Five tips to reduce taxable income and save money
March 14, 2018
How to reduce your taxable income
Tax season can be rough on anyone. Something we can all agree on, though, is that it's better to save as much money on taxes as possible. One of the most effective ways to lower your taxes is by reducing your taxable income. This year you can maximize your savings by taking steps to lower the income you report on your tax return.
Invest in retirement
A retirement plan, like a traditional 401(k), is an easy way to reduce your taxes. The money that you divert directly from your paycheck into a 401(k) does not get taxed, with the amount you can set aside per year depending on your age, between $18,000 and $24,000.
The majority of retirement accounts — except the Roth individual retirement account — allow you to deduct from your taxable income the amount paid into the account. Not only will you be able to reduce your total taxable income, the funds will also be able to grow tax-free until retirement.
Discover flexible spending
Flexible spending accounts, also known as FSAs, allow you to funnel tax-free money from your paycheck into an employer-sponsored account. This money can then be used by you or a dependent for medical expenses, lip balm, sunscreen, and more approved purchases.
Dependent Care FSAs are also available, where you can avoid paying taxes on money used for after-school care, day camps, elderly care, and more. The 2018 limit is $2,650 for FSAs and $5,000 for dependent FSAs. Health Savings Accounts, HSAs, are also available for medical-related expenses only.
Track medical expenses
If in the past tax year you've dealt with costly medical care — like a stay in the hospital or an expensive dental procedure — be sure to keep your receipts. Medical expenses higher than 7.5% of your adjusted gross income, AGI for short, can be deducted.
Consider that your adjusted gross income is $30,000. This means that any medical expenses greater than $2,250--7.5% of your AGO--are deductible. These tax savings are essential for anyone paying high premiums or out-of-pocket medical costs.
Claim Earned Income Credit
Earned Income Credit, or EIC, is worth looking into if you earned less than $55,000. As opposed to a deduction, which simply reduces how much your income gets taxed, this credit can reduce your bill to zero and even mean more money refunded to you.
Whether you qualify is dependent on income, marital status, and number of dependents, with the amount of credit you can receive up to $6,444.
Give to charity
Perhaps one of the easiest ways to reduce your taxable income is by giving it away. While monetary donations are always an option, other types of donations--food, clothes, household items — are also considered write-offs.
Keep track of any time you make a contribution. Unloading a bag of unwanted goods at the local thrift store can easily net you double digits in savings. If you volunteer your time, you can also deduct out-of-pocket expenses, like gas, mileage, or supplies.
Save money on your taxes
Don't let tax season bring you down. It's now easier than ever to reduce your taxable income and save money. From flexible spending accounts to keeping track of expenses, you'll be able to save big on taxes and spend money on what you want.