If you are looking to pay less in taxes this season, this post is for you. Don't worry, we are not suggesting you finagle your way around paying taxes if you owe them. What we are saying is that there are some perfectly acceptable ways to keep more of your hard-earned dollars in your pocket.
Here are five ways you can pay less in taxes and save some money
Pay Less in Taxes by Contributing To a 401k
One of the easiest ways to lower your taxable income is to contribute to your company's 401k plan. Whatever money you put into your 401k will not count toward your taxable income for the year you make the contribution. This is a tax deferred plan so you don't pay taxes now on the money. Only when you withdraw it later. In addition, you not only get the tax break but you will be working towards growing your retirement savings. This is smart money decision making all around.
For 2020, the maximum 401k contribution is $19,500. Those 50 and older, can make additional contributions of up to $6,500.
Choose the Right Filing Status
The filing status you fall under can have a great impact on your tax situation. This is because it helps to determine both your standard deduction and your tax rate. For example, as a single filer, your standard deduction is $12,200. If you are the head of your house, your standard deduction would be $18,350. In addition, you can expect the tax brackets for HOH to be more generous than those for single filers.
Here are the five filing statuses you have to choose from. Depending on your individual situation, you may be able to choose two different filing statuses :
Single- This includes those that are divorced or legally separated under state law.
Filing Jointly as a Married Couple- You plan to file your taxes together with your spouse. If your spouse passes away that year that you are filing for, you should be able to still file a joint return.
Married Filing Separately- This is self explanatory. Keep in mind this typically does not result in you paying less in taxes.
Head of Household- This means you are paying more than half the costs in your household for you and another qualifying person. This is usually a dependent child or parent.
Qualifying Widow(er) With Dependent Child- This status would apply to you if your spouse died during the current tax year or in the two preceding tax years. They also require for a dependent child to be living with you.
Always read further about these filings because there are additional conditions apply. The IRS puts out their Publication 501 which has all the info you need.
Check Back on Those Old Returns
If you are filling out your taxes and realize you may have missed some deductions or credits on past years returns, take the time to go back and check. If less than three years have passed, you have the option to file an amended return. Just make sure all the information is accurate and complete as they really scrutinize these returns carefully.
Have a Professional Prepare Your Taxes
Depending on what your tax situation looks like, you may want to enlist a tax professional who may be able to identify tax savings opportunities you’ve overlooked. You have the option of going with a qualified tax professional, such as a CPA or a non-credentialed preparer. Just keep in mind that the former may cost more but they are also required to take a certain number of continuing education hours each year and they also must follow a code of ethics. So you know they are staying abreast of any changes in tax laws which could amount to more savings for you. Check out the IRS’s database of credentialed preparers. You can also get access to CPAs or enrolled agents through H&R Block and TurboTax .
Go Back to School
Whether to learn something new or to finish your college degree, the IRS offers tax breaks for qualifying education expenses. They have what is called the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. The AOTC is applicable for the first four years you are enrolled in an undergraduate program. In addition, you have to be enrolled at least half-time in a degree-seeking program. If you meet the qualifications, you can get a tax credit up to $2,500 per student.
Another program that can offer a tax credit is the Lifetime Learning Credit. The criteria for this one is broader. There is no limit to the number of years you can claim it, and you don’t have to be enrolled in a degree program The credit is worth up to $2,000. For further information related to these credits go to the IRS Publication 970.