10 Ways to Lower Your Taxes

1. Contribute to an FSA or HSA

If your employer offers flexible spending accounts (FSAs), your contributions to the account are exempt from income taxes, Social Security and Medicare taxes, and some state taxes. An employer may offer a health savings account (HSA), or you can open one on your own if you have a high-deductible health plan.

You can withdraw money you contribute to either account to pay your qualifying out-of-pocket costs. Because you don't have to pay taxes on any amounts you withdraw to pay qualified expenses, the funds contributed to the FSA or HSA are effectively shielded from tax.

Unfortunately, there is a "use it or lose it" rule for FSA funds. So, if you don't use the money you contributed to your FSA to pay medical expenses during the year, you will lose most of it. This is because the IRS only allows you to carry over a small amount from one year to another ($640 for 2024). You can roll over money in an HSA account indefinitely to future years.

2. Maximize Your Deductions

Tax deductions are payments you make to reduce the amount of your income subject to tax. So, you can use deductible expenses, like state and local tax payments, mortgage interest, and student loan interest, to lower what you owe. You claim a deduction for the amount paid on your tax filing. Track every deductible expense you're entitled to to maximize your deductions.

Because of the standard deduction, not everyone should claim their deductible expenses, which are only available to those who itemize their deductions. Taxpayers must choose between claiming the standard deduction and itemized deductions each year.

Unfortunately, for most taxpayers, the standard deduction is larger than the total of their deductible expenses. So, maximizing deductions is a tax strategy that only works for the 10% to 20% of taxpayers who itemize their deductions.

3. Contribute to a 401(k) or IRA

Like a tax deduction, contributions to a 401(k) retirement plan or individual retirement account (IRA) will lower your taxes. It reduces the income included on your tax return. Only traditional IRA contributions are deductible in the year they're made. Roth IRAs are not deductible. The contributed funds get invested and will enjoy tax-deferred growth. That means you won't pay any capital gains taxes when the investments increase.

Eventually, you must withdraw your investments from your 401(k) or IRA account: required minimum distributions (RMDs). Those withdrawals will get taxed as ordinary income. Since RMDs begin at age 73, it's assumed that you will be retired, earning less income. You will get taxed at a lower rate because you will be in a lower tax bracket.

4. Donate to Charity

If you itemize your deductions, charitable donations will reduce your tax liability. But make sure you are donating to a qualified charitable organization, or the IRS will reject your deduction. This is often a problem when someone has gotten scammed into donating to an unapproved charity. You will lose the amount donated to the bogus charity, and the IRS will deny your deduction.

Ensure that an organization is on the IRS-approved tax-exempt organization list before you give it money. You can also donate stocks, bonds, real estate, or other assets that have gained in value since you purchased them. Besides the deduction, you will avoid paying capital gains taxes on any increase in their value since you bought them.

5. Take Advantage of Tax Credits

A tax credit is a dollar-for-dollar reduction in the amount of tax you owe. The government uses tax credits to encourage taxpayers to engage in certain activities or to give financial benefits to low- to middle-income taxpayers. Some tax credits are "refundable credits" because if the credit amount is less than the tax you owe, the government will refund the difference. If you owe $750 in taxes and have a refundable $1,000 credit, the government will pay you $250.

Some common tax credits include the child tax credit (CTC), earned income tax credit, first-time homebuyer credit, child and dependent care credit, adoption credit, education credit, and retirement savings contributions credit.

6. Pay Medical Bills

High medical bills are rarely good news for anyone, but they may be deductible if you itemize. You can deduct medical and dental expenses greater than 7.5% of your adjusted gross income.

The IRS defines medical expenses as diagnosis, treatment, cure, mitigation, or disease prevention costs. You, your spouse, or a dependent can have these medical expenses. You can claim medical expenses in the year you paid the bill, regardless of the year they happened.

7. Sell Losing Investments

A taxpayer can reduce tax liability with losses sustained on their investment. The taxpayer must have taxable gains and losses to qualify for the deduction. Capital gains are the profit you get from selling an asset (stocks, real property, a business, etc.) after holding it for more than one year. Capital losses are when you sell an asset held for more than a year for less than you paid.

Capital losses will decrease the capital gains that are subject to tax. Therefore, if you sold stocks for $1,000 more than you paid for them and sold an investment property for $1,000 less than you paid for it, you would have no taxable capital gains for the year. If you have greater capital losses than capital gains, you can carry forward the unused losses to future tax years.

Suppose you have capital losses but no capital gains. In that case, you can use the first $3,000 in capital losses to offset ordinary income and carry any unused losses forward for future tax years.

8. Energy-Efficient Home Improvements

The 2022 Inflation Reduction Act provided several tax breaks for homeowners who make energy-efficient home improvements through tax credits. Improvements to the following apply if they meet energy-saving requirements:

• Exterior doors, windows and skylights
• Insulation materials
• Central air conditioners, water heaters, furnaces, boilers and heat pumps
• Biomass stoves and boilers
• Home energy audits

The size of the credit depends on the amount spent on a qualifying improvement during a tax year. For the 2023 through 2032 tax years, the credit is 30% of expenses, up to a maximum amount of $1,200 in a year. Heat pumps, biomass stoves, and boilers cost a maximum of $2,000. There is no lifetime limit on claiming the credits so that you can claim the credit every year until 2032.

9. Donate Your RMDs

If you have an IRA or 401(k) and are 73 or older, you must start taking required minimum distributions from your account, whether you need the money. Unfortunately, you get taxed on that distribution. You can avoid paying taxes on an RMD by donating the distribution to a qualified charity because it won't be in your yearly income.

10. Income Shifting

Income shifting is an option for small-business owners or the self-employed. This is usually the moving of income from taxpayers in a higher tax bracket to one in a lower bracket with a lower tax rate. For example, you can hire one of your children and attribute some of your business income to them. But beware of the so-called "kiddie tax" that can get assessed on the child's unearned income.

Another common method of income shifting is timing the receipt of income for a future tax year to postpone tax payments.

If you're considering taking advantage of income shifting, consult a tax lawyer, CPA, or other tax professional first. You must follow specific rules, and failing to do so could result in more tax payments, penalties, and interest.

Still Have Questions? An Attorney Can Help

While there are many tricks you can use to reduce your tax bill, it's complicated to pull them off. If you make a mistake, the IRS could notice, and you might pay more income taxes, penalties, and interest. A local tax lawyer can help. Tax attorneys understand the strategies you can use to reduce your income now and in the future. They can help you with tax planning and structuring your affairs to limit the amount of taxable income you get in a year.