How to Pay Less in Taxes
Understand the difference between deductions and credits, and how they affect your taxes., Know the difference between an Itemized and a Standard Deduction., Review IRS Form 1040 Schedule A to see all of the deductions that you may be eligible for...
Step-by-Step Guide
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Step 1: Understand the difference between deductions and credits
The best way to reduce the amount you have to pay in taxes each year is to take full advantage of every deduction and credit you are eligible for.
A deduction is something that reduces the amount of your income that is taxed.
These can include charitable donations, job-related expenses, interest paid on student loans and mortgages, energy-efficient home improvements and more.A credit reduces the actual amount of money you have to pay for your taxes, which makes them much more powerful than deductions.
A $2000 credit will lop $2000 dollars off the taxes you owe, which can make a huge difference.
Finding every credit you're eligible for is essential for reducing your yearly taxes. -
Step 2: and how they affect your taxes.
Choosing the correct deduction can have a significant impact on your taxable income for the year.
Choose whichever deduction is greater when filing.
Itemized Deduction
- There are a wide variety of expenses that can count on your itemized deduction list.
These include, but are not limited to, charitable donations, student loan and mortgage interest, health and dental care, job-related expenses, and more.
Many of the available deductions will be outlined in the following sections.
Standard Deduction
- This deduction is a set amount based on your filing status.
Choose this deduction if your itemized deduction is less. , This will give you an idea for what receipts to save throughout the year. , Start a filing system so that you can easily track your receipts down when it's time to file taxes.Save every receipt from your donations, even the toaster that you gave to Goodwill.
You can claim a significant portion of your donations, leading to a big deduction.
Save any receipts and bills for healthcare expenses, as an expense over
7.5% of your adjusted income is deductible.
If you run your own business, save every job-related receipt.
If you're hunting for a job, save the receipts for your job-hunting expenses (cab fares, employment agency fees, etc.). , This is a major life-event deductions, and gives you access to several major deductions and credits detailed below.
Obviously this isn't a decision to be taken lightly, but becoming a homeowner can provide significant tax benefits for years to come. , Mortgage interest is deductible, and can add a significant deduction to your gross income.
Consider continuing to make monthly payments on your mortgage instead of paying it off early.
You'll need to weigh the benefits of this tax deduction versus the benefits of paying your mortgage off early.
Your mortgage interest will be deducted through the Itemized Deduction. , There are several credits that you can take advantage of by installing earth-friendly energy sources, including geothermal heat pumps, solar panels, and fuel cells.You can also get credits for improving your insulation, getting new windows and doors, or getting a more efficient furnace. , If you get a second mortgage and use it to make improvements to your home, you may be able to deduct some or all of the points, or up-front costs, of the second-mortgage.
You'll need to weigh the benefits of this versus going further into debt with the second mortgage.
You can use a second mortgage to pay off credit card debt, which cannot be deducted.
You can then deduct the interest on your second mortgage while getting rid of your looming credit card debt at the same time. , While taxes shouldn't be a motivating factor behind the decision to have a child, you can get some powerful benefits when it comes time to file should you choose to become a parent.
Make sure to get your child a Social Security number so that you can claim them as a dependent. , Claiming a child as a dependent will act as an immediate deduction of #3,950 from your taxable income, no matter when in the year the child was born.
Since you're claiming a dependent and your tax bill will be reduced, you can cut back on your withholding at work so that your paycheck is a little larger.
You will need to fill out a new W-4 for your employer. , You can claim one of these credits for each of your qualifying children.
Each credit can be worth up to $1,000 off of the taxes you owe, depending on your income. , Depending on the number of children you have and the amount of money you spend on childcare, this could be worth up to $2,100. , Depending on the adoption costs you paid, you may be eligible for a tax credit of up to $13,190 per adopted child. , There are two tax credits available for students, but you can only claim one or the other.American Opportunity Credit
- This credit is only for students in their first four years of post-secondary school education.
The credit is worth up to $2,500 for qualified tuition, and you must be enrolled at least half time for one academic period.
Lifetime Learning Credit
- This is available to any adult taking undergraduate, graduate, and professional degree courses.
The credit is %20 of up to $10,000 of your tuition, with the upper limit being $2,000. , A 401k or IRA will allow you to funnel money from your paychecks into a retirement account.
This makes your paychecks a little less, but the money that you invest in your retirement plan is tax-deductible.
Click here for instructions on starting a retirement account.
Deduct your retirement deposits in the itemized deductions list. , This is a credit that can be worth up to $1,000 depending on how much you've deposited into your retirement plan. , This is a scaling credit based on the amount of income that you earn.
Typically if you make $50,000 or less in a year, the credit can help get you a significant return.This credit is often overlooked, but can be very helpful for low-income filers. , You can amend a return for up to three years if you missed something and need to correct it.
There are all kinds of reasons that you may want to go back and file an amended return, including:
Neglected to file for an Earned Income Tax Credit when eligible.
Forgot to get a credit for purchasing a hybrid car in
2010.
Forgot to claim education credits, or any other credit or deduction that you were eligible but didn't claim. , Professional tax preparers are paid to know all of the tax regulations inside and out, and can be very helpful in tracking down every last deduction and credit.
You may be able to get a guarantee that if you paid more taxes than you should have the tax firm will repay the difference. -
Step 3: Know the difference between an Itemized and a Standard Deduction.
-
Step 4: Review IRS Form 1040 Schedule A to see all of the deductions that you may be eligible for.
-
Step 5: Save every essential receipt.
-
Step 6: Buy a home.
-
Step 7: Consider avoiding paying off your mortgage.
-
Step 8: Install energy-efficient upgrades for your home.
