Spring is in the air. It’s warming up out there. The days are getting longer. Birds are coming out to greet the sun, chirping incessantly, blissfully unaware that you have to file your taxes by the fast-approaching annual deadline. That’s right. It may be Spring, which is great, but it’s also tax season, which is stressful.
From gathering all of your documents in one place and calculating your expenses to navigating changes in the tax code and managing the inherently obfuscating tangle of forms, schedules, and ledgers required by the IRS, filing your taxes can be challenging. But in the end, your goal is always the same—to reduce the amount that you are legally obligated to pay to your federal and state governments. Whether you expect to owe money, and you’d like to owe less, or you’re anticipating a tax return, and you’d like it to be bigger, your objective is to do anything you can do within the bounds of the law to save money on your taxes.
Fortunately there are a lot of ways to do this that aren’t particularly complicated. The truth is, filling out your taxes is part science and part art. The science is in understanding and following the rules. It goes without saying that errors on your taxes can cascade into missed opportunities, penalties, and even audits.
As for the art—well, there is a certain creativity that can go into filing your taxes. This isn’t a sly way of saying that you can bend the rules. We must state clearly and unequivocally that we strongly discourage doing anything that might be construed as dishonest as you complete your taxes. However, the better you understand the rules, the more readily you can use them to your advantage. There are countless opportunities within the confines of these rules to reduce your tax burden, but it’s up to you to recognize and seize these opportunities.
If you need clarification on some of these rules before you dig in, one of the best sources for reliable information is the IRS itself. However, it’s not always easy to get a hold of a helpful person, especially in the throes of tax season. That’s why we’ve developed these tips for How to Speak to a Human at the IRS.
If you feel you understand the rules but you’d like to learn more about how you can make them work for you, read on…
1. Get Those Student Discounts
College students get breaks in all kinds of places. Your student ID could get you a cheaper movie ticket, a lower price at the big chain bookstore, or a few dollars off your meal at countless locations. But did you know that the IRS has its own ways of discounting tax burdens for students and their families? According to 20 Something Finance, American Opportunity and Lifetime Learning Credits are available to those undergraduates enrolled at least half time in a degree, certificate or professional program. The tax credit can provide a student or their family a tax credit of “up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year per eligible student. Tax credit can be received for 100% of the first $2,000, plus 25% of the next $2,000 that has been paid during the taxable year.”
In order to qualify for this credit, a filer must complete IRS Form 8863. This is a program which is only available to students who have not yet graduated. But there’s also help for those who are no longer in school (and their parents). If you or your kid are still paying off student loans, you are entitled to write off any interest that you’ve paid toward these student loans over the course of the taxable year. This will ultimately reduce your tax burden in proportion to the amount of this loan you’ve paid off in the prior year.
2. Save for College
As a parent, you also have opportunities to save on your taxes well before you send your kid off to school. Just as college spending can be used to offset your taxable income, so too can saving for college. According to Nerdwallet, opening a college savings account is a great way to begin planning for school while sheltering your money from the IRS. The 529 Plan is a particularly popular option. This savings account is typically sponsored by your state or by a specific university. As such, while you wouldn’t be able to deduct your contributions to this savings plan from your federal taxable income, it could make a big dent in what you owe to the state government. The sooner you start saving for college, the sooner you can also start saving money on your state taxes.
3. Don’t Forget to Count Summer Camp
If you pay for daycare or private school, then there’s a good chance you’re already maxing out your Child and Dependent Care Tax Credit. But what about those of us with kids in public school? The education may be free, but we could still use a little help, right? Well here’s some good news. Summer camp actually counts as child care—which makes total sense when you think about it. After all, it’s just like school but with more dirt and bugs.
Unfortunately, a lot of filers leave this money on the table. According to Vice, “if you are a parent who is sending your kids off for a week of fun, sunshine, and adventure while you catch up on several lifetimes of sleep? That totally could apply towards the Child and Dependent Care TAX Credit.” While your kids are enjoying swim lessons, relay races, and s’mores, you’ll enjoy a quiet house, a peaceful work space, and a few dollars off of your debt to the IRS. In fact, consider sending your kids to overnight camp. That’s not a tax tip. I just think you deserve a break.
4. See If You Qualify for the Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is a great way to save money at both the federal and state levels, but this credit is only accessible to certain filers. According to Tax Outreach, your eligibility for this credit will depend on a number of factors including the size of your household, your personal income, and your marital status. During the 2021 tax year, this credit could amount to as much as $6,728 for those with the most disproportionate ratio between household income and size of household.
Tax Outreach explains that “The credit amount rises with earned income until it reaches a maximum amount, then gradually phases out. Families with more children are eligible for higher credit amounts.” Your income must be below a specific threshold to qualify for EITC. The highest qualifying household income is $57,414, which applies to those who are married and have three or more children. The ceiling goes down from there, with the maximum earning threshold to qualify amounting to $21,430 per year for unmarried workers with no children.
5. Plan for Retirement
If only there was a way to take the money you earn and save it somewhere where the IRS can’t touch it. Hey, as it happens, there are actually a few ways. And not only do these strategies insulate your immediate earnings from taxation, but they can also help secure your financial future. It’s wise to begin planning for your retirement as early as your earnings and financial outlook allow because it will benefit you in both the long- and short-term.
