Top 10 Things the Average U.S. Citizen Can Do to Pay Less in TaxesAs the saying goes, there are only two things certain in life: death and taxes. And while most people can't avoid paying taxes altogether, there are steps you can take to decrease the amount you owe to the IRS.
If you're not a millionaire or billionaire, you might assume that there's not much you can do to reduce your tax burden. After all, the wealthy have access to all kinds of fancy tax strategies that aren't available to the average person such as taking advantage of offshore tax havens and setting up complex trusts. However, for most people, these tactics are simply out of reach.
But the truth is, there are plenty of things that the average U.S. citizen can do to lower their tax bill. In this top ten list, we'll explore some of the most effective ways to reduce your tax burden and keep more of your hard-earned money in your pocket.
By contributing to a traditional IRA or 401(k), you can reduce your taxable income and potentially lower your tax bill. This is because contributions to these accounts are typically tax-deductible, meaning they reduce your taxable income for the year.
Tax credits are even better than tax deductions because they reduce your tax bill dollar-for-dollar. There are many different tax credits available, including the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit, among others.
If your itemized deductions exceed the standard deduction, you could save money on your taxes. Some common deductions include charitable donations, mortgage interest, state and local taxes, and medical expenses.
If you have a high-deductible health plan, you may be eligible to contribute to an HSA. These accounts allow you to save money tax-free for medical expenses, and contributions are tax-deductible.
If you're self-employed or own a small business, there are many tax deductions available that can help you lower your tax bill. For example, you can deduct expenses related to your home office, business travel, and equipment purchases.
If you're saving for your child's education, a 529 plan or Coverdell ESA can help you save money on taxes. Contributions to these plans are not tax-deductible, but earnings grow tax-free and withdrawals are tax-free when used for qualified education expenses.
If you have investments, you can potentially lower your tax bill by timing your capital gains and losses. For example, you can sell losing investments to offset gains and reduce your taxable income.
In addition to retirement accounts and HSAs, there are other types of tax-advantaged savings accounts available, such as Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs).
Charitable donations are tax-deductible, so if you're planning to give to a charity, consider timing your donation to maximize your tax benefits. For example, you could bunch multiple years' worth of donations into a single year to itemize your deductions.
Finally, if you're feeling overwhelmed or unsure about how to reduce your tax bill, consider hiring a tax professional. They can help you identify deductions and credits you may have missed, and provide advice on tax planning strategies that could help you save money in the long run.