How to Save Money on Taxes Legally

Taxes are inevitable, but that doesn't mean you have to pay more than you owe. In fact, there are many ways to save money on taxes legally and ethically, without resorting to shady schemes or risky loopholes. By following some simple tips and strategies, you can reduce your tax bill and keep more of your hard-earned money in your pocket.

In this blog post, we will show you how to save money on taxes legally by:

• Maximizing your retirement contributions
• Claiming all the deductions and credits you are eligible for
• Adjusting your withholding or making estimated tax payments
• Hiring a professional tax preparer or using a reputable tax software

These tips and strategies can help you lower your taxable income, increase your refund, avoid penalties and interest, and optimize your tax return. Whether you are an employee, a freelancer, a business owner, or a retiree, you can benefit from these tax-saving tips and strategies.

Let's get started!

Tip 1: Maximize your retirement contributions

One of the best ways to save money on taxes legally is to contribute as much as you can to your retirement account. Whether you have a 401(k), an IRA, a Roth IRA, or another type of retirement account, your contributions can lower your taxable income and save you money on taxes.

For example, if you contribute $6,000 to a traditional IRA in 2022, you can deduct that amount from your income and reduce your tax bill by $1,320 (assuming a 22% tax bracket). That's like getting a 22% return on your investment!

The more you contribute to your retirement account, the more you can save on taxes. However, there are limits to how much you can contribute each year. For 2022, the limit is $19,500 for 401(k) plans and $6,000 for IRAs (plus an additional $1,000 if you are 50 or older). You can find more information on retirement contribution limits here.

If you have access to a 401(k) plan through your employer, you should take advantage of it and contribute as much as you can afford. Many employers also offer matching contributions, which means they will match a percentage of your contributions up to a certain limit. This is free money that can boost your retirement savings and lower your taxes.

If you don't have access to a 401(k) plan or want to save more for retirement, you can open an IRA and contribute to it on your own. You can choose between a traditional IRA or a Roth IRA, depending on your income level and tax situation. A traditional IRA allows you to deduct your contributions from your income and defer taxes until you withdraw them in retirement. A Roth IRA does not allow you to deduct your contributions from your income, but allows you to withdraw them tax-free in retirement.

You can find more information on the differences between traditional and Roth IRAs here.

Tip 2: Claim all the deductions and credits you are eligible for

Another way to save money on taxes legally is to claim all the deductions and credits that apply to your situation. Deductions and credits can reduce your tax liability and increase your refund by lowering the amount of income that is subject to tax or by directly reducing the amount of tax that you owe.

There are many deductions and credits that you may qualify for depending on your income level, family size, expenses, and activities. Some of the most common ones include:

• Mortgage interest deduction: If you own a home and pay interest on your mortgage loan, you can deduct the interest paid up to a certain limit ($750,000 for loans taken out after December 15, 2017).
• Charitable donations deduction: If you donate money or goods to qualified charitable organizations, you can deduct the amount of your donations up to 60% of your adjusted gross income (AGI).
• Education expenses deduction: If you pay tuition, fees, books, supplies, or other qualified education expenses for yourself or a dependent student, you can deduct up to $4,000 of these expenses from your income.
• Child tax credit: If you have children under the age of 17 who live with you for more than half of the year and meet other requirements, you can claim a credit of up to $2,000 per child.
• Earned income credit: If you have low to moderate income from work and meet other requirements, you can claim a credit of up to $6,728 (for 2021) depending on your filing status and number of children.
• Saver's credit: If you make contributions to a retirement account and meet certain income and filing status requirements, you can claim a credit of up to 50% of your contributions, up to a maximum of $2,000 ($4,000 if married filing jointly).
• Health savings account (HSA) deduction: If you have a high-deductible health plan (HDHP) and contribute to an HSA, you can deduct your contributions from your income, up to a limit of $3,650 for individuals and $7,300 for families (for 2022).
• Medical expenses deduction: If you have unreimbursed medical expenses that exceed 7.5% of your AGI, you can deduct the excess amount from your income.
• Home office deduction: If you use part of your home exclusively and regularly for business purposes, you can deduct a portion of your home expenses, such as rent, utilities, insurance, repairs, etc., based on the percentage of your home used for business.

