For most of us, taxes are a necessary evil we've come to accept -- but that doesn't mean we shouldn't try to pay the IRS as little as possible. If you're looking to lower your taxes (and who isn't?), here are five easy ways to get started.
1. Put more money into a retirement account
One of the best ways to lower your taxes is to put more money into a 401(k) or IRA. Not only will you save money on taxes, but you'll also be setting yourself up for a financially secure retirement. Talk about a win-win. For 2016, you can contribute $18,000 in tax-deferred dollars to a 401(k) and, depending on your income, $5,500 tax-free to an IRA. If you're 50 or older, there's even better news: You're allowed to make tax-deferred catch-up contributions as well, to the tune of an extra $6,000 for a 401(k) and $1,000 for an IRA (provided you're eligible for a tax break).
2. Sign up for commuter benefits
Did you know that your commute could actually save you money on taxes? All you have to do is sign up through your employer, and you'll be able to allocate tax-free dollars to pay for your commuting expenses. For 2016, the tax-free allowable limits are $255 per month for transit and $255 for parking, for a combined total of $510. As an example, if your effective tax rate is 25% and you spend $255 a month on a transit pass, you can shave $750 off your tax bill by taking advantage of this benefit.
3. Get a Flexible Spending Account
The money you pay for doctor visits, prescriptions, and other medical expenses doesn't all have to come from after-tax dollars. If you sign up for a Flexible Spending Account (FSA) through your employer, you can allocate tax-free dollars to cover eligible medical expenses, which include everything from copays to eyeglasses. For 2016, the pre-tax limit is $2,550. You can also sign up for a dependent-care FSA, which allows you to allocate pre-tax dollars toward eligible child-care expenses such as day care or summer camp. For 2016, the pre-tax limit is $5,000 for single parents and married couples filing jointly, or $2,500 for parents who are married but file separately.
4. Be charitable
Giving money to charity isn't just good for the soul; it's also good for your tax bill. As long as you donate to a qualified charity or organization, the amount you give is tax-deductible. The only catch is that you'll need to keep a good record of your donations, so be sure to hang on to your receipts or acknowledgements whenever you give. If possible, pay for charitable contributions with a credit card or check instead of cash so that there's a paper trail in the event you lose your receipt. You can also get a tax deduction for donating things like old clothing, furniture, or toys. However, it's especially important that non-cash donations be well-documented.
5. Know what credits and deductions you're eligible for
A big part of lowering your taxes is taking advantage of credits and deductions, so do some research or consult with a tax professional to learn what you're eligible for. Otherwise, you could be costing yourself hundreds, or even thousands, in tax savings each year.
Own a home? If so, your mortgage interest can serve as a major tax deduction. Have kids? Look into the Child Tax Credit. Depending on your income, you may be able to claim a $1,000 tax credit every year per qualifying child under 17. You may also be eligible for the Earned Income Tax Credit, which is a credit for low-to-moderate income filers, or the Child and Dependent Care Credit, which lets eligible filers claim up to 35% of the cost of child care.
The money you make doesn't come easy, so why shouldn't you try to keep as much of it as possible? With a little forethought and planning, you can lower your tax bill and put more of that hard-earned cash to work for you.
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