They say it because itâs true: The only certain things in life are death and taxes.
Donât worry, weâre not talking about tax evasion, but there are some totally legit ways to keep more of your hard-earned dollars in your pocket.
It might be too late to make some of these moves for the 2021 tax season but think about making some changes soon for the 2022 tax season. One thing you can do now, though, is max out your contributions to a traditional IRA. You have until April 15, 2022, to do this for the â21 filing.
Hereâs several ways on how to save money on taxes for earnings that wonât get you in trouble with Uncle Sam come tax time.
1. Contribute to a 401(k)
Lowering your taxable income is one of the best ways to pay less in taxes. Less income earned means less money you pay to the government.
The easiest way to reduce your taxable income is to contribute to tax-deferred retirement accounts, like your companyâs 401(k) plan or some other type of workplace retirement plan.
Money you contribute to a 401(k) is pre-tax money, so it doesnât count toward your taxable income for the year you make the contribution, though you will be taxed when you make withdrawals later.
For 2022, you can contribute up to $20,500 for those under 50, and up to $27,000 those 50 and above. This doesnât include the amount your employer contributes to your plan.
2. Contribute to a Traditional IRA
Just like that company-sponsored retirement plan we were talking about, the funds you contribute to your Traditional IRA donât count toward your taxable income.
This type of retirement account is different to a Roth IRA, where contributions are taxed today but then grow tax-free thereafter.
For 2022, you can contribute up to $6,000 to an IRA, or $7,000 if youâre over the age of 50.
You have until April 15, 2022, to max out your IRA contribution for the 2021 calendar year.
An important caveat: If you or your spouse is covered by an employer-sponsored retirement plan, you may not be able to deduct your full IRA contribution or any contribution at all if your income is above a certain amount â head to the IRS website for full details on these phase-out limits.
3. Contribute to a Health Savings Account
A Health Savings Account (HSA), is a great tax-exempt option if you have a high deductive health health plan (HDHP). Your contributions to an HSA are made with pre-tax income (aka youâre not taxed) and neither are your withdrawals, as long as theyâre used to pay medical expenses that are qualified.
In 2022, you can contribute up to $3,650 to an HSA if you have individual coverage, and up to $7,300 if your HDHP covers a family.
You can leave funds in your HSA indefinitely since theyâre not subject to required minimum distributions. (And if youâre like most of us, youâll have more health care-related costs as you get older, anyway.)
4. Donât Forget Your FSA or Dependent Care Expenses
A flexible spending account (FSA) is similar to an HSA in that youâre allowed to contribute pre-tax dollars from your paycheck each year. Yes, it means you can reduce your taxable income, therefore paying less in taxes.
The limit in 2021 was $2,750 and went up to $2,850 in 2022.
Keep in mind youâll have to use up the money during the calendar year on qualifying expenses for you and qualifying dependents.
Have dependents â aka children or elderly members of your household youâre taking care of? If your employer offers a dependent care FSA account, you can contribute up to $10,500 in pre-tax dollars to go towards expenses such as day care, after-school care and preschool.
Why not save money on childcare and on your tax bill at the same time?
5. Put Your Kids Through College
If youâve got kids, chances are youâre already gritting your teeth thinking about paying for college.
According to U.S. News & World Report, average costs range from $10,338 to $38,185 per year (yikes!). To help with these costs and hopefully help you save money on taxes, consider opening a 529 savings plan.
This account is an investment vehicle specifically built for educational savings. You can use it to pay for your kidsâ college tuition or even to send yourself or your spouse to school.
The exact tax benefits vary by state â more than 30 states offer full or partial tax deduction or credits on 529 contributions.
6. Give It Away
The IRS, in an effort to encourage charitable donations, will allow you to claim up to $300 per person (or up to $600 if youâre married filing jointly) if youâre taking the standard deduction. The caveat is that these need to be cash contributions.
If you decide to donate more than $600 or want to itemize other types of donations like those bagged Goodwill items, youâll need to itemize.
Make sure to track the estimated value of your contributions. Plus, youâll have to have enough deductions to supersede the standard deduction to qualify â which is a fairly hefty $12,550 for single filers and $25,100 for joint filers for the 2021 tax year.
7. Know Your Deductions
You may already know that certain expenses are tax-deductible. But which ones, exactly?
Major medical bills: In general, if youâve spent more than 7.5% of your adjusted gross income (AGI) on qualified medical expenses, you may be able to write them off if you itemize your deductions.
Student loan debt interest: Depending on your modified adjusted gross income (MAGI), you may be able to deduct up to $2,500. This is an âabove-the-lineâ deduction, which means you can take it even if you opt for the standard deduction.
Home mortgage interest and local property taxes: These may both be eligible for partial deductions, though youâll need to itemize your tax return.
Business-related deductions: If youâre a freelancer or you work from home, you should also look into business-related deductions, like the cost of your home office space.
You might also be able to deduct certain supplies, travel expenses, and even meals and entertainment.
8. Take Advantage of Tax Credits
In certain scenarios, the IRS extends credits to eligible taxpayers. Tax credits count as an actual reduction of your total tax bill. If the tax credit is refundable, youâll get a refund if your tax credits exceed what you owe.
For instance, if you would have owed $500 and claim $1,000 in tax credits, not only will your payment be waived â youâll also receive a $500 tax refund.
Here are a few tax credits you may qualify for:
American Opportunity or Lifetime Learning Credits: Depending on your enrollment status, AGI, and how youâve paid for educational expenses, you may be entitled to the American Opportunity or Lifetime Learning Credits. (Check out this quick quiz from the IRS, which will tell you if youâre qualified in just 10 minutes.)
Earned Income Tax Credit: If you earned less than $57,000 in 2021, you might be eligible for the Earned Income Tax Credit, a benefit the IRS extends to low-to-moderate earners.
You could be eligible for up to $7,000 in federal income tax credits, though the exact amount depends on your income, marital status and number of qualified dependents. For details, check out the IRSâ Earned Income Tax Credit fact sheet.
9. Adjust Your Withholdings
The tax form W-4 is one you give to your employer specifying how much of your wages should be withheld for taxes.
It might seem intuitive to keep your withholdings as low as possible to keep more of your paycheck. However, if you find you owe taxes in April, you might want to go in and tweak your withholding claim so you donât run into the same problem each tax season.