These are just some of the deductions and credits that you may be eligible for. There are many more that you can explore here. To claim these deductions and credits, you will need to itemize your deductions on Schedule A of Form 1040 or use the standard deduction, which is a fixed amount that varies by filing status. For 2022, the standard deduction is $12,950 for single filers, $18,800 for head of household filers, and $25,900 for married filing jointly filers.

You should compare the amount of your itemized deductions with the amount of your standard deduction and choose the option that gives you the lower tax bill. You can use this calculator to help you decide.

Tip 3: Adjust your withholding or make estimated tax payments

Another way to save money on taxes legally is to adjust your withholding or make estimated tax payments throughout the year. Withholding and estimated tax payments are ways of paying taxes as you earn income, rather than waiting until the end of the year. This can help you avoid underpaying or overpaying taxes and avoid penalties and interest.

If you are an employee, your employer will withhold a certain amount of taxes from your paycheck based on the information you provide on Form W-4. You can adjust your withholding by changing the number of allowances or the additional amount you want to withhold on Form W-4. You should review your withholding at least once a year or whenever you have a change in your income or personal situation. You can use this calculator to help you determine the right amount of withholding.

If you are self-employed, a freelancer, a business owner, or have income from sources other than wages or salaries, such as interest, dividends, alimony, rent, etc., you may need to make estimated tax payments every quarter. Estimated tax payments are based on the amount of income and taxes you expect to have for the year. You can use Form 1040-ES to calculate and pay your estimated taxes. You should pay at least 90% of your tax liability for the current year or 100% of your tax liability for the previous year (110% if your AGI is more than $150,000) to avoid penalties.

You can find more information on withholding and estimated tax payments here.

Tip 4: Hire a professional tax preparer or use a reputable tax software

The final way to save money on taxes legally is to hire a professional tax preparer or use a reputable tax software to file your tax return. A professional or a software can help you save money on taxes by ensuring accuracy, compliance, and optimization of your tax return. They can also help you with complex tax situations, such as multiple sources of income, self-employment income, foreign income, rental income, etc.

A professional tax preparer is someone who has the knowledge and experience to prepare and file your tax return for a fee. They can also represent you before the IRS in case of an audit or a dispute. You should choose a professional who is qualified, licensed, and trustworthy. Some of the credentials to look for are:

• Certified Public Accountant (CPA): A CPA is someone who has passed a rigorous exam and met education and experience requirements in accounting and taxation. A CPA can provide a wide range of services related to taxes, such as tax planning, tax preparation, tax resolution, and tax representation.
• Enrolled Agent (EA): An EA is someone who has passed a comprehensive exam and met ethical and continuing education requirements in taxation. An EA can specialize in various areas of taxation, such as individual, business, estate, or international taxes. An EA can also represent you before the IRS in any tax matter.
• Annual Filing Season Program (AFSP) Participant: An AFSP participant is someone who has completed an annual tax refresher course and met other requirements in taxation. An AFSP participant can prepare and file your tax return and represent you before the IRS in limited situations.

You can find more information on how to choose a professional tax preparer here.

A reputable tax software is a program or an app that can help you prepare and file your tax return online or electronically. A reputable tax software can guide you through the process of filing your taxes, ask you relevant questions, check for errors, and suggest deductions and credits that you may qualify for. Some of the features to look for in a reputable tax software are:

• Accuracy: The software should be updated with the latest tax laws and regulations and provide accurate calculations and results.
• Security: The software should protect your personal and financial information with encryption and other security measures.
• Support: The software should provide customer service and technical support in case you have any questions or issues with the software or your tax return.
• Audit assistance: The software should provide audit assistance or representation in case you are audited by the IRS or receive a notice from them.

You can find more information on how to choose a reputable tax software here.

Conclusion

Saving money on taxes legally is possible and beneficial for your financial goals. By following these tips and strategies, you can lower your taxable income, increase your refund, avoid penalties and interest, and optimize your tax return. Whether you are an employee, a freelancer, a business owner, or a retiree, you can benefit from these tax-saving tips and strategies.

We hope this blog post has been helpful and informative for you. If you have any questions or comments, please feel free to leave them below. We would love to hear from you.

Thank you for reading and happy tax-saving!