9 Best Ways to Lower Your Taxes - Experian (2024)

1. Contribute to Retirement Accounts

Contributing to your employer's 401(k) or other qualified retirement plan reduces your taxable income and lowers your tax bill. Investments in a 401(k) grow tax-deferred until you withdraw the money in retirement. If your employer matches your retirement contributions, you'll come out even farther ahead. You can deduct up to $20,500 in 2022, or $27,000 if you're 50 or older. Additional options include:

• Contribute to your own IRA. In 2022, you can contribute up to $6,000 ($7,000 if you're 50 or older) to a traditional IRA and deduct your contribution on your tax return. Be mindful of income limits if you're also covered by another retirement plan: Your deduction may begin to phase out starting at $109,000 in adjusted gross income if you're married filing jointly or $68,000 if you're single in 2022. If you contribute to a Roth IRA, your contribution is not deductible but your earnings and withdrawals will be tax-free going forward.
• Set up your own SEP-IRA or SIMPLE plan. If you're self-employed or own your own business, SEP and SIMPLE IRAs make it easy for employers to set up tax-advantaged retirement plans for employees. With a SEP-IRA, contributions are limited to 25% of compensation up to $61,000. A SIMPLE plan's contributions are limited to $14,000 plus $3,000 if you're 50 or older.

2. Fund an HSA or FSA

You can pay for out-of-pocket health care or dependent care expenses with pretax dollars using a flexible spending account (FSA) or health savings account (HSA).

• FSAs are offered through your employer. Depending on the type of FSA, you can use funds to pay for qualified medical expenses, dependent care or specified vision or dental care costs.
• HSAs are for people with qualifying high-deductible health insurance plans. You can open and fund your own HSA with pretax contributions. Your money grows tax-free and you won't pay taxes on qualified withdrawals.

3. Take Self-Employment Deductions

If you've started doing contract work or freelancing, track your business expenses throughout the year, including home office expenses, business use of your vehicle, business travel, supplies, equipment and advertising. When tax time comes, you can deduct qualified business expenses on Schedule C of your tax return. You can also deduct half of the self-employment tax you pay and may be entitled to a 20% pass-through deduction as well.

These deductions don't apply to money you've made on the job. And, in case you get audited, you'll want to save receipts and credit card statements for any expenses you deduct.

4. Look for Tax Credits

Tax credits can be even better than tax deductions because they reduce your tax bill dollar for dollar—instead of reducing your taxable income, as deductions do. The federal government offers a range of tax credits, including:

• Child tax credit: Although the expanded child tax credits that were part of the American Rescue Plan Act ended in 2021, regular child tax credits of up to $2,000 per qualifying child are still available.
• Child and dependent care credit: If you pay for child care or care for other qualifying dependents, you may be eligible for a child and dependent care credit to help cover the costs.
• Earned income tax credit (EITC): The earned Income tax credit provides relief for low- and moderate-income taxpayers in the form of a refundable tax credit. Eligibility depends on your income and family size.
• American opportunity credit: For each student they are sending to college, parents may be able to claim up to $2,500 in tax credits—100% of the first $2,000 in qualifying expenses and 25% of the second $2,000. Eligibility and income limitations apply.
• Plug-in electric drive vehicle credit: You can receive a credit of up to $7,500 for the purchase of a qualifying electric vehicle, as long as the vehicle manufacturer's eligibility hasn't phased out.
• Residential energy efficient property credit: A tax credit of 22% to 26% of the costs associated with installing solar electric property, solar water heaters, geothermal heat pumps, small wind turbines, fuel cell property and qualified biomass fuel property may be available.

5. Give to Charity

If you itemize deductions on your tax return, you can deduct charitable contributions up to 60% of your adjusted gross income. (It may be less in certain circ*mstances: See IRS Publication 526 for details.) Contributions must be made to qualifying charities, which include charitable organizations like the American Red Cross, churches or synagogues, veterans' groups, nonprofit schools and hospitals. You can also deduct nonreimbursable expenses you incur when you volunteer for a qualifying charity.

You can also save on capital gains taxes by donating stocks or other investments to charity directly instead of converting investments to cash and realizing the gain yourself.

6. Harvest Investment Losses

When your investments drop in value, you can sell them at a loss and claim the loss on your tax return. Capital losses can cancel out capital gains, reduce your taxable income by up to $3,000 a year and carry over to future years.

7. Deduct Medical Expenses

Out-of-pocket medical expenses are deductible when they exceed 7.5% of your adjusted gross income. These expenses include but aren't limited to:

• Payments to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists and nontraditional medical practitioners
• Out-of-pocket prescription drug costs
• Prescription eyeglasses, contact lenses, hearing aids, crutches, wheelchairs, false teeth or a guide dog or other service animal
• Transportation to and from medical treatment

This deduction doesn't kick in until you've exceeded 7.5% of your AGI, and then it only applies to the amount that's over this threshold. So, if your AGI is $100,000 and your health expenses for the year are $10,000, your deduction would be $10,000 minus $7,500, which is $2,500.

8. Deduct Student Loan Interest

You may deduct up to $2,500 in student loan interest paid during the tax year as an adjustment to income. This means you don't have to itemize to claim this deduction. The interest must be paid on a qualifying student loan on which you are legally required to pay interest. You must also meet income and filing restrictions to be eligible.

9. Look for State or Local Tax Savings

If you pay income taxes to your state or local government, you may be eligible for tax savings there as well. For example, the state of California offers its own earned income tax credits for low-income taxpayers. At the local level, you may be able to lower your property tax bill by reviewing your property's assessed value or applying for property tax credits.