An unexpected tax bill can ruin anybody’s day. To help avoid that unpleasant surprise, here are 12 easy moves many people can make to cut their tax bills. In many cases, you must itemize rather than take the standard deduction in order to use these strategies, but the extra effort may be worth it.
- If you got a huge tax bill this year and don’t want another surprise next year, raise your withholding so you owe less when it’s time to file your tax return.
- If you got a huge refund, do the opposite and reduce your withholding — otherwise, you could be needlessly living on less of your paycheck all year.
- You can change your W-4 any time. (How it works.)
- For 2020, you can funnel up to $19,500 per year into an account.
- If you’re 50 or older, you can contribute an extra $6,500 in 2020.
- These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s. And if your employer matches some or all of your contribution, you’ll get free money to boot.
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You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make.
- For the 2019 tax year, you may not be able to deduct your contributions if you’re covered by a retirement plan at work, you’re married and filing jointly, and your modified adjusted gross income was $123,000 or more. In 2020, that number rises to $124,000.
There are limits to how much you can put in an IRA, too:
- For 2019 and 2020, the limits are $6,000 per year, or $7,000 for people 50 or older.
- You have until the tax-filing deadline to fund your IRA for the previous tax year, which gives you extra time to take advantage of this strategy. (How it works.)
- In 2020, the limit is $2,750.
- You’ll have to use the money during the calendar year for medical and dental expenses, but you might also be able to use it for related everyday items such as bandages, pregnancy test kits, breast pumps and acupuncture for yourself and your qualified dependents.
- Some employers might let you carry money over to the next year. (How it works.)
- The IRS will exclude up to $5,000 of your pay that you have your employer divert to a Dependent Care FSA account, which means you’ll avoid paying taxes on that money. That can be a huge win for parents of kids under 13, because before- and after-school care, day care, preschool and day camps usually are allowed uses.
- Elder care may be included, too.
- What’s covered can vary among employers, so check out your plan’s documents. (How it works.)
- Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, so long as you use them for qualified medical expenses.
- For 2020, if you have self-only high-deductible health coverage, you can contribute up to $3,550.
- If you have family high-deductible coverage, you can contribute up to $7,100 in 2020.
- Your employer may offer an HSA, but you can also start your own account at a bank or other financial institution. (How it works.)
Depending on your income, marital status and how many children you have, you might qualify for a tax credit of up to almost $7,000 in 2020.
A tax credit is a dollar-for-dollar reduction in your actual tax bill — as opposed to a tax deduction, which simply reduces how much of your income gets taxed. It’s truly found money, because if a credit reduces your tax bill below zero, the IRS might refund some or all of the money to you, depending on the credit. (How it works.)
If you’ve donated clothes, food, old sporting gear or household items, for example, those things can lower your tax bill if they went to a bona fide charity and you got a receipt.
Many tax software programs include modules that estimate the value of each item you donate, so make a list before you drop off that big bag of stuff at Goodwill — it can add up to big deductions. (How it works.)
- In general, 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. (How it works.)
- You can deduct losses on stock sales, which can offset any taxable capital gains you might have. The limit on that offset is $3,000, or $1,500 for married couples filing separately.
- One other note: Never let tax avoidance become a substitute for wise investing. Sell a stock only if it truly doesn’t work for your portfolio anymore. Don’t do it just to get a tax break, because if you decide to buy back your stock within 30 days, the IRS can take back your deduction. (How it works.)