How to Reduce Taxable Income

You are likely overpaying in taxes. Many people may not know it, but there are tax strategies you could potentially implement that could bring sizable savings by lowering your taxable income. If you’d like to know how to reduce taxable income, here are a few simple ways to begin.

Sell Certain Stocks

If any stocks are weighing down your portfolio, it may be worth selling them for a tax deduction. This helps offset taxable capital gains and thereby reduce taxable income. Keep in mind the limit for offsetting is ,000 for married filing jointly or ,500 for married couples filing separately. Also, remember that you can’t buy back the stock within 30 days or the IRS could take back the deduction.

Contribute to an IRA

You can deduct contributions to a traditional IRA. Limits are $6,000 per year, or $7,000 for those 50 or older. The amount you can deduct depends on whether you or your spouse is covered by a retirement plan at work and if you are filing jointly with your spouse with a modified adjusted gross income of over $125,000 (for 2021).

Take Advantage of the EITC

The Earned Income Tax Credit (EITC) has some complex rules, but if you earned less than $57,000, it is worth looking into to see if you are eligible. Factors include income, marriage status and how many children you have. You could qualify for a tax credit up to almost $7,000 in certain situations. Keep in mind that a tax credit is better than a deduction because a credit is taken directly off your tax bill, while a deduction only indirectly reduces your bill by decreasing how much of your income is taxed.

Use Your 401(k)

Whenever you can reduce your taxable income, it’s going to help you save money on taxes. 401(k)s are another popular way to do this. For 2021, you can put up to $19,500 into your account, and if you are 50 or older, you can contribute an additional $6,500. If you aren’t aware if your employer offers a 401(k) plan, be sure to ask. Sometimes employers will also match the contribution up to a certain percentage, which makes this strategy even more useful.

Establish a 529 Plan

If you have a child, you can reduce your taxable income by putting money into a 529 plan, which is a savings account for college. While this isn’t a federal income deduction, you might be able to deduct on your state return. Be careful, however, about contributing more than $15,000, as there could be gift tax consequences.

Set Up an HSA

If you have a high-deductible health care plan, you could potentially lighten your tax liability by contributing to a health savings account (HSA). This allows you to build a tax-exempt account to pay for medical expenses. The individual coverage contribution limit for 2021 is $3,600, but a family can contribute up to $7,200. Those 55 and older can add an extra $1,000 to their HSA.

Donate to a Charity

Of course, one simple way to ease tax burden is to make charitable contributions. Even donating clothes, food and other items can lower a tax bill if you make sure to get a receipt. The bigger the gifts, the bigger the deductions.

Deduct Medical Expenses

If you have been in the hospital this year or have had expensive medical or dental costs, you can deduct qualified medical expenses that are more than 7.5% of their adjusted gross income for the year. As an example, if you have $80,000 in gross income, anything beyond $6,000 in medical bills could be deductible.

Knowing How to Reduce Taxable Income Isn’t Rocket Science

While the tax code is large, these ideas are a good place to start learning how to lower taxable income and reduce tax liability. It’s just a matter of finding available tax deductions and credits you qualify for.

In many cases, the basic strategies work extremely well. For example, if you are a married couple over age 55, you could significantly reduce your earned income down to a much lower adjusted gross income simply by taking full advantage of 401(k), IRA and HSA contributions.

Knowing how to reduce taxable income is key to doing more than just getting your tax return done. It’s possible to legally reduce an individual’s tax obligation to zero, even for those who earn six figure salaries. Of course, there are more advanced strategies that platforms like Corvee can help with.

Going Beyond Tax Preparation

As you look to save money, there are three main things our tax planning software can help you with:

1. Finding out how much you have overpaid in taxes in the previous year.
2. Calculating how much you can save in taxes in the current year.
3. Understanding how much you can save every year going forward.

These three benefits help produce powerful tax plans. Our software helps you identify proactive strategies, including calculations, descriptions, code references and the ability to add new custom strategies and combinations yourself.