We all want to pay the IRS as little money as possible. But while there are a number of underhanded -- and illegal -- ways to go about that, like hiding some of your earned income, clearly, you should plan to stick to legitimate tactics to lower your taxes. Here are a few options in that regard.
1. Save in a traditional retirement plan
Funding a traditional 401(k) or IRA will help ensure that you have enough money to live on during retirement. But that's not all -- the money you put into these accounts is income the IRS won't tax you on, so you'll reap some immediate savings as well. In 2020, you can contribute up to $19,500 to a 401(k) if you're under 50, or $26,000 if you're 50 or older. With an IRA, these limits stand at $6,000 and $7,000, respectively.
2. Contribute to a health savings account
Like traditional retirement plans, health savings account (HSA) contributions serve the very important purpose of exempting a portion of your income from taxes. And the beauty of HSA funds is that they never expire -- you can withdraw from your HSA immediately to cover near-term healthcare expenses, or carry that money forward to future years and use it when you need to. Currently, you can contribute up to $3,550 to an HSA on your own behalf, or up to $7,100 on behalf of your family. And if you're 55 or older, you get a $1,000 catch-up in addition to the limit you qualify for.
3. Take advantage of investment losses
Though the stock market has generally been up this year, you may have one or two underperforming investments taking up real estate in your portfolio. If that's the case, selling them at a loss opens the door to tax savings. First, any investment losses you take can be used to offset capital gains when you sell winning investments for more than what you paid for them. Furthermore, if your net loss exceeds your gains, you can apply up to $3,000 of your remainder to offset your ordinary income. And if you're still left with a loss after that, you can carry it forward into future tax years.
4. Be charitable
The money you give to charity won't just help others; it'll help you lower your taxes, provided you donate to registered organizations (unfortunately, those GoFundMe campaigns generally don't count for tax write-off purposes). And it's not just cash donations that will lower your taxes; you can also write off the fair market value of goods you donate. But to be clear, the fair market value is what those items would sell for in their used condition. If you donate a 12-year-old piece of furniture to charity that initially cost you $800, you can't claim that full $800 on your taxes.
5. Keep detailed records of your business expenses
If you're self-employed, any expense you incur in the course of doing business is a potential write-off. If you're a freelance graphic designer, for example, you can deduct the cost of a new laptop, travel to and from clients, and office supplies. If you drive for a rideshare company, you can deduct expenses related to your vehicle like gas, tolls, and car washes. The key, however, is to maintain detailed records so that you not only know how much to claim, but have proof of your deductions in case the IRS comes asking for it.
The less money you pay the IRS, the more you get to enjoy yourself. It pays to read up on the various ways you can shrink your tax bill to reap the maximum amount of savings you're entitled to.