It’s possible to save money on your taxes.

 

Being smart about deductions and credits lets you get away from paying more in taxes.

Currently, the federal income tax brackets range from 10% to 37%, which is a lot of money out of your pocket.

But there are some tricks you can use to pay less. Being smart about deductions and credits lets you get away from paying more in taxes. Continue reading for our top tips to avoid a large bill.

Contributions

Contributing to a retirement account is one way to reduce your tax bill. That’s because when you contribute to traditional 401(k)s or an IRS account, it can be deducted from your taxable income. In turn, reducing the amount of federal income tax, you’ll owe for the year.

It’s important to note that in 2020 and 2021, the maximum contribution is $19,500 per year. But, if you’re 50 or older, you can contribute an extra $6,500.

The money that’s placed in these accounts will also grow tax-free until retirement. Making it a simple solution for short-term savings and long-term financial growth.

So, if you plan on contributing, and have a workplace 401(k) account you must do it before the end of the calendar year. Whereas tax-deductible contributions can be made to traditional IRAs up until the tax-filing deadline (April 15th).

Health Savings Account

Contributing to a health savings account is another option for saving. Although this is only an option for those who have a high deductible medical plan, putting money into this account results in an immediate tax deduction. Another benefit of this option is that it will grow tax-deferred and can be withdrawn tax-free for qualified medical expenses.

Paycheck Deductions

If you were surprised by a huge tax bill last year, consider raising your withholdings on your W-4 form. This form instructs employers on how much tax to withhold from each paycheck. The more you withhold, the less you’ll owe when it comes time to file your return.

You are able to access this form using the IRS’s website. However, there are different steps depending on your situation so it’s important to read through the information to determine what you need to do.

To help determine what you may owe, the IRS offers a Tax Withholding Estimator tool online. This allows you to enter all the information from your most recent pay statements to determine if your deductions are accurate.

Municipal Bonds

Interest that’s earned on municipal bonds is often exempt from federal and state income tax. Meaning, if you’re looking for a way to avoid a large tax bill, investing in municipal bonds could be your answer.

These bonds have a set number of interest payments that are to be made over a pre-determined period of time. Then, once it reaches its maturity date, the full amount of the investment is repaid to the buyer. Offering you a simple solution to a lower tax bill.

Credits

There are numerous IRS tax credits that can reduce the money you owe the IRS. For example, there is the Earned Income Tax Credit for 2020, where low-income taxpayers could claim credits up to $6,660 with three or more qualifying children. Another credit you could be taking advantage of is the American Opportunity Tax Credit which offers a maximum of $2,500 per year for eligible students.

Regardless of which credit you’re interested in, it will take some research to determine what you qualify for. At A.P Accounting and Tax Services, we believe it’s best to speak with a financial professional who will be able to review your current situation to determine the credits that are right for you.

Ultimately, saving money on your taxes is possible. However, it does take some serious planning, careful research, and patience.

Whether you’d be interested in learning more, or knowing what services would benefit you, give us a call at 407-328-5001.

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