How to Pay Less in Taxes

How to Pay Less in Taxes

Paying taxes is a stressful time for most people, but it doesn't have to be like pulling teeth. With some planning and preparation throughout the year, you can significantly reduce the amount of taxes that you owe. You can even start lowering your withholding once you lower the taxes that you owe, allowing you to get more money from each paycheck.

Part 1 of 8:
Deductions and Credits

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1
Understand the difference between deductions and credits, and how they affect your taxes. The best way to reduce the amount you have to pay in taxes each year is to take full advantage of every deduction and credit you are eligible for. A deduction is something that reduces the amount of your income that is taxed. These can include charitable donations, interest paid on student loans and mortgages, and more.[1] X Research source A credit reduces the actual amount of money you have to pay for your taxes, which makes them much more powerful than deductions. A $2000 credit will lop $2000 dollars off the taxes you owe, which can make a huge difference. Finding every credit you're eligible for is essential for reducing your yearly taxes. For example, one source of credit can be energy-efficient home improvements.
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Part 2 of 8:
Itemized or Standard Deduction?

Image titled Pay Less in Taxes Step 2
1
Know the difference between an Itemized and a Standard Deduction. Choosing the correct deduction can have a significant impact on your taxable income for the year. Choose whichever deduction is greater when filing. Itemized Deduction - There are a wide variety of expenses that can count on your itemized deduction list. These include, but are not limited to, charitable donations, mortgage interest, health and dental care, and more. Many of the available deductions will be outlined in the following sections. Standard Deduction - This deduction is a set amount based on your filing status. Choose this deduction if your itemized deduction is less.
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2
Review IRS Form 1040 Schedule A to see all of the deductions that you may be eligible for. This will give you an idea for what receipts to save throughout the year.
Image titled Pay Less in Taxes Step 4
3
Save every essential receipt. Start a filing system so that you can easily track your receipts down when it's time to file taxes. [2] X Research source Save every receipt from your donations, even the toaster that you gave to Goodwill. You can claim a significant portion of your donations, leading to a big deduction. Save any receipts and bills for healthcare expenses, as an expense over 7.5% of your adjusted income is deductible. If you run your own business, deduct your expenses on Schedule C and save every job-related receipt.
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Part 3 of 8:
Homeowner Deductions and Credits

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1
Buy a home . This is a major life-event deduction and gives you access to several major deductions and credits detailed below. Obviously this isn't a decision to be taken lightly, but becoming a homeowner can provide significant tax benefits for years to come.

Tip: If you benefit from itemizing deductions, you can include the real estate taxes you paid as part of your itemized deductions.

Image titled Pay Less in Taxes Step 6
2
Consider avoiding paying off your mortgage. Mortgage interest is deductible and can add a significant deduction to your gross income. Consider continuing to make monthly payments on your mortgage instead of paying it off early. You'll need to weigh the benefits of this tax deduction versus the benefits of paying your mortgage off early. Your mortgage interest will be deducted through the Itemized Deduction.
Image titled Pay Less in Taxes Step 7
3
Install energy-efficient upgrades for your home . There are several credits that you can take advantage of by installing earth-friendly energy sources, including geothermal heat pumps, solar panels, and fuel cells. [3] X Research source You can also get credits for improving your insulation, getting new windows and doors, or getting a more efficient furnace.
Image titled Pay Less in Taxes Step 8
4
Consider refinancing your mortgage to pay for home improvements. If you get a second mortgage and use it to make improvements to your home, you may be able to deduct some or all of the points, or up-front costs, of the second-mortgage. You'll need to weigh the benefits of this versus going further into debt with the second mortgage.
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Part 4 of 8:
Child-Related Deductions and Credits

