How Can You Reduce Your Taxes in the US?

A typical American has to pay federal income taxes amounting to around USD 14,000 annually. Without proper tax planning, you may end up paying more than required, causing a strain on your personal finances. The good news is that there are some ways to reduce your taxes in the US. This article covers multiple strategies to save on taxes. Not only do these strategies lower your taxes in the short term, but they contribute to your overall financial stability in the long run.

Donate to a 501(c)(3) Organization

A 501(c)(3) organization is a nonprofit entity in the United States and falls outside the federal income tax. There are strict rules for an organization to be labeled as such and they must operate exclusively for purposes like charity, education, and science. Additionally, none of their earnings can benefit private shareholders or individuals.

Donating to a 501(c)(3) organization can lower your tax liability. When you make a donation to a 501(c)(3) nonprofit, you can deduct that amount from your taxable income, lowering the amount subject to tax. This strategy will not only work to reduce your taxes, but you will also be contributing to an organization that supports causes you care about.

For example, Transparent Hands is a 501(c)(3) organization that raises funds through an online crowdfunding platform to provide free surgical and medical treatments to the underprivileged.

                                                                   Donate for Tax Benefits

Maximize Deductions

Tax deductions are expenses that you subtract from the amount of taxable income you have, reducing the tax you pay. These are often called ‘tax write-offs’. There are two classes of this: standard deduction and itemized deductions.

A standard deduction is a fixed amount that is taken off your income and depends on your filing status. For the fiscal year 2023, this was $13,850 for single filers or married individuals filing separately, while for joint filers and heads of household, it was $27,700 and $20,800 respectively. Itemized deductions are expenses that one is exempt from paying tax on, including mortgage interests and medical expenses. You can opt for standard deduction or itemized deductions based on which one helps you save more on taxes. Consider using tax software to find out which option is better for you. To maximize deductions, keep detailed records throughout the year like receipts and documentation related to deductible expenses. 

Take Advantage of Tax Credits

Tax credits are useful for reducing tax liability dollar-for-dollar. For instance, one such tax credit is the Earned Income Tax Credit (EITC) which is designed to benefit low and moderate-income individuals and families. The amount depends on the income and the number of children you have, but you can qualify without children as well.

Another is the Child Tax Credit, available to taxpayers with qualifying children under the age of 17, provided they have a valid Social Security number, and you meet income requirements. There’s also the American Opportunity Tax Credit that helps offset college costs by providing tax benefits for qualifying educational expenses. Again, income and other requirements need to be met.

To claim these and others, there are forms to fill out and file with your tax return, and you need to provide evidence through documentation.

Utilize Health Savings Accounts (HSAs)

An HSA is a type of savings account where you can put money to pay for certain medical expenses, and contributions to such an account are made with pre-tax dollars which do not fall under federal income tax.

Additionally, with an HSA, there is tax-free growth and any interest or investment earnings on the funds in the account are not taxable so you can accumulate savings over time. If you choose to withdraw money, it will be tax-free as long as it’s for a qualified medical expense, making HSAs an effective way to pay for healthcare.

There are eligibility requirements that need to be met for an HSA and you must be part of a high-deductible health plan (HDHP).

                                                            Donate to a 501(c)(3) Charity

Contribute to Retirement Accounts

Retirement accounts are specially designed for savings to help with retirement years and offer tax advantages to enhance long-term savings. For example, a 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their paycheck into the account before taxes are taken out. For the year 2024, if your employer offers a tax-deferred retirement plan, you can reduce your taxable income through a 401(k) by as much as $23,000. Those who are beyond the age of 50 can add $7,500 to this amount. But keep in mind that the  amount you defer cannot be greater than what you earn during the pay period. Maxing out your 401(k) or other such plans can bring you significant tax benefits.

Conclusion

Effective tax planning strategies like contributing to retirement or health savings accounts, maximizing deductions, taking advantage of tax credits, and donating to 501(c)(3) organizations can reduce your taxes significantly. Staying informed and maintaining the required documentation documents helps you improve your finances. To save on taxes while supporting a noble cause like providing free surgical and medical care to the needy, donate to Transparent Hands today.