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60-Second Guide to Cutting Your Taxes

Nobody wants to pay Uncle Sam any more than necessary. But you also don't want to end up on the receiving end of an IRS audit -- or worse. Luckily, there are plenty of perfectly legitimate ways to make sure you don't pay more than your fair share of income tax. Here's the quick scoop on ways to save both in April and year-round.

0:60 Pull out your old returns
Take a trip down memory lane to visit those ghosts of tax returns past. Sure, it'll bring back memories of late nights in mid-April spent frantically trying to get everything together. But without looking at your returns for past years, you won't know where to begin to look for ways to save. So go find those files!

0:52 Make the most of your income
The easiest way to pay no tax is not to earn any income, but we'll assume that you don't find that a very appetizing strategy. You can, however, pick investments where you'll either pay no tax or qualify for reduced rates. Know the nuances and you can save yourself some serious money. 

0:43 Use your tax shelters -- legally!
The tax laws give everyone some great ways to cut taxes by saving toward many different important financial goals. Retirement accounts, such as traditional IRAs and 401(k) plans, let you defer paying tax on part of your income for decades, until you use that money after you retire, as well as lower your taxable income for the year by the amount you contribute. Other accounts, like Roth IRAs and 529 plans, let you save toward retirement or college expenses without ever having to pay tax on the income your investments generate. Using these shelters wisely can add up to thousands in tax savings.

0:29 Be smart about deductions
Everyone gets a standard deduction, but that doesn't mean you should take it. Millions of people give up potential tax savings simply because they don't keep records or take the time to itemize their deductions. Especially for homeowners and those with high medical bills, missing out on itemized deductions is hazardous for your financial health. And if you do go with the standard deduction, don't just assume that you should take it on both your state and federal returns, or you could be leaving money on the table.

0:21 Get extra credit
No, we're not talking about applying for that ultra-titanium credit card. The tax laws give taxpayers incentives on all sorts of different things, from raising a child and paying for educational expenses to making foreign investments. These credits are free for the taking, but you have to know they're available to take advantage.

0:09 Think about next year
There's only so much you can do to cut your tax bill for a particular year if you wait until the last minute to prepare your return. With some advance planning, you can get a head start on next year's taxes and take the opportunity to do some things you may have missed out on in past years. Things like checking your withholding and monitoring your income can help put you in better shape next time around.

0:04 Celebrate!
With all this planning, your taxes are filed, and it's not even April 13 yet! Give yourself a well-deserved pat on the back -- and then keep up the good work this year and next.

Got another minute?  
For more on the basics of saving on taxes, learn more on:


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 20, 2013, at 7:47 PM, Jilli wrote:

    Another thing to consider is donating. Our company recently replaced all of our computers and we donated the older ones to www.charityboats.org. Obviously, they accept more than just boats at their organization. It was free, very simple, and they even came and picked them up. Besides the good deed of donating to charity, we got a significant tax deduction.

  • Report this Comment On November 26, 2013, at 12:52 PM, HarryKyin wrote:

    We all pay tax on our own individual earnings and assets. But thanks to a number of reliefs and allowances offered to married couples and civil partners, it is possible to reduce the total amount of tax you pay as a couple if you arrange your finances correctly. This, though, works only if one partner pays a lower tax rate. Accountants recommended switching income-producing assets, such as shares, investment funds, bank and building society accounts and jointly owned property, into the name of the partner who pays the lower rate of tax. This way, you pay less tax on dividends, rent and savings interest. The general rule that jointly owned income is taxed 50/50 can be altered by making a specific election where there has been a genuine outright gift of assets. If you are unmarried and transferring assets, this could potentially trigger a capital gains tax (CGT) bill.

  • Report this Comment On July 30, 2014, at 10:20 AM, hickoryposcery wrote:

    Thanks for the information. Taxes stress me out so this will help me to stay on top of them and not get too stressed. In the "get extra credit" section, you wrote about how there are lots of ways to get money back. How can I find out all the ways to get extra credit? Is there a list anywhere of all the ways to get money back?

    Hickory Poscery | http://taxproblemfixers.com/

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