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1
Have children. While taxes shouldn't be a motivating factor behind the decision to have a child, you can get some powerful benefits when it comes time to file should you choose to become a parent. Make sure to get your child a Social Security number so that you can claim them as a dependent.
Image titled Pay Less in Taxes Step 11
2
Claim the "Child Tax Credit". You can claim one of these credits for each of your qualifying children. Each credit can be worth up to $2,000 off of the taxes you owe, depending on your income. The credit is also refundable so you can claim it even if your tax liability is 0. You can only get up to $1,400 refunded back per child.
Image titled Pay Less in Taxes Step 12
3
Claim the "Child and Dependent Care Credit" if you pay for childcare while working. Depending on the number of children you have and the amount of money you spend on childcare, this could be worth up to $2,100.
Image titled Pay Less in Taxes Step 13
4
Claim the "Adoption Credit" if you adopted a child this year. Depending on the adoption costs you paid, you may be eligible for a tax credit of up to $14,080 per adopted child.
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Part 5 of 8:
Student Credits

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1
Determine which credit you are eligible for. There are two tax credits available for students, but you can only claim one or the other per student. [4] X Research source American Opportunity Credit - This credit is only for students in their first four years of post-secondary school education. The credit is worth up to $2,500 for qualified tuition, and you must be enrolled at least half time for one academic period. Lifetime Learning Credit - This is available to any adult taking undergraduate, graduate, and professional degree courses. The credit is 20% of up to $10,000 of your tuition, with the upper limit being $2,000.
Advertisement

Part 6 of 8:
Employee Benefits

1
Check if your employer has a dependent care benefit if you pay for childcare. Some employers may offer to withhold some of your income to set aside for childcare payments. The money that’s set aside doesn’t have any income or payroll tax applied to it. After you provide your employer proof of childcare payments, you’re eligible for reimbursements. [5] X Research source
2
See if your employer has retirement plans available. If your employer offers a regular retirement plan, then contributing some of your income will reduce your taxable wages. On top of the money you contribute, many employers will also match the amount up to a certain point. The money you set aside into a retirement plan is still subject to Social Security and Medicare taxes.
3
See if your employer has included health benefits. Talk with your employer to see if they have policies available for health, dental, and vision insurance. If they do, sign up for the policies so you’re under their coverage. The insurance will withhold some of your pre-tax income to pay for the policies and you won’t have to pay as much taxes.
Advertisement

Part 7 of 8:
Retirement Deductions and Credits

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1
Start a retirement account. A 401k or IRA will allow you to funnel money from your paychecks into a retirement account. This makes your paychecks a little less, but the money that you invest in your retirement plan is tax-deductible. Click here for instructions on starting a retirement account.
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2
Claim the "Saver's Tax Credit". This is a credit that can be worth up to $2,000 depending on how much you've deposited into your retirement plan.
Advertisement

Part 8 of 8:
Other Ways to Save

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1
Apply for the "Earned Income Tax Credit". This is a scaling credit based on the amount of income that you earn. Typically if you make $50,000 or less in a year, the credit can help get you a significant return. [6] X Research source This credit is often overlooked but can be very helpful for low-income filers.
2
Contribute to a Health Savings Account for tax deductions. If you’re covered by a High Deductible Health Plan (HDHP), then you can make regular contributions to a Health Savings Account (HSA). As you contribute, you’ll be able to generate a deduction on your income tax that can help you save money. Some employers may offer their employees withholding funds for an HSA contribution, which can help protect your money from payroll taxes as well.
Image titled Pay Less in Taxes Step 18
3
Check your previous returns. You can amend a return for up to three years if you missed something and need to correct it. There are all kinds of reasons that you may want to go back and file an amended return, including: Neglected to file for an Earned Income Tax Credit when eligible. Forgot to get a credit for purchasing a hybrid car. Forgot to claim education credits, or any other credit or deduction that you were eligible but didn't claim.
Image titled Pay Less in Taxes Step 19
4
Have a professional review your taxes. Professional tax preparers are paid to know all of the tax regulations inside and out, and can be very helpful in tracking down every last deduction and credit. You may be able to get a guarantee that if you paid more taxes than you should have the tax firm will repay the difference.
Advertisement

