting others in need – a win-win situation. You can deduct up to 60% of your adjusted gross income but be aware you will need to itemize your taxes rather than taking the standard deduction.
For more tips on reducing your tax bill – and the stress that comes with it – reach out to Bell Finance.
