To hear some folks tell it, low taxes are basically the Holy Grail of personal finance. Those folks just might be right!
Over the course of several years, a few hundred or a few thousand extra dollars on your tax return can pay for some nice vacations, round out your retirement savings, or even give you the start of a college fund.
But there's just one problem: Many people don't know how to pay less taxes while staying in the good graces of the IRS.
Here are 7 proven tax-saving tips that could help you save a bundle during this year's tax season. Keep reading to find out more.
1. Put More Money Into Your Employer 401(K) or an Individual Retirement Account
Saving money for retirement isn't always at the top of people's financial to-do lists.
Some folks are carrying credit card debts that need to be paid off. Others are building up their immediate savings. And the next thing you know, you're getting ready to retire with very little money in your RRSP.
But it turns out that putting more money into your 401(k), IRA, or another qualified retirement account, can actually put more tax return money into your pocket this year. And when you're figuring out how to save on taxes, those immediate tax benefits can be huge.
As Investopedia explains, retirement contributions are made using pre-tax income. That's a slightly more technical way of explaining that your retirement contributions can reduce your taxable income.
In other words, you can effectively get tax savings simply by giving yourself more money. With that kind of tax deduction on the line, you may want to run, not walk, to your payroll department.
2. Become a Homeowner
When you're getting ready to buy your forever home, chances are you're not touring houses and thinking, “Oh my goodness this house is the perfect opportunity to reduce my tax burden this year!”
But in a way, your home purchase can make it possible to do exactly that. This is because owning property is like an investment in some regards.
After you put the money in, the value of your home will ideally appreciate in value to the point where you don't sell it at a loss if you decide to move in the future.
But unlike a shareholder or a stock market trader, who is expected to pay taxes on their dividends, homeowners can deduct property taxes and mortgage interest from their federal taxes.
And if you sell your home for more than you bought it for, you can avoid being taxed on the capital gains as a homeowner. 250 for an individual and 500K for a married couple. Thats a lot!
From a financial standpoint, that is a perfect trifecta of tax savings.
3. Get Married
It turns out that the words “for richer or for poorer” weren't just for show. Getting married can help you literally get richer in the form of reduced taxes.
Here's why:cBecause filing jointly allows you to double your deductions on combined income.
To be clear, a lot depends on your income level. If you and your spouse are a financial power couple, it'll be faster and easier to let your accountant help you maximize your tax returns.
But if you're married and taking home a lower paycheck, or if one spouse is working while the other stays at home, it's possible to file jointly on a single income and get those doubled deductions.
4. Have Kids
When you add up the money spent on food, clothing, car seats, and college, to name just a few of the costs associated with children, children can certainly be more expensive than what you'd get back in your tax returns.
However, if your gameplan is to have kids in the near or distant future, they can help you reduce your taxes for two reasons.
First, they're dependents that you can claim on your tax filings. And second, because you can benefit directly from child tax credits.
A lot of soon-to-be parents don't realize this right away, but kids can help you lower your tax bill simply by existing.
5. Get a Side Hustle
According to Bankrate, 45%of working Americans reported having side hustles. With those numbers, it's clear that side hustles and alternative revenue streams are here to stay.
From a tax standpoint, freelancers are able to claim a lot of regular expenses as business deductions in ways that traditional employees can't.
If you can show that you use them for business purposes, your rent or mortgage, your laptop, your phone bills, and more can be deducted from your taxable income.
To be clear, you don't want to pull a fast one on the IRS because that can come back to haunt you. But if you do a few hours of freelance work a week, you can benefit from both the added income and the lower taxes.
6. Are You a Business Owner? Get a Solo 401(K)
Remember the first point on how 401(k)s and IRAs can substantially lower your taxable income?
Well, If you're self-employed, the tax incentives are still there if you save for your retirement. But at the same time, you don't get to simply pay into a traditional IRA or an employer-based 401(k).
Fortunately, you're not out of luck. You can enjoy those tax benefits by getting a solo 401(k) to put towards your retirement savings.
And most importantly, this kind of plan allows a married couple to put a whopping 116K away, tax deferred (as of 2021).
As far as tax planning strategies go, this is a relatively quick, easy and high-value way to save on taxes. Take a look at mysolo401k.com.
7. Move To a State That Doesn't Have State Income Taxes
Walking away from your problems isn't always productive. But when you're trying to figure out how to pay fewer taxes, moving to a place that has no state income taxes is probably one of the most significant ways to do so.
Of course, you don't want to go through the trouble of finding a job, crossing state lines, buying a house, and getting settled in just to get hit with an out-of-this-world property tax bill.
If relocating is on the table as a means of saving money on taxes, make sure that additional regional features, like the average property tax, are factored into your calculations before you move.
Want To Know More About How To Pay Less Taxes?
They say that “death and taxes” are the only two things we can be certain of in life. But as it turns out, you can modify the “taxes” part more easily than you think.
You can cash in on the things you were already doing, like buying a home or having a baby and you can also benefit from making more contributions to your retirement fund or looking for work in a state that has lower state income taxes.
If you'd like to know more about how to pay less taxes while planning for your financial future, you can read more Play Louder posts for more tax tips and financial advice.