How to Save Money on Taxes: 11 Ways to Give Uncle Sam the Bare Minimum

While no one likes paying taxes, 2019 will bring a larger refund for many people. If you’re getting ready to file your taxes in April, you may be feeling a little resentful about all the money you’ll be handing over to Uncle Sam.

In this article, you’ll learn how to save money on taxes, so you can make the most of your hard-earned cash this year.

Ready? Let’s get started.

How Taxes Work in the United States

The income tax system in the United States is progressive- meaning the more you earn, the more you pay. However, there are a number of tax breaks like exclusions, deductions, and credits that you can take advantage of.

If you work for someone else, you’ll be under the “pay-as-you-go” tax system. That means that you don’t need to do your own taxes throughout the year. Each paycheck, your income tax is automatically deducted by your employer and sent to the IRS.

For people who are self-employed, you’ll have a few more hoops to jump through. This includes estimated tax payments (usually paid every three months).

At the end of each year, you’ll either receive a refund (if you paid too much) or a bill (if you paid too little).

These are the current tax rates for single filers:

$0- $9,525 = 10%

$9,526- $38,700 = 12%

$38,701- $82,500 = 22%

$82,501- $157,500 = 24%

$157,501- $200,000 = 32%

$200,001- $500,000 = 35%

$500,001+ = 37%

Keep in mind that getting bumped up to the next tax bracket doesn’t increase your tax liability for your entire income. For example, if you earned $10,000 last year, you’ll pay 10% on the first $9,525, and 12% on the remaining $475.

Your top tax bracket will depend on which tax deductions you can take since these can knock you back into a lower bracket. This reduces the overall taxes you pay.

How to Save Money on Taxes

If you’re like many people, you may be looking at your paycheck and feeling your stomach sink as you see how much is taken by the government. This is even worse if you’re self-employed since you need to keep that money in a savings account and then hand it over each quarter.

Luckily, there are a few things you can do to save money on your taxes this year. Here are 11 of the best tips to keep more money in your bank account:

1. Max Out Your Retirement Plan

You can reduce your taxable income by contributing as much as possible to your retirement plan or 401k. For people aged 18-50, you can add up to $18,500, while people over 50 can add $6,000.

IRAs allow you to contribute $5,500 if you’re younger than 50, while those over 50 can contribute an extra $1,000.

This is good news if you’re self-employed as well. If you’re contributing to SEP IRAs, you can deduct $55,000 or 25%- whichever is higher.

Now’s the time to make sure you’re taking advantage of your employer’s match if you have a 401(k). While you won’t get a tax break for contributing to a Roth IRA or Roth 4019k), you’ll be growing your money tax-free. This money can also be withdrawn without paying tax when you retire.

2. Pay More on Your Mortgage

Unfortunately, the new tax law will significantly reduce how many homeowners will benefit from this tax break. However, millions of people will still be able to claim this deduction.

If you own your own home, you’ll often get a mortgage interest deduction. For this reason, it’s well worth making an extra mortgage payment. If you bought a home in 2018, you can write off interest for up to $750,000 in loans.

3. Watch the Market

Sure, the market downturn is depressing. And if you invest, you’re likely to have watched them lose value in 2018. However, those losses will zero out your capital gains.

For example, if you had an overall loss of $6,000, you can claim up to $3,000 to offset your income. The remaining $3,000 can be carried over to next year.

This is known as tax-loss harvesting and it allows you to lower your tax liability. However, it’s only applicable for taxable accounts, and can’t be used for your IRA or 401(k).

4. Check Your Health Care

Did you spend more than 7.5% of your adjusted gross income on healthcare last year? If so, these expenses can be deducted.

These expenses include:

  • Orthodontics
  • Nursing home costs
  • Long-term health insurance premiums
  • Medicare premiums
  • Other expenses paid out-of-pocket

Add up any of the above expenses, and check if the total exceeds 7.5%. Keep in mind that this is only available if you’re itemizing all of your deductions. You can’t use this tax break if you’re also opting for the standard tax deduction.

5. Be Charitable

The deduction for charitable deductions hasn’t changed. However, you will need to itemize those deductions. And that number is higher this year.

One way to save money is to ‘bunch’ your donations. Instead of donating $5,000 a year to charity, swap this to $10,000 every two years. This will allow you to get your itemized deductions.

6. Use a 529

Hoping to help your kids save for college? 529 contributions can give you a tax break. These can’t be deducted for your federal taxes, however, it’s well worth checking if you can deduct them for your state taxes.

7. Consider Itemizing

While taking the standard deduction is easier, you may save a lot more money by itemizing. This is particularly true if you’re living in a high-tax area, you own your own home, or you’re self-employed.

The standard deduction is currently $24,000 for married couples filing together and $12,000 for singles.

If you’re self-employed, you may be pleased to learn that the eligibility rules for home office deductions have been loosened slightly. This means that you can claim this deduction if you use your home office for management or administrative activities- even if you don’t meet your clients at home.

Keep in mind that this space must be used exclusively for business.

8. Remember Your Kids

If you’ve got kids, don’t forget to add their Social Security Numbers to your return. Without these, you won’t be able to get any dependent credits.

Keep in mind that if you’re divorced, only one of you can claim this deduction. If you’ve recently had a baby, make sure you get their Social Security card ASAP. This will ensure it’s ready to go at tax time.

9. Defer Your Work Bonus

Many people receive end-of-year work bonuses. However, if this bonus bumps you up to the next tax bracket, you’ll end up paying more in taxes.

That’s why it’s a good idea to check if your employer can pay you this bonus in January instead of December. You’ll still be getting it close to the end of the year, but you won’t need to pay taxes when you file the return for last year.

This can be a particularly good option if you know you earned more last year than you’ll earn this year. That’s because it spreads your income out, reducing the amount you’ll pay in taxes.

10. Check Your Finances

If you’re not regularly checking your finances, you’re likely leaving money on the table.

Have you recently checked your tax withholding? Have you kept track of your business expenses so you can itemize? Do you know how much you’re contributing to your retirement?

If you’re hoping to save money on taxes, you first need to ensure you understand exactly what you’re working with when it comes to your finances.

This is particularly important if you’re self-employed. While an individual’s chances of being audited are approximately 1 in 160, this increases significantly for people who are self-employed.

Freelancers, for example, are more likely to be audited than large corporations. As in, three times more likely. This is simply because freelancers are more likely to make mistakes on their taxes. If you’re drowning in 1099 forms and receipts, it’s a good idea to begin getting these organized well before tax time.

At the same time, you can benefit from a number of deductions if you’re self-employed. Be sure to do your research to discover more.

11. Use a Professional

Sure you can easily do your taxes yourself. But having a chat with a professional can be well worth it. Tax isn’t just about forms and numbers. If you’re not completely up to date with the latest breaks and deductions, you could be costing yourself thousands of dollars.

An experienced tax professional can save you money, reduce the chances that you’ll be audited, and save you time- even without finding extra deductions.

There are plenty of excellent services and professionals available. They’ll look for life-changing events and changes to the tax code and make sure you’ve got all the forms you need to save money on your taxes.

Wrapping up

Now you know how to save money on taxes this year. Whether you’re an employee or self-employed, keeping an eye on your finances is key.

Make sure you’re well aware of what the changes to tax law mean for you. And be sure to check if you should take the standard deduction, or whether it’s worth itemizing your deductions to get the best possible bang for your tax buck.

Want to learn more about getting your finances in order this year? Check out some of our money and finance blog posts today.

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