How Can I Reduce My TAX Bill?
A tax bill is a written statement outlining what a person owes in tax liability.
Taxable income is your total adjusted gross income (AGI) minus expenses that are removed through tax deductions.
Standard tax deductions reduce your tax bill by a fixed amount depending on your IRS filing status. Itemized tax deductions reduce your tax bill through the cumulative subtraction of allowed deductions from your taxable income.
Contributions to a health savings account are tax-deductible at the time of contribution and tax-free at the time of withdrawal. An HSA card can only be utilized for qualified medical expenses and for those with high-deductible health insurance plans.
If your employer offers a flexible spending account you can make tax-free contributions from your paycheck to pay for medical costs.
Employees can reduce their tax bills by adjusting their W-4 to withdraw more from their paychecks so they owe less during tax season. This process can also be reversed if you receive a large tax refund and would prefer to see that money in your regular paycheck.
Pre-tax contributions to a 401(k) retirement savings account can help you reduce your tax bill by withdrawing funds from your paycheck tax-free, but you have to pay the taxes on your 401(k) contributions when you withdraw the money at retirement age.
The annual contribution limit to a Roth IRA is $6,000, and although these contributions are not tax-deductible, a benefit is that you pay taxes on your contributions now, and when you withdraw the funds at retirement age, you do not have to pay taxes on the interest gains. Traditional IRAs have the same contribution limit but are usually deductible and are taxed at the time of withdrawal.
Earned income tax credits can lower your actual tax bill by a dollar amount depending on your income, marital status, and how many children you have.
Donating to charity can be a tax write-off if you itemize your charitable deductions.
When the annual tax season rolls around, many people experience anxiety about the process of filing their taxes and determining what they must pay in taxes that year. After all, on top of all of the other bills that we are required to pay throughout the year, a hefty tax bill can be a financial burden that generates a significant amount of stress. Nevertheless, the more up-to-date you are on filing your tax returns and keeping organized records of your tax and financial information, the more prepared you will be to lower your tax bill when it is time for tax season.
What is a Tax Bill?
A tax bill is a written demand for an individual or business to pay what they owe in taxes. Typically, a tax bill will be sent when a person files a tax return but does not submit payment for what they owe. If you receive a tax bill, it is best to pay your tax burden to avoid accruing penalties and fines.
There are certain strategies taxpayers can use to reduce their tax bills so that the financial burden is more manageable when it comes time to pay taxes to the IRS each tax year. Additionally, the sooner you look into the tax advantages that can lower your tax bill, the more likely you will be able to reduce what you owe when you file your tax return. If you are looking for more advice to reduce your tax bills, consult with a tax expert at Ideal Tax to resolve your tax problems once and for all.
What is Taxable Income?
Almost all U.S. citizens are required to pay taxes to the IRS on all taxable income that was earned throughout the tax year. Taxable income is considered your total adjusted gross income (AGI) except for what is removed through tax deductions. The Internal Revenue Service utilizes the value of your adjusted gross income to determine how much you owe in tax liability for the tax year. The adjusted gross income differs from gross income in that it accounts for business expenses, student loan interest payments, and other adjustments that are allowed to be written off before paying taxes.
Taxable income includes salaries, wages, bonuses, and tips that can be earned by working for an employer. Investment income and other forms of unearned income can also be included in the taxable income for the tax year.
What is a Tax Deduction?
A tax deduction can reduce what you owe in income taxes by subtracting eligible expenses from your income before calculating your tax liability. There are multiple types of tax deductions that can help you reduce your tax bill, including standard deductions and itemized deductions. The benefit of tax deductions is you can determine if a standard or itemized deduction will reduce your tax bill the most and select the option that best serves your situation.
Standard reductions reduce your taxable income by a fixed dollar amount. The extent to which your income taxes will be reduced due to standard deductions depends on your filing status and tax bracket. This includes whether you file your tax return individually, jointly with a spouse, as a widower, or as the head of household. Additionally, when determining which tax-deductible situation will be most beneficial for you, it is beneficial to learn how the amounts of standard deductions can influence your tax bill.
Here are the amounts for standard deductions:
$12,550 for those who are single or married couples filing separately
$25,100 for married couples filing jointly or qualifying widow(ers)
$18,800 for those who are the head of household
If you are above the age of 65 or considered legally blind, these deduction amounts also increase. These standard deduction amounts increase by $1,650 if you are single or the head of household and by $1,300 if you are married or considered a qualifying widower.
This form of tax deduction is the most common for taxpayers to choose when exploring how deductions can reduce their tax bills. Even if you don’t have expenses that qualify for an itemized deduction, such as business expenses, medical expenses, or charitable donations, standard deductions allow you to still benefit from deductions and lower your income tax liability. This form of deduction also relieves you of the responsibility of maintaining diligent bookkeeping of receipts and expenses in the case that you are audited by the IRS.
An itemized deduction utilizes a different method of lowering your adjusted gross income to reduce your overall tax bill. Rather than subtracting a fixed amount from your tax liability, the dollar amount that can be written off from your tax bill when utilizing itemized deductions will vary depending on the individual taxpayer. The best way to determine if an itemized deduction would be the best route for you is to determine what your standard deduction would be according to your filing status and compare it to your itemized deduction through business deductions, a home office deduction, or other tax-deductible contributions. Whichever saves you the most money on taxable income is the best option for you.
