Contributions to traditional 401 (k) and IRA accounts can be deducted from your taxable income and, as a result, reduce the amount of federal taxes you owe. These funds also grow tax-free until retirement. There are also Roth accounts that are funded with after-tax dollars. The common theme here for reducing your taxable income is investing your money.
Investing can significantly differ and even reduce your tax liability in some cases. In addition, by investing, you are allowing your money to grow and accumulate over time. Generally, the longer you can wait to pay taxes, the better. Deferring income from the current year to the next is a way to delay paying taxes and reducing taxable income for the current year.
If you have a low or moderate income, the Earned Income Tax Credit (EITC) can help you reduce the amount of taxes you owe. To qualify, you must meet certain requirements and file a tax return. Even if you don't owe any taxes or are not required to do so, you still need to file a return to be eligible. If the EITC lowers your taxes to less than zero, you may receive a refund.
Tax breaks, deductions and credits can reduce the amount of tax a person owes. Some of these tax benefits are intended to reflect a person's ability to pay taxes; the child tax credit, for example, recognizes the costs of raising children. Other tax benefits, such as deductions for charitable donations and the payment of mortgage interest, are incentives aimed at promoting specific social policy objectives. If you lose money on a capital investment, such as a stock, you can use that loss to lower your taxes.
If you want to reduce income taxes this year, group your expenses as much as possible in the current year. A health savings account (HSA) is a medical savings account designed for taxpayers with a high-deductible health plan (HDHP) to save for upcoming health care expenses. Exemptions and deductions indirectly reduce the amount of tax a taxpayer must pay by reducing their “taxable income”, which is the amount of income on which the taxpayer pays taxes. One of the easiest and potentially most beneficial ways to reduce your taxable income is to contribute to a pre-tax retirement account, such as an employer-sponsored 401 (k) or a traditional IRA.
Another great way to reduce your taxable income and, at the same time, accumulate savings is to make a contribution to a 401 (k) or a traditional IRA, Greene-Lewis says. Unlike exemptions and deductions, which reduce the taxpayer's taxable income, credits directly reduce the taxpayer's tax liability, that is, the amount of taxes the taxpayer must pay. Unlike some credits (such as the earned income credit and the additional child tax credit), the savings credit is not refundable if the credit exceeds the taxpayer's tax liability. The Jacksons are also proud to have recently paid their 30-year mortgage on the house they bought when they were newlyweds.
Jacksons have the right to apply for the Retirement Savings Contribution Credit to further lower their tax bill. While student loans can be a burden, the interest you've paid can be a simple deduction from your taxable income. Careful tax planning could significantly reduce your tax burden to next to nothing, even if you have fairly high incomes. All households can apply for a standard deduction to lower their taxable income, and many families with children can offset income taxes with the child tax credit.
The payroll tax is by far the most important federal tax for households in the lowest income quintile, in terms of how much they pay. Most low-income households don't pay federal income taxes, usually because they don't owe taxes (because their income is lower than the standard deduction) or because tax credits offset the taxes they would owe. .