We all want to pay the IRS as little money as possible, yet many of us unknowingly increase our tax bills by not taking advantage of the savings opportunities out there. Here are a few reasons why you might be paying more taxes than necessary.

1. You're not contributing to a tax-advantaged retirement plan

IRAs and 401(k)s are designed to help you save for retirement, but if you're contributing to the traditional type of either account (as opposed to a Roth), you stand to save money right away, too. The money that goes into either account is considered pre-tax.

With a 401(k), your contributions are deducted automatically from your paychecks, and with an IRA, you fund your account directly but then write off that amount on your tax return. Either way, you can slash your tax bill substantially by contributing as much as you can, up to the annual limits.

Tax forms on top of hundred-dollar bills.


Right now, savers under 50 can sock away up to $5,500 a year in an IRA and $18,500 in a 401(k). For 2019, these limits are going up to $6,000 and $19,000, respectively.

Older workers get an even bigger opportunity to save. Those 50 and over can contribute up to $6,500 at present to an IRA and $24,500 to a 401(k). Come next year, these limits will rise to $7,000 and $25,000, respectively.

To give you an example of what you might save on your taxes, imagine your effective tax rate is 25% and you contribute $5,000 to either an IRA or a 401(k) this year. Doing so will automatically take $1,250 off of your 2018 taxes, just like that.

2. You're not using pre-tax dollars to pay for healthcare and child care

If you have regular medical bills (which, let's face it, most of us do) or are paying for child care so that you can work, signing up for a flexible spending account, or FSA, is a great way to lower your tax burden. FSAs let you allocate pre-tax dollars to pay for healthcare and child care expenses, and your savings are a function of your effective tax rate, as is the case when contributing to an IRA or 401(k).

Currently, you can contribute up to $2,650 per year to a healthcare FSA and $5,000 a year to a dependent care FSA (one that's designated for child care costs, such as after-school programs or day care centers). Imagine you max out both accounts in the same year and your effective tax rate is 25%. That move alone cuts your tax bill by over $1,900.

The only caveat with FSAs is that they work on a use-it-or-lose-it basis, so if you overfund either type, you risk forfeiting your balance. You can avoid this issue, however, by combing through your medical bills from the previous year to estimate your present healthcare needs. Meanwhile, most people who require full-time care for their children won't have to worry about hitting the $5,000 dependent care limit, but run some calculations first just to be sure.

3. You're not getting a discount on your commuting costs

If you regularly drive or take a bus or train to work, signing up for commuter benefits is a good way to reap some tax savings along the way. Currently, you can allocate up to $260 a month in pre-tax dollars to pay for transit and another $260 a month to pay for parking, provided your employer offers this benefit (many do, though). This means that if you pay $200 a month for a train pass and $100 a month to park at the train station, you can sign up for benefits in that amount ($300 per month). Assuming a 25% tax rate, you can save yourself an easy $900 on taxes over the course of a year.

There's no sense in giving the IRS more of your money than necessary. Take advantage of IRA or 401(k) contributions, FSAs, and commuter benefits, and you'll lower your tax bill instantly.