-
Step 9: Consider refinancing your mortgage to pay for home improvements.
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Step 10: Have children.
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Step 11: Claim the child as a dependent.
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Step 12: Claim the "Child Tax Credit".
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Step 13: Claim the "Child and Dependent Care Credit" if you pay for childcare while working.
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Step 14: Claim the "Adoption Credit" if you adopted a child this year.
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Step 15: Determine which credit you are eligible for.
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Step 16: Start a retirement account.
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Step 17: Claim the "Saver's Tax Credit".
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Step 18: Apply for the "Earned Income Tax Credit".
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Step 19: Check your previous returns.
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Step 20: Have a professional review your taxes.
Detailed Guide
The best way to reduce the amount you have to pay in taxes each year is to take full advantage of every deduction and credit you are eligible for.
A deduction is something that reduces the amount of your income that is taxed.
These can include charitable donations, job-related expenses, interest paid on student loans and mortgages, energy-efficient home improvements and more.A credit reduces the actual amount of money you have to pay for your taxes, which makes them much more powerful than deductions.
A $2000 credit will lop $2000 dollars off the taxes you owe, which can make a huge difference.
Finding every credit you're eligible for is essential for reducing your yearly taxes.
Choosing the correct deduction can have a significant impact on your taxable income for the year.
Choose whichever deduction is greater when filing.
Itemized Deduction
- There are a wide variety of expenses that can count on your itemized deduction list.
These include, but are not limited to, charitable donations, student loan and mortgage interest, health and dental care, job-related expenses, and more.
Many of the available deductions will be outlined in the following sections.
Standard Deduction
- This deduction is a set amount based on your filing status.
Choose this deduction if your itemized deduction is less. , This will give you an idea for what receipts to save throughout the year. , Start a filing system so that you can easily track your receipts down when it's time to file taxes.Save every receipt from your donations, even the toaster that you gave to Goodwill.
You can claim a significant portion of your donations, leading to a big deduction.
Save any receipts and bills for healthcare expenses, as an expense over
7.5% of your adjusted income is deductible.
If you run your own business, save every job-related receipt.
If you're hunting for a job, save the receipts for your job-hunting expenses (cab fares, employment agency fees, etc.). , This is a major life-event deductions, and gives you access to several major deductions and credits detailed below.
Obviously this isn't a decision to be taken lightly, but becoming a homeowner can provide significant tax benefits for years to come. , Mortgage interest is deductible, and can add a significant deduction to your gross income.
Consider continuing to make monthly payments on your mortgage instead of paying it off early.
You'll need to weigh the benefits of this tax deduction versus the benefits of paying your mortgage off early.
Your mortgage interest will be deducted through the Itemized Deduction. , There are several credits that you can take advantage of by installing earth-friendly energy sources, including geothermal heat pumps, solar panels, and fuel cells.You can also get credits for improving your insulation, getting new windows and doors, or getting a more efficient furnace. , If you get a second mortgage and use it to make improvements to your home, you may be able to deduct some or all of the points, or up-front costs, of the second-mortgage.
You'll need to weigh the benefits of this versus going further into debt with the second mortgage.
You can use a second mortgage to pay off credit card debt, which cannot be deducted.
You can then deduct the interest on your second mortgage while getting rid of your looming credit card debt at the same time. , While taxes shouldn't be a motivating factor behind the decision to have a child, you can get some powerful benefits when it comes time to file should you choose to become a parent.
Make sure to get your child a Social Security number so that you can claim them as a dependent. , Claiming a child as a dependent will act as an immediate deduction of #3,950 from your taxable income, no matter when in the year the child was born.
Since you're claiming a dependent and your tax bill will be reduced, you can cut back on your withholding at work so that your paycheck is a little larger.
You will need to fill out a new W-4 for your employer. , You can claim one of these credits for each of your qualifying children.
Each credit can be worth up to $1,000 off of the taxes you owe, depending on your income. , Depending on the number of children you have and the amount of money you spend on childcare, this could be worth up to $2,100. , Depending on the adoption costs you paid, you may be eligible for a tax credit of up to $13,190 per adopted child. , There are two tax credits available for students, but you can only claim one or the other.American Opportunity Credit
- This credit is only for students in their first four years of post-secondary school education.
The credit is worth up to $2,500 for qualified tuition, and you must be enrolled at least half time for one academic period.
Lifetime Learning Credit
- This is available to any adult taking undergraduate, graduate, and professional degree courses.
The credit is %20 of up to $10,000 of your tuition, with the upper limit being $2,000. , A 401k or IRA will allow you to funnel money from your paychecks into a retirement account.
This makes your paychecks a little less, but the money that you invest in your retirement plan is tax-deductible.
Click here for instructions on starting a retirement account.
Deduct your retirement deposits in the itemized deductions list. , This is a credit that can be worth up to $1,000 depending on how much you've deposited into your retirement plan. , This is a scaling credit based on the amount of income that you earn.
Typically if you make $50,000 or less in a year, the credit can help get you a significant return.This credit is often overlooked, but can be very helpful for low-income filers. , You can amend a return for up to three years if you missed something and need to correct it.
There are all kinds of reasons that you may want to go back and file an amended return, including:
Neglected to file for an Earned Income Tax Credit when eligible.
Forgot to get a credit for purchasing a hybrid car in
2010.
Forgot to claim education credits, or any other credit or deduction that you were eligible but didn't claim. , Professional tax preparers are paid to know all of the tax regulations inside and out, and can be very helpful in tracking down every last deduction and credit.
You may be able to get a guarantee that if you paid more taxes than you should have the tax firm will repay the difference.
About the Author
Anna White
Dedicated to helping readers learn new skills in DIY projects and beyond.
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