Key Takeaways
- If you have medical bills, you might be able to save on taxes by deducting your unreimbursed medical expenses or using a health Flexible Spending Account (FSA) to pay those bills.
- You may qualify for the Lifetime Learning Credit if you pay the tuition, fees, and other qualifying expenses for yourself, your spouse, or your dependents taking classes at a post-secondary school.
- By putting money in a traditional IRA or 401(k) account, you can reduce your tax bill for the year you make the contribution. Funds in the account grow on a tax-deferred basis, but you must include withdrawals in your taxable income.
- If you itemize deductions on your tax return, you generally can deduct donations to qualified charities, churches, schools, and other organizations.
1. Medical tax deduction
A big medical bill can chew up a lot of your savings. This is especially true if you have an emergency that your health insurance doesn't cover.
Fortunately, 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 qualified unreimbursed medical expenses for the year to the extent they're more than 7.5% of your adjusted gross income (AGI).
For example, if you have an AGI of $50,000 and $6,000 of medical expenses, you would qualify for a $2,250 medical expenses deduction. To calculate this amount, multiply $50,000 by 7.5% to find out the threshold above which you can deduct your expenses, which is $3,750 ($50,000 x 0.075 = $3,750). You can claim the deduction for any qualified medical expenses above this amount, which is $2,250 ($6,000 - $3,750 = $2,250).
If you know in advance that you’ll have some larger medical bills in the near future – such as elective surgery, new glasses, or braces for your child – schedule them all in the same year if possible. That way you’ll have a better chance of exceeding the 7.5%-of-AGI threshold that year, which may then put you in a better position to itemize your deductions as opposed to taking the Standard Deduction.
In addition, make sure you include all eligible expenses when determining if you qualify for the deduction. For instance, the deduction not only applies to medical and dental care, but also to prescription drugs, transportation to and from medical appointments, long-term care services, and certain health insurance premiums (including for Medicare and long-term care insurance).
2. Health FSAs
You may have access to a health flexible spending account (FSA) as part of your employee benefits package. If your company offers FSAs, think about 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 2024, you can contribute up to $3,200 to an FSA (up from $3,050 in 2023). Whatever you contribute will lower your taxable income by an equivalent amount. For example, if you earned $50,000 and contributed $2,000 to your FSA, your taxable earnings would be reduced to $48,000 ($50,000 - $2,000 = $48,000).
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 pay for:
- doctor or dentist visits
- prescription and over-the-counter medications
- medical supplies like band-aids, bandages, and gauze
- medical equipment like crutches, slings, and wheelchairs
There’s also no tax on withdrawals from a health FSA as long as the money is used to pay for qualified medical expenses.
But keep in mind: If you don't use the money in your FSA by a certain date (usually by the end of the year or slightly later if your employer allows a grace period or carryover amount), you lose those funds.
3. Contribute to a traditional retirement plan
A great way to reduce your tax bill now and provide for your future is to put money in a traditional IRA, 401(k) plan, or other tax-deferred retirement account. Contributions to these tax-advantaged accounts are made with pretax dollars, so you don't pay income tax on them in the year you make them. This lowers your taxable income for that year, which could mean a smaller tax bill. You might also qualify for the Saver’s Credit, which will reduce your tax bill even further.
There are limits on the amount you can contribute to these plans each year, though. For example, as an employee, you can’t put more than $23,000 in 401(k) accounts in 2024 if you’re under 50 years old, or $30,500 if you’re 50 or older ($22,500 and $30,000, respectively, for 2023). The IRA contribution limit for the 2024 tax year is $7,000 if you haven’t turned 50 before the end of the year, or $8,000 if you’re at least 50 years old ($6,500 and $7,500, respectively, for 2023).
The money in these accounts grows on a tax-deferred basis. That means you don't pay taxes on any interest, dividends, or capital gains while the money stays in the account. This can help your money grow faster over time.
You'll have to pay income tax on withdrawals from the account. Your tax rate at the time of the withdrawal will apply. However, the idea is that you'll be in a lower tax bracket when you retire, so you'll pay less in taxes on the withdrawals than you would have paid on the contributions if you had not made them while you were working. This can help you save more for retirement and pay less in taxes overall.
You might have to pay a 10% early withdrawal penalty if you pull money out of the account before you turn 59½ years old. On the other hand, if you don’t withdraw money from the account, the IRS will eventually force you to take “required minimum distributions” – which are mandatory withdrawals – each year beginning when you turn 73 years old (75 starting in 2033).
TurboTax Tip:
With a Roth IRA or Roth 401(k) plan, there are no tax breaks when you contribute to the account. But withdrawals of both the contributions and earnings after age 59½ are tax-free. These accounts are good if you expect to be in a higher tax bracket when you retire, or if you simply want to minimize taxes in your golden years.
4. Lifetime Learning Credit
If you pay tuition, fees, and other qualified education expenses for yourself, your spouse, or a dependent enrolled in a post-secondary school (after high school), you may be able to claim the Lifetime Learning Credit.
The maximum annual credit is equal to 20% of up to $10,000 in eligible educational expenses, or $2,000. Your school should report your eligible costs on Form 1098-T.
Eligible education expenses generally include the cost of:
- tuition
- student activity fees
- course-related books, supplies, and equipment
You can't claim the Lifetime Learning Credit and the American Opportunity Credit in the same year for the same student. However, the Lifetime Learning Credit is a good option if an eligible student doesn't qualify for the American Opportunity Credit, such as if you've already claimed the American Opportunity Credit for the student for the maximum four years.
Educational expenses that you pay for with tax-free funds from a 529 plan or Coverdell Education Savings Account aren’t eligible for these two education tax credits, either.