Part 1 of 8:
Deductions and Credits

Image titled Pay Less in Taxes Step 1
1
Understand the difference between deductions and credits, and how they affect your taxes. The best way to reduce the amount you have to pay in taxes each year is to take full advantage of every deduction and credit you are eligible for. A deduction is something that reduces the amount of your income that is taxed. These can include charitable donations, interest paid on student loans and mortgages, and more.[1] X Research source A credit reduces the actual amount of money you have to pay for your taxes, which makes them much more powerful than deductions. A $2000 credit will lop $2000 dollars off the taxes you owe, which can make a huge difference. Finding every credit you're eligible for is essential for reducing your yearly taxes. For example, one source of credit can be energy-efficient home improvements.
Advertisement

Part 2 of 8:
Itemized or Standard Deduction?

Image titled Pay Less in Taxes Step 2
1
Know the difference between an Itemized and a Standard Deduction. Choosing the correct deduction can have a significant impact on your taxable income for the year. Choose whichever deduction is greater when filing. Itemized Deduction - There are a wide variety of expenses that can count on your itemized deduction list. These include, but are not limited to, charitable donations, mortgage interest, health and dental care, and more. Many of the available deductions will be outlined in the following sections. Standard Deduction - This deduction is a set amount based on your filing status. Choose this deduction if your itemized deduction is less.
Image titled Pay Less in Taxes Step 3
2
Review IRS Form 1040 Schedule A to see all of the deductions that you may be eligible for. This will give you an idea for what receipts to save throughout the year.
Image titled Pay Less in Taxes Step 4
3
Save every essential receipt. Start a filing system so that you can easily track your receipts down when it's time to file taxes. [2] X Research source Save every receipt from your donations, even the toaster that you gave to Goodwill. You can claim a significant portion of your donations, leading to a big deduction. Save any receipts and bills for healthcare expenses, as an expense over 7.5% of your adjusted income is deductible. If you run your own business, deduct your expenses on Schedule C and save every job-related receipt.
Advertisement

Part 3 of 8:
Homeowner Deductions and Credits

Image titled Pay Less in Taxes Step 5
1
Buy a home . This is a major life-event deduction and gives you access to several major deductions and credits detailed below. Obviously this isn't a decision to be taken lightly, but becoming a homeowner can provide significant tax benefits for years to come.

Tip: If you benefit from itemizing deductions, you can include the real estate taxes you paid as part of your itemized deductions.

Image titled Pay Less in Taxes Step 6
2
Consider avoiding paying off your mortgage. Mortgage interest is deductible and can add a significant deduction to your gross income. Consider continuing to make monthly payments on your mortgage instead of paying it off early. You'll need to weigh the benefits of this tax deduction versus the benefits of paying your mortgage off early. Your mortgage interest will be deducted through the Itemized Deduction.
Image titled Pay Less in Taxes Step 7
3
Install energy-efficient upgrades for your home . There are several credits that you can take advantage of by installing earth-friendly energy sources, including geothermal heat pumps, solar panels, and fuel cells. [3] X Research source You can also get credits for improving your insulation, getting new windows and doors, or getting a more efficient furnace.
Image titled Pay Less in Taxes Step 8
4
Consider refinancing your mortgage to pay for home improvements. If you get a second mortgage and use it to make improvements to your home, you may be able to deduct some or all of the points, or up-front costs, of the second-mortgage. You'll need to weigh the benefits of this versus going further into debt with the second mortgage.
Advertisement

