Tax season is most people’s least favorite time of the year. You have to gather all your receipts, proof of income, and other documentation to tell the government how much you’ve earned and what they can take from you. There are few things as sure in life as taxes, but that doesn’t mean you have to pay as much as you’re paying now. There are many different ways to reduce your taxable income, such as these below.
1. Transfer Estate Ownership
While not an immediate form of tax relief, transferring ownership of your estate for the purposes of life insurance tax reductions may mean your beneficiaries pay less or no tax on your insurance policy.
According to the Internal Revenue Service, money from a life insurance policy is not taxable, but some exceptions apply. For example, IRS rules dictate that interest income from a policyholder is taxable. You may be able to reduce the taxes your beneficiaries pay by transferring ownership of your estate to someone else, such as a family member.
2. Defer Work Bonuses
Some workplaces like to reward their employees for their hard work by paying them a bonus at the end of the year. While this bonus can be well-received, it may also increase your income for the year and put you into the next tax bracket. As a result, you may have to pay more taxes. If possible, consider asking your manager whether you can defer your bonus until the following year so that it doesn’t make up part of the previous year’s income.
3. Donate to Charity
You may like to donate to a charity out of the goodness of your heart, but there can also be tax benefits associated with doing so. Under the CARES Act, you can take advantage of a cash donation deduction of up to $300 for an individual made to a 501(c)(3) organization and double for a married couple filing jointly.
4. Record Your Large Purchases and Property Taxes
Not everyone realizes it, but you can deduct sales taxes, income taxes, and state and local property taxes up to $10,000. While these used to be fully tax-deductible, you may at least save a small amount when you make large purchases throughout the year or pay your property taxes.
5. Adjust Your W-4 Withholding
As you go about your daily life, adjusting your W-4 withholding is one of the last things you think about doing. However, as this form lets your employer know how much money to hold back from your paycheck, keeping it up to date can be crucial. Make sure it’s as accurate as possible and takes into consideration any recent changes, such as a job loss, a new family addition, and changes in tax laws.
6. Contribute to a Retirement Account
Not only does a retirement account benefit you in your retirement years, but it may also impact how much tax you have to pay each year. Contributions to IRA and 401(k) accounts can be deducted from your taxable income, which may reduce how much federal tax you owe. The money you contribute to these accounts also remains tax-free until retirement.
It can sometimes seem like you’re giving away far more of your hard-earned money than you need to. Take note of some of these tax tips above and see if you can experience some reprieve this tax season.