Individuals may benefit from filing with itemized deduction in the following situations:
Their itemized reductions are a larger total than what their standard deductions would be.
They paid large amounts of money out-of-pocket toward medical expenses or dental bills.
They paid real estate taxes on their homes or mortgage interest.
They experienced environmental disasters such as uninsured casualties from wind, fire, or flood, or they suffered from theft losses.
They donated quantifiable amounts to a charity.
They have losses from gambling.
They possess other allowable deductions, such as when a person with a disability has impairment-related work expenses.
When determining which form of tax deductions may work best for you, it is also important to consider the implication of state and federal taxes. Some states do not allow itemized tax deductions, so it is important to consider all tax considerations when exploring your deductible options.
Tips To Reduce Your Tax Bill
There are certain strategies taxpayers can utilize to lower taxable income and reduce their tax bill when it is time to calculate taxable income each year.
Open a Health Savings Account (HSA)
Navigating medical expenses and health insurance in the United States can be expensive – especially when you have a high-deductible health plan that leads you to pay a lot of money out of pocket. If you find yourself in this situation, opening a health savings account is a great way to lower your overall tax responsibility as contributions to this account are tax-deductible and withdrawals from the account are tax-free. The only caveat is that you must utilize your HSA card for qualified medical expenses. Sometimes an employer will provide an HSA card for you, but if not, wage employees or self-employed individuals can start their own health savings account.
Fund A Flexible Spending Account
Flexible spending accounts can be an effective strategy to help taxpayers reduce their tax bills by funneling tax-free dollars from your paycheck into your FSA. Flexible spending accounts are similar to health savings accounts in that there are qualified medical expenses that are compatible to pay for using the card, but while an HSA is owned by the individual, an FSA is an employer-funded account. Flexible spending accounts usually have a wider range of medical costs that are compatible with the card and some employers allow you to carry over FSA contributions into the following tax year.
Adjust Your Withholding From Your W-4
The W-4 form is a tax piece of documentation between an employer and an employee that determines how much tax is withheld from their paycheck. If you are a wage employee and find yourself with a large tax bill each tax season, instructing your employer to withhold more tax will ensure that you owe less when you file your tax return. On the contrary, if you find that filing a tax return leads you to achieve a substantial refund, you may prefer to do the opposite and reduce how much tax is withheld from your paychecks.
Contribute To A 401(k)
The lower your taxable income is, the less you will owe in taxes each tax year, so if you are looking to reduce taxable income, contributing to a 401(k) is a great strategy. When you contribute money from your paycheck into a 401(k) the IRS will not tax that amount that is directly diverted. 401(k) contributions are considered pre-tax contributions because the contributions are withdrawn from your paycheck before taxes are deducted. While this lowers your overall taxable income for the current year, you will be required to pay taxes on your 401(k) contributions when you are at retirement age and go to remove the funds from your retirement account.
A retirement account like a 401(k) is a great option for employees because many employers will match some or all of employee contributions.
Contribute To An Individual Retirement Account (IRA)
An individual retirement account (IRA) is a different approach to help people save their money, reduce their tax bills, and create a retirement plan. Anyone can open an IRA, whether they are a wage employee or if they are self-employed. There are two main types of IRAs: a Roth IRA and a Traditional IRA.
Roth IRA contributions are not tax-deductible, but there are many benefits to contributing to this type of IRA. The annual contribution limit for a Roth IRA is $6,000 per year, or $7,000 per year if you are above the age of 50. The major benefit to contributing to a Roth IRA is that you pay taxes on your contributions now and when you retire your savings and the interest gains can be withdrawn tax-free, so it is beneficial to prioritize making maximum IRA contributions to this type of retirement plan.
Contributions to traditional IRAs are usually deductible. Similar to a Roth IRA, a traditional IRA also has an annual contribution limit of $6,000, but until Roth IRAs, a traditional IRA is taxed at your ordinary income tax rate when you withdraw the money in retirement.
Explore Earned Income Tax Credits
Compared to deductions that reduce the amount of your income that is taxed, a tax credit reduces your actual tax bill by a dollar amount. While the eligibility requirements for tax credits can be complicated, depending on your income, marital status, and how many children you have, you may qualify for an earned income tax credit of up to $7,000. It is possible for tax credits to reduce your tax bill to zero or even qualify you for a tax refund.
Donate To Charity
Charitable contributions are another method taxpayers can use to lower their tax bills. As long as you maintain detailed bookkeeping records so you can prove your donations, you may be eligible to deduct both cash and noncash contributions to charitable organizations. Charitable deductions must be itemized on your tax return.
Although paying taxes can be a confusing process, it is beneficial to be aware of your options and explore strategies to potentially reduce your tax bill. If you are ready to manage your tax liability and lower your tax liability, consulting with tax professionals such as the tax attorneys at Ideal Tax is a great place to start. Looking for tax relief? Check out our various services!