Most people dread tax season, worrying about what they will owe the government on top of what was already taken out of their pay all year. These 20 tax hacks and deductions can help you save money, and you may even receive a refund on April 15th.
Maximize Retirement Account Contributions
Contributing to retirement accounts like 401(k)s and IRAs can significantly reduce your taxable income. For example, contributions to a traditional 401(k) are made pre-tax, lowering your taxable income for the year. In 2023, the contribution limit for a 401(k) was $22,500, with an additional catch-up contribution of $7,500 if you’re 50 or older.
Utilize Health Savings Accounts (HSAs)
HSAs are triple tax-advantaged: contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free. This makes them an excellent tool for reducing taxable income while saving for healthcare costs.
Harvest Tax Losses
Selling investments at a loss can offset gains you’ve realized throughout the year, a strategy known as tax-loss harvesting. This can help reduce your taxable capital gains and, in turn, your overall tax liability. Just be wary of the wash-sale rule, which prohibits buying a substantially identical asset within 30 days before or after the sale.
Deduct Home Office Expenses
If you use part of your home regularly and exclusively for business, you may be eligible to deduct expenses related to its use. This can include a portion of utilities, property taxes, and mortgage interest, helping to lower your taxable income. Motley Fool warns not to make the mistake of claiming a home office just because you work remotely; this tax deduction is only for self-employed people.
Claim Depreciation on Business Assets
Business owners can deduct the cost of tangible assets over their useful lives through depreciation. This includes vehicles, computers, and office furniture, effectively spreading the expense across several years for tax purposes.
Invest in Municipal Bonds
Interest from municipal bonds is generally exempt from federal income taxes and, in some cases, state and local taxes as well. This makes them an attractive investment for those in higher tax brackets looking to receive tax-free income.
Use Flexible Spending Accounts (FSAs)
FSAs allow you to set aside pre-tax dollars for medical and dependent care expenses, reducing your taxable income. However, planning carefully is essential, as FSAs generally have a use-it-or-lose-it policy.
Take Advantage of the Lifetime Learning Credit
The Lifetime Learning Credit offers up to $2,000 per tax return for qualified tuition and related expenses. This can be claimed for an unlimited number of years, helping to reduce the amount of tax you owe.
Deduct Student Loan Interest
You can deduct up to $2,500 of student loan interest paid during the year, directly reducing your taxable income. This deduction is available even if you don’t itemize deductions. However, the IRS says, “The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.”
Claim the Saver’s Credit
Low to moderate-income individuals saving for retirement may qualify for the Saver’s Credit. This credit can be worth up to $1,000 ($2,000 if filing jointly), directly reducing your tax liability.
Deduct Charitable Contributions
If you itemize deductions, charitable contributions to qualified organizations can be deducted. This includes both cash and non-cash donations, such as goods or stock, or even time and mileage for those who volunteer.
Deduct Real Estate Taxes
Homeowners can deduct the amount paid for state and local real estate taxes. This deduction is capped at $10,000 ($5,000 if married filing separately) under the state and local taxes (SALT) deduction.
Maximize Business Expense Deductions
Small business owners can deduct a wide range of business expenses, including advertising, utilities, rent, and more. Keeping detailed records and understanding what expenses qualify can significantly reduce taxable business income.
Use the Foreign Earned Income Exclusion
The foreign-earned income exclusion is intended to prevent double taxation by excluding income taxed in another country from U.S. taxation. U.S. citizens living abroad can use the Foreign Earned Income Exclusion to exclude a portion of their income earned overseas from U.S. taxes, potentially excluding up to $112,000 (as of 2023).
Deduct Medicare Premiums for the Self-Employed
Self-employed individuals can deduct premiums paid for Medicare Part B and Part D, as well as supplemental Medicare policies or Medicare Advantage plans. This deduction is taken as an adjustment to income, which can reduce taxable income.
Claim Dependent Care Credit
The Dependent Care Credit can offer significant tax savings for those paying for childcare or dependent care. This credit is based on a percentage of the costs you incur to enable you to work or actively look for work.
Deduct Investment Interest Expenses
If you borrow money to invest, you may be able to deduct any interest paid on the loan against your investment income. This can include interest from margin accounts used to buy securities.
Take Early Withdrawals from Retirement Accounts Without Penalty
Certain early withdrawals from retirement accounts, such as those for qualified education expenses or first-time home purchases, can be taken without the typical 10% penalty. However, they may still be subject to income taxes.
Deduct Alimony Payments
For divorces finalized before 2019, alimony payments are deductible by the payer and taxable to the recipient, providing a tax break to the individual making the payments. For spousal support payments to be considered tax-deductible, your agreement should be consistent with the following requirements under the tax code, according to Brotman Law: payments must be required under a divorce, separate maintenance decree, or written separation agreement; they must be paid in cash; the spouses may not live in the same household; and the payment cannot be designated as anything else, such as child support.
Utilize the Adoption Credit
The Adoption Credit can offset some of the costs associated with adopting a child. This credit can be very beneficial, directly reducing your tax liability rather than just your taxable income.
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