Part 4 of 8:
Child-Related Deductions and Credits

Image titled Pay Less in Taxes Step 9
1
Have children. While taxes shouldn't be a motivating factor behind the decision to have a child, you can get some powerful benefits when it comes time to file should you choose to become a parent. Make sure to get your child a Social Security number so that you can claim them as a dependent.
Image titled Pay Less in Taxes Step 11
2
Claim the "Child Tax Credit". You can claim one of these credits for each of your qualifying children. Each credit can be worth up to $2,000 off of the taxes you owe, depending on your income. The credit is also refundable so you can claim it even if your tax liability is 0. You can only get up to $1,400 refunded back per child.
Image titled Pay Less in Taxes Step 12
3
Claim the "Child and Dependent Care Credit" if you pay for childcare while working. Depending on the number of children you have and the amount of money you spend on childcare, this could be worth up to $2,100.
Image titled Pay Less in Taxes Step 13
4
Claim the "Adoption Credit" if you adopted a child this year. Depending on the adoption costs you paid, you may be eligible for a tax credit of up to $14,080 per adopted child.
Advertisement

Part 5 of 8:
Student Credits

Image titled Pay Less in Taxes Step 14
1
Determine which credit you are eligible for. There are two tax credits available for students, but you can only claim one or the other per student. [4] X Research source American Opportunity Credit - This credit is only for students in their first four years of post-secondary school education. The credit is worth up to $2,500 for qualified tuition, and you must be enrolled at least half time for one academic period. Lifetime Learning Credit - This is available to any adult taking undergraduate, graduate, and professional degree courses. The credit is 20% of up to $10,000 of your tuition, with the upper limit being $2,000.
Advertisement

Part 6 of 8:
Employee Benefits

1
Check if your employer has a dependent care benefit if you pay for childcare. Some employers may offer to withhold some of your income to set aside for childcare payments. The money that’s set aside doesn’t have any income or payroll tax applied to it. After you provide your employer proof of childcare payments, you’re eligible for reimbursements. [5] X Research source
2
See if your employer has retirement plans available. If your employer offers a regular retirement plan, then contributing some of your income will reduce your taxable wages. On top of the money you contribute, many employers will also match the amount up to a certain point. The money you set aside into a retirement plan is still subject to Social Security and Medicare taxes.
3
See if your employer has included health benefits. Talk with your employer to see if they have policies available for health, dental, and vision insurance. If they do, sign up for the policies so you’re under their coverage. The insurance will withhold some of your pre-tax income to pay for the policies and you won’t have to pay as much taxes.
Advertisement

Part 7 of 8:
Retirement Deductions and Credits

Image titled Pay Less in Taxes Step 15
1
Start a retirement account. A 401k or IRA will allow you to funnel money from your paychecks into a retirement account. This makes your paychecks a little less, but the money that you invest in your retirement plan is tax-deductible. Click here for instructions on starting a retirement account.
Image titled Pay Less in Taxes Step 16
2
Claim the "Saver's Tax Credit". This is a credit that can be worth up to $2,000 depending on how much you've deposited into your retirement plan.
Advertisement

Part 8 of 8:
Other Ways to Save

Image titled Pay Less in Taxes Step 17
1
Apply for the "Earned Income Tax Credit". This is a scaling credit based on the amount of income that you earn. Typically if you make $50,000 or less in a year, the credit can help get you a significant return. [6] X Research source This credit is often overlooked but can be very helpful for low-income filers.
2
Contribute to a Health Savings Account for tax deductions. If you’re covered by a High Deductible Health Plan (HDHP), then you can make regular contributions to a Health Savings Account (HSA). As you contribute, you’ll be able to generate a deduction on your income tax that can help you save money. Some employers may offer their employees withholding funds for an HSA contribution, which can help protect your money from payroll taxes as well.
Image titled Pay Less in Taxes Step 18
3
Check your previous returns. You can amend a return for up to three years if you missed something and need to correct it. There are all kinds of reasons that you may want to go back and file an amended return, including: Neglected to file for an Earned Income Tax Credit when eligible. Forgot to get a credit for purchasing a hybrid car. Forgot to claim education credits, or any other credit or deduction that you were eligible but didn't claim.
Image titled Pay Less in Taxes Step 19
4
Have a professional review your taxes. Professional tax preparers are paid to know all of the tax regulations inside and out, and can be very helpful in tracking down every last deduction and credit. You may be able to get a guarantee that if you paid more taxes than you should have the tax firm will repay the difference.
Advertisement