Did you get in over your head with your taxes this year?
Although tax season has passed for this year, there’s no reason you shouldn’t start working on reducing your taxable income for next year.
If you want to learn ways to reduce your taxable income and make the most tax credits, you came to the right place.
Read on to learn how to reduce taxable income today.
-
Pre-Tax Contribution to Your Retirement Accounts
If you want to know how to legally reduce your taxable income, the first place to start is by making pre-tax contributions to your 401(k).
By contributing to your retirement plan, you will reduce your adjusted gross income. For example, a single person under 50 can contribute up to $19,000 a year into their 401(k). However, if you’re over 50, you can contribute $25,000.
For example, if you earn $75k a year and contribute the max amount to your 401(k), you can take your income down from $75k to $56K a year.
A married couple, for example, can contribute up to $38,000 a year into their 401(k). This means if they make a combined income of $120k a year, their taxable income can be reduced to $82k a year.
On top of reducing your taxable income, you will be saving for your future.
-
Start a Health Savings Account
Another way to reduce your taxable income is by opening a health savings account. A health savings account will allow you to put money into an account pre-tax to spend on qualifying health expenses.
You can continue to save money into your HSA account year after year, and it will not expire.
Individuals can contribute $3,550 into their HSA accounts, and a family can contribute $7,100. If you make $50k a year as an individual and contribute $3,500, your taxable income will be $46K a year.
-
Open a Flexible Spending Account
Like HSA accounts, a Flexible Spending Account allows you to withdraw your income pre-tax for your medical expenses.
As an individual, you’re allowed to contribute $2,700 of your income towards your FSA. This means if you earn 35k a year, you can reduce your adjustable gross income to $32,300 a year.
However, with an FSA account, you have to spend all of the money on your FSA; otherwise, it will expire by the next calendar year.
Find out more about other ways you can reduce your taxable income.
-
Have Dependents
If you’re planning on having a family, this will be another way for you to reduce your taxable income.
According to the tax credit act, you will get $2,000 for each qualifying dependent under 17. The $2,000 child tax credit will remain in place until 2025.
While the tax credit shouldn’t determine whether or not you have a child, it can give you a tax break.
How to Reduce Taxable Income? Now You Have the Answer
Now that you know how to reduce taxable income, you’re ready to take the necessary steps.
To learn how to reduce your taxable income, you should start by making contributions to your 401(k), open an HSA account, or contribute to an FSA account.
If you enjoyed this article and would like to learn more tax tips, check out the rest of our blog.
