We all want to pay the IRS as little as possible, and taking advantage of credits, deductions, and tax-advantaged savings accounts is a great way to do it. This year, you have even more opportunity to capitalize on certain tax breaks, including these four.
1. The Earned Income Tax Credit
A tax credit is a dollar-for-dollar reduction of your tax liability. If you owe the IRS $2,000 in taxes, a $2,000 tax credit will knock that debt down to zero. Not all tax credits are refundable, but those that are will pay you money even if you don't owe any tax. Such is the case with the Earned Income Tax Credit (EITC).
The EITC is a credit for lower-income households and fully refundable up to its maximum value, which changes from year to year. In 2020, the EITC was worth up to $6,660, but this year, its maximum value has increased to $6,728. To be clear, this means that if you claim the EITC and owe no tax, you could get a check for $6,728.
2. Health savings account contributions
Health savings accounts (HSAs) let you set aside funds for near- and long-term medical expenses. You'll qualify to participate if you're enrolled in a high-deductible health insurance plan, the definition of which changes yearly. HSA funds go in tax-free, so the more money you put into your HSA, the less income the IRS will tax you on.
In 2020, HSA contributions maxed out at $3,550 for individual coverage and $7,100 for family coverage. These figures don't include the $1,000 catch-up that's available for savers 55 and over. In 2021, HSA contributions max out at higher levels -- $3,600 for individual coverage and $7,200 for family coverage -- so you have an opportunity to shield even more of your earnings from taxes.
3. SEP IRA contributions
If you're self-employed, you may opt to save in a Simplified Employee Pension IRA, or SEP IRA, for retirement. SEP IRA contributions, like HSA contributions, go in tax-free. In 2020, SEP IRA contributions maxed out at $57,000, but in 2021, they've increased to $58,000.
4. Solo 401(k) contributions
A solo 401(k), like the name implies, is a retirement plan you manage yourself. Solo 401(k)s are designed for the self-employed, and like SEP IRAs, contributions maxed out at $57,000 in 2020 but have increased to $58,000 for 2021. However, solo 401(k)s also allow for catch-up contributions for savers aged 50 and over, so you can actually put up to $64,500 in one of these accounts this year.
Reap all the savings you can
The more tax credits and deductions you're able to claim, the more money you stand to save. Even if the above tax breaks don't apply to you, it still pays to research ways you can lower your tax burden, whether by maxing out a different type of retirement plan or making smart decisions with your investments. The less money you end up having to pay the IRS, the more of your hard-earned cash you get to keep and enjoy yourself.