According to Nerdwallet, “The IRS doesn’t tax what you divert directly from your paycheck into a 401(k). For 2021, you could have funneled up to $19,500 per year into an account. In 2022, this rises to $20,500. If you’re 50 or older, you can contribute an extra $6,500 in 2021 and 2022. These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s.”
If you do work for an employer, be aware that many employers offer matching contributions, which means that in addition to insulating against your tax burden, you’ll get free money for every dollar that you divert into your retirement savings account. The 401(k) isn’t your only option. Higher earners may benefit from alternative savings accounts such as IRAs and Roth IRAs, which also allow you to deduct a certain portion of your contributions from your taxable income. Before you employ this strategy, note that withdrawing any contributions from your retirement accounts before retirement will usually come with hefty tax penalties. In other words, once the money is there, you’ll want to keep it there.
6. Open a Health Savings Account
By contrast, there is a way to divert funds from your taxable income without locking them away for the next several decades. A Health Savings Account (HSA) is one such way to do this. Though the money will be earmarked for a specific purpose, it won’t necessarily carry the same restrictions that come with a retirement account. In essence, the HSA is a tax exempt account that you can use to pay medical bills, and it is particularly advisable to those with high-deductible health plans.
Nerdwallet points out that “Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, so long as you use them for qualified medical expenses. For 2021, if you had a self-only high-deductible health coverage, you could have contributed up to $3,600. For 2022, the individual coverage contribution limit is $3,650. If you have family high-deductible coverage, the contribution limit was $7,200 in 2021 and is $7,300 in 2022.”
Essentially, you’re putting this money aside for medical expenses for which you would ultimately have to pay anyway. This way, you’re both saving in advance for these expenses and reducing your tax burden as a reward for this saving.
7. Keep Good Records of Your Medical Bills
You don’t necessarily need to open a special account to save money on your medical expenses. In fact, all you really need to do is keep close track of your expenses on appointments, treatments, copays, deductibles, medications, medical devices, and more. Contrary to an HSA, the amount you can deduct will be capped based on the proportion of your income that is consumed by medical expenses.
“In general,” says Nerdwallet, “you can deduct qualified medical expenses that are more than 7.5% of your adjusted gross income for that tax year. So, for example, if your adjusted gross income is $40,000, anything beyond the first $3,000 of your medical bills — 7.5% of your AGI — could be deductible. If you rang up $10,000 in medical bills, $7,000 of it could be deductible in this example.” This means that there are tax breaks readily available to those who have endured a particularly costly year in terms of medical expenses.
8. Have Freelance Work, Will Travel
If you’re self-employed, do not neglect to write off your travel expenses any time you work on the road. Naturally, this means you’ll want to write off expenses on hotel rooms, transportation, meals, and certain entertainment experiences any time you are required to travel for work. But it can go a bit deeper than that. It also means that you can choose to work while traveling, and that you can, consequently, write off a portion of those expenses. In other words, getting a little work done on your vacation can save you a few dollars on your taxes.
Hey, if you like to spend 50% of your beach time telecommuting and hitting deadlines, that’s your prerogative. It’s all the same to the IRS as long as you are honestly working and honestly writing off only those expenses that apply to time spent working. If you order a meal to your Vegas hotel room while polishing off a financial report for your boss, write it off. If you decide to call it a day and go out by yourself to see a Lady Gaga impersonator later that night, don’t write it off. Then again, if you’re schmoozing a client at the Lady Gaga concert, write it off!
See what we mean? If you travel and work at the same time, in any capacity, make sure you seize every permissible write-off opportunity. And of course, make sure you confirm that every write-off is actually permissible. If you’re not sure how, consider reaching out to a tax specialist. Companies like H&R Block may be able to provide low-cost consultation for those who travel frequently for work and for those who like to get work done while traveling.
9. Start Your Side Hustle
If you’re not self-employed, this could be a great time to try it, for at least part of the time anyway. Starting your own little business or finding freelance work outside of your regular 9-to-5 obligations are not just great ways to diversify your income. These are also good strategies for offsetting what you owe to the government. Indeed, recent changes to the tax law have actually improved the tax outlook for self-starters.
According to Kiplinger “Tax reform created a powerful incentive for people to hang out their own shingle and participate in the gig economy. Under the new tax law, sole proprietors who use Schedule C, as well as pass-through entities—such as S corporations, partnerships and LLCs—which pass their income to their owners for tax purposes, get to deduct 20% of their qualifying income before figuring their tax bill.” That has the potential to make a pretty profound difference in what you’ll owe to the government after a year of hard work. Hustle for yourself and keep more money for yourself. (Check out also our article on getting a side hustle.)
10. E-File For Free
If you’re looking for a way to bring together all of these strategies in a single place, a good online tax preparation service could go a long way toward helping you realize these savings opportunities. In fact, if you have a basic filing outlook, the top services on the market will actually help you e-file for free at both the federal and state level. Not only that, but the vast majority of these services come with comprehensive information about how to seize all the credits, deductions, and opportunities to which you are entitled.
And should you choose to spend a little more for a premier or deluxe service package, most providers will also include access to a live tax specialist. Make sure that you ask your support specialist for any tax savings tips that you might have missed. With an affordable online tax prep service and just a little human support, you could minimize what you owe and maximize the money you take home from a year of work.
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If e-filing sounds like the right path for you but you’re not entirely sure how to get started, check out our look at the Best Online Tax Preparation Services for 2022.