6 Things You Can Do To Reduce Your Personal Tax Liability

Every time tax season rolls around; you begin to sweat. It seems you’re handed a large tax bill every spring. Now, you’re ready to feel like you’re hitting the jackpot.

You’re not alone in this feeling, either. Research shows that over 40% of households in the United States won’t owe federal income taxes in 2022, which means that the majority — nearly 60% — will.

Fortunately, you can take steps to reduce your personal tax liability. Here’s a rundown of seven ways to save on your taxes year after year.

Let’s jump in!

1. Claim All of the Available Tax Credits and Deductions

One of the best ways to decrease your income tax liability is to take full advantage of all of the tax deductions and credits available to you.

A financial advisor can tell you which ones you are eligible for and how much money they could save you.

For instance, let’s say you own your home and decide to itemize on this year’s taxes. You are allowed to deduct your mortgage interest payments along with your property tax payments.

Also, perhaps you are paying off your student debt. You are allowed to deduct your loan interest. You might also be allowed to deduct some of your health care expenses.

A tax credit for children is also available for tax filers who have minor children. Parents can additionally take advantage of a tax credit available for recouping some of the childcare expenses they’ve paid.

Finally, a tax credit for earned income is available for moderate- and low-income earners. The IRS takes into consideration factors like your number of children and other dependents when determining whether you’re eligible for this credit.

2. Get Rid of Any Underperforming Stocks

Another way to decrease your personal tax liability is to sell any underperforming stocks in your portfolio.

Although you’ll take a loss, you’ll also reduce the amount you owe in taxes. That’s because capital losses may be used for canceling out any capital gains you have earned, which can be taxed.

If your investment loss ends up exceeding your gains, simply use this to offset a few thousand dollars in your income this tax year.

3. Make Contributions to a 401(k) or IRA

Yet another way to minimize those annual tax bills is to save for retirement through a 401(k) or IRA.

When you put money into a 401(k) or a traditional IRA, you can save a significant amount in tax dollars.

For instance, for the 2023 tax year, your maximum deductible IRA contribution amount will be $6,500 for those under the age 50. That figure is $7,500 for those ages 50 and older. Meanwhile, the limit for a 401(k) is $22,500 for 2023.

Avoid Roth IRAs if you’re looking to minimize your tax liability, as they don’t offer immediate tax breaks.

4. Record All of Your Business Expenses

You can also pay less in taxes if you are self-employed and you deduct your business expenses.

These expenses may include the mileage you put on your car if you travel to see clients. They might also include any supplies or equipment you purchase to perform your business tasks.

Maintain comprehensive records so that you are aware of the expenses you can claim.

To make the recordkeeping process easier, consider applying for a credit card for small businesses. In this way, you can make all of your business-related purchases with the card. This will allow you to more easily differentiate between personal and business expenses.

5. Embrace HSAs and FSAs

Minimizing your personal tax liability is also possible with the help of health savings accounts (HSAs) and flexible spending accounts (FSAs).

An HSA allows you to set apart pre-tax money and use it indefinitely for long-term and short-term medical bills. You can qualify for this type of account if your medical insurance plan is a high deductible. A few thousand dollars can go toward this account each year, and the IRS won’t tax it.

If you can’t qualify for an HSA, you can use an FSA instead. FSAs are similar to HSAs except for the fact that you have just one year to utilize your set-aside money. Otherwise, you will have to forfeit the pre-tax money you have placed in it.

6. Make Donations to Charity

Finally, you can decrease the amount of money you pay in taxes by donating goods or money to charity.

The charity you donate to must be a registered one. If this is the case, you may claim tax deductions for the amounts you decide to give away.

When it comes to the goods you donate, you’ll deduct the items’ fair market values. These values are the amounts the goods are worth when you donate them.

Note that even stocks can be donated to charity.

To take advantage of charitable donations every tax year, you’ll need to itemize on your tax return each time.

How We Can Help You to Reduce Your Personal Tax Liability

Claiming all of the credits and deductions available to you is one of the best ways to reduce your personal tax liability. You can also reduce those hefty tax bills by selling off underperforming stocks and even donating more to charity.

At Bennett Financials, we take pride in providing top-tier strategic tax planning services. We can help you to decrease the amount you spend on taxes so that you can keep more money in your pocket every year.