Taxes are a major burden for Americans across all income levels. But if you play your cards right, you can lower your taxes and keep more of your hard-earned money for yourself this year. Here are a few easy ways to get started.
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1. Contribute to a retirement account
Contributing to a retirement account won't just ensure that you'll have enough income in your senior years; it could also lower your taxes up front. Traditional retirement plans like IRAs and 401(k)s are funded with pre-tax dollars, which means you get an immediate tax break the year you contribute. Now your exact savings will depend on your effective tax rate, but if, for example, you contribute $5,000 to an IRA, and your effective tax rate is 25%, you'll save $1,250 on your taxes right off the bat.
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Currently, workers under 50 are allowed to contribute up to $5,500 a year to an IRA and $18,000 a year to a 401(k). If you're 50 or older, you can make catch-up contributions that raise these limits to $6,500 and $24,000, respectively.
On top of that, if you're a lower earner, you might qualify for the Saver's Credit, which puts money back in your pocket for contributing to a retirement account. The Saver's Credit could be worth up to $1,000 if you're a single tax filer or $2,000 if you're a married couple filing jointly, so if you're going to fund a retirement account, it pays to see whether you qualify.
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2. Give to charity
Donating to charity isn't just good for the soul; it can also be a smart tax strategy. As long as you donate to a recognized charity, you can deduct the value of your cash donation on your taxes. And as is the case with retirement plan contributions, your savings will depend on your effective tax rate. A $1,000 donation, for example, will translate into $250 in tax savings if your effective tax rate is 25%.
Don't have cash to donate? You can also take a deduction for donating unwanted goods -- provided you retain a detailed record and receipt to back up your claim. Just be aware that when donating goods, you can only write off the fair market value of the things you give away. In other words, if you donate a used jacket that you once bought for $60, you can't deduct the full $60 because that's not what the item would sell for in its present condition.
3. Become a homeowner
Though buying a home does require a down payment, owning comes with a host of tax benefits that renters aren't entitled to. First, there's the mortgage interest deduction. As long as your mortgage doesn't exceed $500,000 if you're a single tax filer or $1 million if you're filing jointly, you can write off all the interest you pay -- which can be a lot during the early years of your loan in particular.
You can also take a deduction for what you pay in property taxes, as well as any points you pay on your mortgage. Furthermore, if you're required to pay private mortgage insurance (PMI) for putting less than 20% down on your home, you can write off the cost of your premiums provided your income doesn't exceed $54,000 as a single tax filer or $109,000 as a couple filing jointly.
4. Know your credits and deductions
The IRS offers a number of valuable tax credits and deductions that can significantly lower your taxes. The problem, however, is that many taxpayers don't know that these credits and deductions exist or stay away from them for fear that they'll be penalized for making an erroneous claim.
Take the Earned Income Tax Credit, or EITC, which, if you're a lower earner, could give you up to $6,318 back on your taxes. Though the EITC is one of the most valuable tax credits available, it's estimated that a good 20% of eligible filers don't take advantage of it.
If you have children, the Child Tax Credit could save you up to $1,000 per eligible child in your household. And if you pay for child care in order to work, you should see if you qualify for the Child and Dependent Care Credit.
There are also a number of lesser-known tax deductions that could save you a big chunk of money provided you're eligible. For example, you can deduct out-of-pocket medical costs that exceed 10% of your adjusted gross income, as well as certain job search costs and moving expenses if you meet the right criteria. Reading up on credits and deductions could help you shave thousands off your tax bill, so it pays to do your research.
We all want to lower our taxes -- no matter how much we earn. Follow these tips, and you could be well on your way to shielding more of your income from the IRS.
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