Tax season doesn’t have to be a time you fear the most. There are several tried and true ways to save on your tax bill that are completely legal and actually encouraged. Check out our top five ways to save on your taxes in 2021.
1. Utilize Tax Credits
There are several ways to reduce your taxable income that. One of which is to utilize tax credits. Tax credits can be a much better tool than deductions because they reduce the amount of taxable income.
If your income is $100,000 and you have $20,000 in deductions, your taxable income becomes $80,000. That $20,000 would be taxed at 10% or $2,000 in savings. Tax credits actually reduce the amount you owe meaning a tax credit of $20,000 would actually save you $20,000 in taxes.
These are some of most popular tax credits:
- The Earned Income Tax Credit
- The Child Tax Credit
- The Child and Dependent Care Credit
- The American Opportunity Tax Credit
2. Build Up Your Retirement Savings
The best way to save for retirement is through either a 401(k) or Roth IRA. A 401(k) typically comes from your employer who may even offer a match up to a certain level. Taxpayers below 50 can contribute up to $19,500 each year while those over 50 can contribute up to $26,000 per year. Roth IRAs utilize your after tax income meaning that the money in a Roth IRA is tax free provided you do not withdraw too early.
3. Build Up Your HSA
A Health Savings Account (HSA) is an account that uses untaxed dollars to pay for medical bills you may incur in the future. The IRS allows contributors to make HSA contributions up until tax day on April 15th and still apply the deductions to the current year. This method allows HSA owners to lower their taxable income.
4. Create A College Fund For Your Kids
At some point, you may be faced with the challenge of paying for your kid’s college tuition. With the cost of college rising each year, this may seem like an insurmountable task. Parents can utilize a 529 plan to save for tuition. Savings in 529 plan are not tax deductible, but any earnings are. You can also lock in current tuition rates for child at a qualified in-state school. This plan will likely help you save money on taxes and ensure your child gets a quality education to propel them towards their dream career.
5. Donate To Charity
Donating to charity is not only a morally sound thing to do, but can also help lighten your tax burden. While time spent volunteering is not tax deductible, any expenses occurred volunteering can be. Furthermore, any organization you donate to that is a qualified non-profit organization is tax deductible. This means any clothes, toys, food, etc that to a non-profit can be written off on your taxes.
Don’t wait to take advantage of these seven ways to reduce your taxable income. Although its everyone’s civic duty to pay their taxes in full and on time, it’s important to understand when your paying too much or paying taxes needlessly.