Posted By 
By Mark Strohl
Special to the Financial Independence Hub
On your journey to financial freedom, tax season will always be an obstacle you have to deal with. However, taking advantage of the various deductions and credits provided can lead to less money owed to the government, and more money remaining in your bank account. Some incentives afforded to you are dependent on many factors, such as your status of employment, while others are universal to individuals living in the United States. In this guide, we discuss ten ways you can minimize your tax liability, allowing you to save more towards your goal of financial freedom.
Taking advantage of Tax Deductions
Tax deductions are all about lowering your taxable income. There are two types of deductions you can claim: the standard deduction, or the itemized deduction. The standard deduction is a pre-set amount provided by the IRS, and is dependent on your filing status. For the year 2020, the standard deduction amounts are [all US$]:
- Married filing jointly – $24,800
- Single or married filing separately – $12,400
- Head of household – $16,650
It is estimated that around 90% of tax filers in the US take the standard deduction, including all filing statuses. However, the itemized tax deduction can still be useful, even though the passing of the 2018 Tax Cuts and Jobs Act has reduced the range of items that are counted towards deduction. The following are all items that can still be counted towards itemized deductions:
- Interest on home mortgages that $750,00 or below
- Medical and dental expenses that exceed 7.5% of your Adjusted Gross Income
- Charitable contributions (donations)
- Stale/local income, personal property, and sales taxes up to $10,000
- Student loan interest (up to $2,500)
- Investment interest expenses
In certain circumstances, the amount you owe could be less when deciding to take the itemized deduction. However, these requirements are very specific, and it is best if you work with a qualified CPA to discuss what deduction is best for you.
Contribute more towards your Retirement
Whether you contribute to a traditional 401k or an IRA, retirement account contributions are great for reducing the amount of income that can be taxed. Not only is the amount you contribute exempt from taxable income, but the growth the accounts generate is also not taxable until you withdraw from the accounts. However, keep in mind that only the first $6,000 that you contribute to an IRA can be deferred, and the first $19,500 contributed to a 401k.
It’s never a bad idea to start saving for the future, and many employers will match your contributions up to a certain percentage. This is why most in the accounting industry call retirement accounts “free money.” Contributing to your retirement accounts can also be extremely useful if you find yourself just over a particular tax bracket, as you can contribute to the account while simultaneously putting yourself in a lower tax bracket.
Find out what Tax Credits are available to you
While deductions reduce the amount of income that is taxable, tax credit minimizes the amount of taxes you owe. Tax credits are given in specific situations, and dependant on many individual factors. Tax credits come in two types: refundable and non-refundable credits. Refundable tax credits are credits that can be refunded if the amount that is credited is over the amount owed. For instance, if you qualify for a $1000 refundable tax credit but owe only $500 in taxes, you will be reimbursed the extra $500. On the other hand, a non-refundable tax credit can only reduce the amount of taxes you owe to $0. In the same situation described above, you would owe no taxes, but you would not receive the $500 for a non-refundable credit. Here are some common tax credits that many in the United States qualify for:
- American opportunity credit – A credit (up to $2,500) given to students that is used to pay for tuition, books, supplies, and other fees associated with college.
- Child tax credit – A credit (up to $2000 per child) given individuals that have an adjusted gross income of under $400,000 if filing married jointly, and $200,00 for all other filing statuses.
- Residential energy tax credit – A credit that is worth up to 30% of the costs of solar energy systems, such as solar water heaters and solar panels.
- Earned income credit – A refundable tax credit for low-moderate income individuals that is worth up to $6,660 dollars (depending on income and the amount of children you have).
This is only a small amount of the credits available to the public. Certain individuals, such as US expats and foreign nationals qualify for additional foreign tax credits in their country of residence. Work with A CPA to discuss what credits you qualify for, and how to take full advantage of those credits.
Reducing your taxes: Conclusion
There are thousands of ways to reduce your taxable income, or reduce the amount of taxes you owe. Each individual tax situation is different, and the incentives you should take advantage of will be heavily dependent on your income, filing status, family situation, and much more. While this guide gives general tips that apply to most tax filers, researching your situation and the incentives that are specific to your circumstance will always be in your best interest. Work with a CPA, or another qualified tax professional if you feel unsure about your tax situation. Whatever you decide to do, taking advantage of tax incentives can help ensure that hefty tax bills are not the obstacle that stands in your way of financial freedom!
Marc J. Strohl, CPA is the founder and managing director of Protax Solutions, one of the largest and most trusted companies specialized in expat tax services. He is one of the leading experts in the taxation of individual US expatriates and/ or foreign nationals. A member of the American Institute of Certified Public Accountants (AICPA) and the New York State Society of Certified Public Accountants (NYSSCPA), Marc has published articles in many critically acclaimed publications including Thomson Reuters’ twice-monthly newsletter publication Practical International Tax Strategies.
