How to Reduce Your Tax Rate

Nobody likes paying taxes. Not that they don’t pay for some things we definitely need. Roads, some kinds of healthcare, representation in the government, and lots of other things America needs to keep itself running. They are a necessary evil in a civilized society.

But still – we all hate paying them. Anybody with me?  And if possible, I think everyone would like to pay less money into them. And I’m here to tell you that it’s possible to reduce your taxes with a couple different tactics. Some of them may mean the money you’d spend is contributed anyway, but others allow you to keep the money in different ways.

Reduce Taxes Through Your 401k, 403b, or 457

One of the best possible ways to reduce your taxes is to contribute to a 401k or some kind of IRA (like a Roth, SIMPLE, or Education IRA). These retirement-oriented investments allow you to put money away into safe keeping to be withdrawn at a future date. If you leave the money in for the term agreed to by the individual IRA situation, you get to withdraw it completely tax free. So by investing your money into retirement funds before it is taxed, you completely avoid the tax on those dollars and you get to keep the money.

I recently had a client that made a comment that they were being “ate up in taxes” and were looking for anyway to reduce their tax liabilities. The wife was a teacher that had access to a 403b, but was not nearly taking advantage to its full potential. If you are not self-employed, then these employer sponsored plans are your largest resource to reduce your taxes while simultaneously saving for your retirement.

Don’t Forget the Match

Additionally, your employer may offer to match your contributions up to a certain percent. That’s an absolute no brainer. When an employer offers to match your contribution, you should almost always take advantage of that to it’s full extent. It’s like free money. My top recommendation to people looking to lower their taxes is to get involved with some kind of IRA or retirement planning.

Look For All Possible Deductions

Additionally, make sure that you look through the list of possible adjustments to your tax bill every year. You can deduct things like student loan interest paid, classroom related expenses, and other items. There are a number of pages in your tax documentation every year that list the possible adjustments you can take.

Deductions are the other major area to take advantage of when looking to reduce your taxes. There’s a standard deduction for most people, and there are additional deductions that some people may be able to itemize. Things like vehicle expenses, expenses involved with running your own business, interest paid on your mortgage, fees related to investments or tax preparations, or even donations to charity. All of these items allow you some wiggle room in lowering your taxes.

Give Me Some Credit

Once you’ve found all the ways to save money on taxes, it’s a good idea to look at potential tax credits. One that most people can take advantage of is the Lifetime Learner tax credit. This tax credit allows you to write off the costs of college classes no matter what your level of education. There’s also no requirement that college classes be germane to your area of study or employment. If you work as a computer programmer but have an interest in history of the presidents of the United States, classes on that topic would likely qualify you for the Lifetime Learner Credit.

Other credit that you might apply for is if you make energy efficient changes to your home.  The 2011 energy tax credits allow you to deduct a percentage of the cost you make to home improvements such as windows, insulation, solar panels and geo-thermal units.

If you’re not sure what deductions or credits you may apply for,  find a good accountant to help you out.  Many people I talk to think it’s not worth hiring an accountant to do their taxes, but what if they introduce you to a few deductions or credits that you weren’t aware of?  The fee that might pay for them to prepare your taxes could be offset by them.  It never hurts to ask, especially if it may help reduce your taxable income.

Creative Commons License photo credit: Digitalnative

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