Taxes are one of the largest expenses you’ll have over your lifetime. By spending a couple of minutes with these tips, you could potentially lower your income tax and save thousands of dollars a year. Here’s how to pay less taxes by making a few big changes.
1. Move to another state
One very effective way to lower your personal income tax is by moving to a new state with a much lower tax than the state you’re currently living in. According to this website calculator, I could save $2,685 per year if I moved back to Dallas from the Denver area.
If you’ve been considering making a move to a new state, see how the rest of the states stack up against your current location here. You can then make an informed decision about where to move to lower your taxes big time.
2. Purchase a home
Purchasing a home solely for the benefits of lowering your income tax is not a wise idea. However, if you’re ready to set down roots and bid your landlord adieu, buying a house offers some great tax benefits, such as:
- Mortgage interest paid on primary residence
- Real estate and property taxes
- Points paid during closing
- Capital gains exclusion on any profit earned after two years of homeownership
With tax deductions for any points paid when buying your home and mortgage interest paid throughout the year, homeowners have access to lots of tax benefits. You must be able to file a Schedule A with your tax return in order to take all of these deductions, but it may reduce your overall tax burden depending on your tax bracket and other factors.
Either way, you’ll be awarded tax savings as a homeowner. Over the long-term, buying a home is often a smarter investment than continuing to pay rent that goes into someone else’s pocket.
3. Invest in a 401k or IRA
Start investing into a 401k or IRA plan as soon as possible, even if it’s only $25 a month. Every bit you save now means you’re that much closer to retiring early — and the best part is that most retirement accounts offer tax benefits as an incentive to help you save for the future.
With a 401k plan (usually offered by your employer) you can defer tax due on money that would normally be in your paycheck. This reduces your tax bill at the end of the year since you’re contributing pre-tax funds to your 401k.
However, it’s important to note that you will pay income taxes on 401k withdrawals when you reach retirement age, at which point you could be in a higher tax bracket. But saving for retirement is rarely a bad idea, and your employer may even offer to match your savings contributions!
You may also qualify for a Saver’s Credit on your tax return — that’s a tax credit made available to individuals who contribute to a qualified retirement plan, including a 401k or IRA. The credit is based on your income and how much you’ve contributed to retirement throughout the year.
With a Roth IRA, you’ll be able to withdraw from the account tax-free in the future — which includes the interest earned on this money, too! You can also take out qualified withdrawals (meaning they’re fee-free) for things like higher education or purchasing your first home, all of which help boost your tax savings at the end of the year.
4. Tally job hunting expenses
Expenses you incurred while on the job search are completely tax deductible. The expenses must be related to your current career field while actively looking for a job, including fees paid to an employment agency, preparing and mailing copies of your resume, and even travel expenses to and from prospective work interviews.
One point to know is that you cannot deduct job-hunting expenses if this is your first job, and the expenses must exceed a certain threshold on your tax return.
5. Give to causes you care about
Giving to charities and nonprofits is a great way to help others and save money in your journey to learn how to pay less taxes. This giving calculator shows the tax savings you could be eligible for based on your donation. This includes cash donations or donations of property, cars, clothing, furniture, and more.
If you’re able to itemize your deductions on a Schedule A, along with any mortgage tax savings and job hunting expenses, you can include all of your donations to charities made throughout the year.
As you learn how to save on taxes with donations, remember to get a receipt from the organization, especially if you contribute more than $250. This will have to be saved with your tax documents at the end of the year.
6. Maximize education tax credits
As a college student, there are multiple higher education credits you could qualify for. Even if you’re no longer enrolled in college you could still get a credit for classes that improve job skills or continuing education to maintain the degree in your current field.
In addition, there’s also a deduction for up to $2,500 for any interest you pay towards your student loans. Wondering how much you can save with the student loan interest deduction? Find out with our deduction eligibility quiz!Start the Quiz
7. Start a freelance business
Becoming a self-employed business owner has some major tax perks, even if you’re not a full-time business. There are scores of tax benefits, including deducting expenses for business-related costs like office supplies, new equipment, internet and cell phone charges, website fees, and membership dues, to name a few.
For any self-employment tax you pay as part of your Social Security and Medicare taxes, you can deduct half of that on the front of your tax return. That’s quite a significant savings, so if you’ve been considering starting a side hustle, this is the perfect excuse to do so.
How to pay less taxes
Hopefully, your tax professional will suggest these tax savings as options and see whether or not you qualify for them. However, it’s important to know how to pay less taxes yourself so you don’t miss out on vital credits or deductions.
Do your due diligence since every deduction you can claim will decrease your taxable income, and every credit you rightfully qualify for will decrease the amount of tax you owe.
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