Ways to Lower Your Income Taxes

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Ways to Lower Your Income Taxes

Income taxes on the federal level are a fact of life for everyone, and many people also have to pay state and local taxes. When you make an effort to plan around taxes, you can save yourself money that you would otherwise pay to the federal, state, or local governments. While you may not notice the impact of federal taxes because they are being taken out of your paycheck, they are the biggest expense that most families incur in the course of a year.

There are many ways you can lower your taxes

Many retirement plans shelter your money from taxes. They are tax-deferred, in other words. Tax-deferred means that the earnings that build up in your retirement plan are not taxed, as long as they stay in there. However, once you draw them out, either at retirement or before, your earnings from these plans may be taxed.

Here are some of the methods that can pay off in the biggest ways:

• Retirement contributions: Contributing to a retirement plan is one of the best ways you can save for your own future and save money on taxes. When you contribute to a traditional 401(k) plan at work, those contributions reduce your income, so you will owe less tax. When you contribute to a traditional individual retirement account (IRA), you also reduce your taxable income, as you will record how much you contributed on your tax form, and that will be subtracted from your income. With a Roth IRA or a Roth 401(k), however, you cannot take such a deduction.
• Flexible spending account contributions: When you make contributions to a flexible spending account at work, the contributions are taken out of your pay, meaning there is less income for you to be taxed on. Flexible spending accounts help pay for certain expenses, such as medical costs.
• Health savings account contributions: If you have a health savings account, you can deduct the contributions you make to it from your income, which means less income for you to be taxed on. This also helps you save for healthcare expenses.
• Charitable donations: If you donate money to a church, social services organization or non-profit, you may be able to deduct that money from your income on your tax return. It’s important to document what you donate, which you can do either by writing a check or obtaining a receipt from the charitable organization.
• Student loan interest paid: Interest is tax-deductible.
• Moving: Employment-related moving expenses are no longer deductible, beginning in 2018. But some exceptions still exist for military personnel.
• Tuition and fees: Education expenses not paid by grants and scholarships (that is, if the individual pays them him- or herself) can be deducted from your income on your tax return, thus reducing the amount of tax you must pay. Generally, qualified education expenses are amounts paid for tuition and fees.