You may know some basic tax-saving strategies to lower your tax bill — now, it's time to explore some less common ways to save when tax time rolls around.
Tax favored strategies
While everyone faces a unique tax situation, you likely can take certain steps to lower your taxable income. Here are six tax-saving strategies from TurboTax Live tax experts to help you lower your tax bill.
1. Medical deductions
Medical expenses can take a bite out of your expenses when the bill is due. This holds especially true when you have an emergency that your insurance doesn't cover.
The IRS provides some relief to taxpayers through the medical expenses deduction, making these expenses partly tax deductible if you itemize your deductions. You can deduct your total qualified unreimbursed medical care expenses for the year if they're more than 7.5% of your adjusted gross income.
For example, if you have an adjusted gross income of $50,000 and $6,000 of medical expenses, you would qualify for a $2,250 medical expenses deduction.
To calculate this number, you multiply $50,000 by 7.5% to find out the threshold above which you can deduct your expenses. In this case, that number amounts to $3,750. This leaves you with a medical expense deduction of $2,250 ($6,000 - $3,750).
2. FSA options
You may have access to a Flexible Spending Account (FSA) as part of your employee benefits package. If your company offers FSAs, you might consider taking advantage of these tax-smart medical expense accounts. They allow you to contribute pretax dollars to pay for out-of-pocket medical expenses.
In 2023, you can contribute up to $3,050 to your FSA, reducing your taxable income by an equivalent amount. For example, if you earned $50,000 and contributed $2,000 to your FSA, this would reduce your taxable income by $2,000. This limit increases to $3,200 for 2024.
You can use your FSA funds to pay for health insurance deductibles and copayments, as well as other covered medical and dental expenses.
For example, you can use FSA funds to buy:
- Prescription and over-the-counter medications
- Medical supplies like band-aids, bandages, and more
- Medical equipment like crutches, slings, and blood-testing kits
But keep in mind: If you don't use these funds by a certain time (usually by the end of the year or slightly later if your employer allows a grace period), you lose these funds.
3. Lifetime Learning credit
If you've paid for a portion of the tuition, fees, and other qualifying expenses for yourself, your spouse, or your dependents enrolled in a post-secondary school (after high school), you may have access to the Lifetime Learning credit. This credit reduces the taxes you pay on a dollar-for-dollar basis within certain limits. The Lifetime Learning credit is also an option if you, your spouse, or your dependents don’t qualify for the American Opportunity credit, or if you’ve already claimed that credit for the maximum four years.
The maximum credit you can claim on a tax return amounts to 20% of up to $10,000 in eligible educational expenses, or $2,000. Your institution should report your eligible costs on Form 1098-T: Tuition Statement.
As for the specifics on the eligible expenses, you can include the cost of the following:
- Required books or supplies purchased directly from the school
This applies as long as the expenses come as a condition of your enrollment. For example, if your professor recommends that you purchase a textbook but you can still enroll in the class without one, then you can't include the cost of the textbook in the credit.
You can't claim double benefits under the Lifetime Learning credit and the American Opportunity credit in the same year for the same student. The IRS only allows you to claim one tax credit per student per year. Also, any expenses that you pay for using a 529 plan or Educational Savings Account are not eligible for these education credits.
4. Energy tax credits
If you made energy-efficient or renewable energy upgrades to your home, you may be able to claim an energy tax credit. You can offset some of the costs of improvements on your tax return with two tax credits:
- Energy Efficient Home Improvement credit for 2023 through 2032)
- Residential Clean Energy credit
For prior years, the Nonbusiness Energy Property credit allows you to claim a credit for up to 10% of the cost of qualified energy efficiency improvements, with a maximum credit of $500 for all years combined, from 2006 through 2022. Within the Nonbusiness Energy Property credit, different types of property have different limits for the credit.
Beginning in 2023, the Nonbusiness Energy Property credit is renamed and enhanced as the Energy Efficient Home Improvement credit and provides for higher credit amounts and additional qualifying home improvements.
The Residential Clean Energy credit (solar, wind, fuel cell, and geothermal) has a limit of 30% of the cost for 2023 through 2032. Equipment that qualifies for this tax credit includes solar, wind, geothermal, and fuel-cell technology. Fuel cells have a limit of $500 for each half-kilowatt of power capacity.
The credit is up to a maximum of 30% of the costs (except for the fuel cell limit mentioned above) for tax years 2022 through 2032. The credit then steps down to 26% in 2033 and 22% in 2034 after which it is no longer available.
5. Homeowners can appeal property taxes
In 2023, home values continued to rise across the country, meaning your property taxes will likely go up based on the increased assessed value of your home. These tax increases can hit particularly hard with states that carry high property taxes. This holds true considering that the Tax Cuts and Jobs Act limited state and local tax deductions to $10,000 per year.
In some cases, the tax assessor may significantly increase the assessed value of your home. If this happens, you may have grounds for appealing this action, particularly if your increase appears more than other property in your area.
You may want to contact your tax assessor's office to file an appeal. If you win, this could save you a significant amount of money on your annual property tax bill.
6. Moving to a state with a lower tax burden
If you find yourself living in a high-tax state, you may want to consider a move to a more tax-friendly area. Those nearing retirement who may not need to stay in place for a job may find it easiest to capture this benefit.
Eight states have no income tax while others exempt a significant amount of your retirement income from Social Security, military pension benefits, and more. Some even offer other tax reductions such as charging no tangible personal property tax.
If you can afford the move and don't mind the relocation, you may want to consider reviewing this list of states with the lowest taxes.
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