David Bakke is a writer for Money Crashers Personal Finance, where he shares tips for smart shopping, saving money, and building a long-term nest egg.
The federal government recently allowed the payroll tax holiday to expire, which resulted in a reduction in take-home pay for many Americans. With the current national debt close to $17 trillion, more changes might not be out of the question in the future. You can’t control tax policy, but you can control your own personal economy. There are several measures you can take to reduce your overall tax bill simply by educating yourself and doing a little work. If you’re serious about saving money on taxes, check out the following helpful tips.
1. Prepare Your Return on Your Own Check out the IRS website for free file fillable forms along with a list of organizations that can help you prepare your tax return for free – as long as your adjusted gross income is $57,000 or less. Alternatively, explore the many options for tax preparation software from your local retailer. Most are very user-friendly and are designed to maximize your return and minimize your bill. Plus, the cost of that software is tax-deductible. Preparing your own return also has the benefit of giving you an education on your own finances and how they interact with taxes, which can lead to even more ways to save.
2. Know Whether to Itemize or Take the Standard Deduction Regardless of how you prepare and file your return, you can reduce your tax bill by itemizing your deductions – especially if you pay significant mortgage interest. If you’re using software, run the numbers under both scenarios. If filing manually, determine on paper if your deductions exceed the standard amount. If so, itemize them.
3. Keep Your Documents Organized You won’t be able to take full advantage of every tax deduction you qualify for if your documents aren’t organized. Consider putting together an organizing system for your receipts and file them accordingly throughout the year. This can help you guard against forgetting or losing anything, plus it significantly reduces the amount of time it takes to complete your return – and saving time is just as good as saving money. Create files for job search expenses, unreimbursed medical expenses, charitable contributions, and moving expenses if you’ve recently changed jobs.
4. Make Charitable Contributions Making charitable contributions throughout the year is a great way to reduce your tax bill. And it’s not limited to cash contributions. That bag full of clothing you dropped off at Goodwill is tax-deductible, as are any other household items you donate. Just be sure to keep accurate receipts and make sure the organization you give to is a qualified charity – you can find a list on the IRS website.
5. Contribute More to Retirement Every dollar you contribute to a 401K retirement plan is one less dollar you have to pay taxes on (until you start withdrawing funds). If you don’t currently have one – and if your employer offers it – get signed up now. If you do already have a 401K, try contributing more. Alternatively, you can open and contribute to an IRA which also reduces your taxable income.
Final Thoughts Once you get that tax bill reduced, you may find yourself getting a sizeable check back from the government. Don’t make the mistake of spending it unnecessarily. This is not “extra” money; it was yours to begin with and should be treated as such. Use it to pay down your credit card debts or get an emergency fund in place. Invest it in college for the kids or boost your retirement savings. There’s nothing wrong with using a portion of your return for a modest personal purchase, just don’t blow the whole wad. Once you put it where it can do the most good, your overall financial picture becomes that much easier to manage.
What other ways can you think of to reduce your tax bill?