When Preparing Your Taxes, What Can Possibly Help Reduce the Amount of Taxes That You Owe?

With tax season comes excitement and fear for a lot of Americans. Now, you don't have to be tense about paying taxes. Instead, you can lower your federal taxes using the right methods.

Now, you may want to know how to reduce taxes owed to IRS. The secret is to find out what valid ways you can reduce your tax bill.

Some powerful steps can cut down your tax bill when you are getting everything ready. In this article, we'll answer one of your major questions about taxes. When preparing your taxes, what can possibly help reduce the amount of taxes that you owe? 

What Are Tax Credits vs. Tax Deductions?

You should know the main difference between tax credits and tax deductions. This is essential when working out how to reduce taxes owed to IRS. A tax credit reduces your bill by exactly the same amount. This makes it a very helpful tool. Suppose you owe $3,000 in taxes and you have a $1,000 tax credit. You then only pay $2,000 in taxes.

Tax deductions lower the amount of income that is taxed. However, they don’t change your total tax bill. The importance of a deduction changes with your tax bracket. For example, let's say you have a $1000 tax bill. You'll only have to pay $780 in taxes if you’re in the 22% tax bracket. Credit certificates are positively recognized. They are more helpful for saving on expenses.

Many Americans take tax credits, including the Earned Income Tax Credit. That's for those with low income. Another is the American Opportunity Tax Credit for education expenses. Credits can help you save money on taxes. If your income was low enough, you might even be eligible for a refund.

When Preparing Your Taxes, What Can Possibly Help Reduce the Amount of Taxes That You Owe?

Here are strategies on how to reduce taxes owed to IRS:

Contributions to Retirement Account 

To lessen your tax obligation right now, try to save in retirement accounts. Traditional 401(k) and IRA accounts help you pay less tax in a year. You can deduct your contributions from your income. For 2024, workers may add up to $23,000 to a 401(k) plan. If they are 50 or over, they can add an extra $7,500. This is a catch-up contribution.

You get two benefits from making retirement contributions. You grow your savings and pay less tax today. It depends on your income and whether you can invest in an employer’s retirement plan. Your Traditional IRA contributions may be deducted from your taxes.

Self-employment does not disqualify you. SEP-IRAs and Solo 401(k)s are great ways to save taxes. With these, you can put away more money than in usual accounts.

Health Savings Accounts and Flexible Spending Plans

Out of many different tax-advantaged accounts, Health Savings Accounts stand out. They provide what’s called triple tax benefits. Contributions are deductible from your taxes. Growth is exempt from taxes, and using the funds for health expenses is also not taxed.

In 2024, people can set aside up to $4,150 for themselves. Then, they can contribute 8,300 for their families. There's also a catch-up contribution of $1,000, which applies to those 55 and up.

Having a high-deductible health plan is required for an HSA. Since the benefits are tax-free, lots of taxpayers think it’s worthwhile. With Health Savings Accounts, the money never runs out. Over time, they can be very useful ways to save. If you are over 65, you can take the money from your HSA for anything you wish without tax. Yet, you still have to pay taxes on that money.

You lose what is left in your Flexible Spending Account if it is not used. These accounts can save you on tax-deductible medical costs. Families who frequently need medical care can save a lot. They'll do this by paying with pre-tax dollars through a health savings account.

Business Owners and Self-Employed

People running their own businesses enjoy a variety of deductions. This is another option on how to reduce taxes owed to IRS. You may deduct home office expenses for the section of your home that you only use for business. It can save someone working from home quite a bit.

Office supplies, equipment, and business trips can be counted as business expenses. Be thorough with your books. This makes sure your expenses, both ordinary and necessary, will help you. Also, you may be partnering in a side business aside from your main job. So, you may be able to get business deductions for that activity.

Self-employed people can remove half of their self-employment tax. They may end up saving money by deducting their family’s health care costs. Deductions can enormously lower the taxes self-employed people need to pay.

Education-Related Tax Benefits

Several ways exist to save tax dollars on education expenses. Students in their first four years of college can receive an American Opportunity Tax Credit. This is worth up to $2,500, and up to $1,000 of that credit is refundable. You can get up to $2,000 with the Lifetime Learning Credit. This is for taking undergraduate, graduate, or professional classes.

You can deduct up to $2,500 of student loan interest on your taxes each year. This helps people who are paying for their education. In addition, there are 529 education savings plans. There, your money grows tax-free. You don’t have to pay taxes when you use it for eligible education costs.

Charitable Contributions and Donation Strategies

Charitable donations continue to be an effective way to cut your tax bill. It’s another answer to how to reduce taxes owed to IRS. That's if you are someone who itemizes deductions. Your donation in cash can be claimed as a deduction. This is for up to 60% of your adjusted gross income.

Gifts of appreciated property also have advantages. Bunching donations into alternative years lets some taxpayers exceed the standard deduction. This helps them get the greatest tax benefits.

How to Time Your Income and Expenses

Trying to time your income and payments can reduce your tax bracket. This increases the deductions you take. If you think you’ll pay less tax next year, it may benefit you to hold off on getting paid. Rather, bring your deductible expenses into this year. This can help you pay less tax on your earnings.

Individual and small business entrepreneurs may find this technique especially effective. You can deduct expenses from the end of the tax year. Do this by purchasing the necessary items before it ends and supporting your operations.

You can set up elective medical expenses or large purchases within a certain time. With this, you may exceed the 7.5% threshold and get that deduction.

Wrap Up

When preparing your taxes, what can possibly help reduce the amount of taxes that you owe? Now, you know. If you want to cut down on your taxes, have a plan. You should think about taxes all year long instead of waiting until filing season. Make decisions about your finances at the optimal time. Since tax laws are always subject to change, ensure you understand the latest policies. Get professional help when you need it to make the best use of your tax opportunities.

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