5. Energy tax credits for home improvements
If you make energy-efficient upgrades to your home, you might be able to reduce your tax bill with an energy tax credit. Two tax credits are available to help you cover some of the costs of energy-efficient home improvements:
- Energy Efficient Home Improvement Credit
- Residential Clean Energy Credit
The Energy Efficient Home Improvement Credit is available for up to 30% of the costs of installing certain energy-efficient insulation, windows, doors, water heaters, heat pumps, central air conditioning systems, and certain other energy-saving improvements in your home. You can also claim the credit for a home energy audit.
However, there are annual limits on the credit amount based on the type of home improvement. The maximum credit you can claim each year is:
- $1,200 for the total of most qualified home improvements, with specific annual limits for doors ($250 per door and $500 total), windows ($600), and home energy audits ($150)
- $2,000 for qualified heat pumps, biomass stoves or biomass boilers
The Residential Clean Energy Credit can be claimed for the cost of new systems that use solar, wind, geothermal, fuel cell, or battery technology to generate electricity, heat water, or control the temperature of your home.
The credit is currently worth up to 30% of qualifying costs, although fuel cells have a limit of $500 for each half-kilowatt of power capacity. The credit amount drops to 26% in 2033 and then to 22% in 2034. The credit will no longer be available after 2034.
6. Charitable gift deduction
Donating to charity certainly benefits other people and makes you feel good, but it can also reduce your tax bill. Thanks to the charitable gift deduction, you might be able to reduce your taxable income by the amount of cash or property you give to qualified charities, churches, schools, and other organizations. If you volunteer for a qualified organization, you can also deduct:
- out-of-pocket expenses related to your volunteer work
- 14¢ per mile or the actual cost of gas and oil, plus any parking fees and tolls, if you drive your own vehicle while volunteering
However, there are a number of requirements and limitations for this tax deduction. For instance, you can only claim it if you itemize deductions. In addition, if you receive a benefit for making a gift or donation – such as food, tickets to an event, or merchandise – you generally can only deduct the amount that’s more than the value of the benefit you receive.
Your deduction is typically limited to a certain percentage of your adjusted gross income (AGI), too. For example, the tax deduction for cash donations is generally limited to 60% of your AGI. If you donate appreciated assets – such as stocks or real estate that have increased in value – the deduction is usually capped at 30% of your AGI. However, any donations that exceed an AGI limit for a particular tax year can generally be carried over to up to five future tax years.
If you donate a car worth at least $500 to charity, the deduction is generally limited to the amount received by the charity when it sells the car, or the car’s fair market value (FMV) on the date you donate it, whichever is lower. However, if the charity keeps the car, fixes it up before selling it, or sells it to a needy person for less than its value, then you can generally deduct the car’s FMV on the date of donation. If the charity sells the car for $500 or less, you can typically deduct the smaller of $500 or the car’s FMV.
You also might have to obtain certain documents to prove you made a donation. For example, you need to get a written acknowledgment from the charitable organization if you donate property worth at least $250. For charitable gifts worth $5,000 or more require a written appraisal from a qualified appraiser.
Other restrictions or limitations may apply.
7. Delay capital gains to get lower tax rate
One often overlooked tax strategy is taking advantage of the long-term capital gains tax rates. Basically, capital gains are the profits made from selling an asset, such as stocks, bonds, real estate, or other investments. When you sell an asset for more than what you paid for it, you generally have a capital gain. However, the tax rate on these gains can vary depending on how long you hold the asset before selling it.
The long-term capital gains tax rates apply to assets held for more than one year. They’re currently 0%, 15%, and 20%. Which one applies to you depends on your taxable income.
On the other hand, if you hold an asset for one year or less before selling it, the short-term capital gains tax rates typically apply. These are the same rates that apply to your wages, tips, and other “ordinary” income. So, the current short-term capital gains tax rates range from 10% to 37%. Again, which one applies to you depends on your taxable income.
The taxable income ranges for both sets of capital gains tax rates are set up so that your long-term rate is typically lower than your short-term rate. To illustrate how this can save you money on your taxes, assume you bought 100 shares of stock for $10,000 and sold them six months later for $12,000. This means you have a capital gain of $2,000 ($12,000 - $10,000 = $2,000). If you’re in the highest tax bracket and subject to the short-term capital gains tax rate of 37%, you would owe $740 in taxes on this gain ($2,000 x 0.37 = $740). However, if you held onto the stock for more than a year and were subject to the long-term capital gains tax rate of 20%, you would only owe $400 in taxes ($2,000 x 0.20 = $400). That’s a savings of $340 ($740 - $400 = $340) just by holding onto the investment for a few additional months.
Of course, as with any tax strategy, there are some limitations and considerations to keep in mind. For example, the long-term capital gains tax rate only applies to investments held in taxable accounts. Investments held in tax-advantaged accounts, such as 401(k) plans and IRAs, are subject to different tax rules. Additionally, there are certain types of investments, such as collectibles, that have their own specific capital gains tax rates.
8. Adjust tax withholding from your paycheck
The federal tax system operates on a “pay-as-you-go” basis, which means you have to pay federal income taxes periodically throughout the year as you earn taxable income. If you’re self-employed, you generally satisfy the periodic payment requirement by making quarterly estimated tax payments. But if you’re an employee, taxes are likely withheld from your paycheck and sent to the IRS.
While tax withholding doesn’t affect the amount of tax you’ll ultimately pay, it can have a huge impact on your refund or tax bill when you file your next tax return. If you have too much tax withheld during the year, you might receive a larger than expected tax refund when you file your taxes.
Although that might sound like a good thing, it essentially means you gave the government an interest-free loan. Your goal should be to have your tax withholding come as close to your tax liability for the year as possible. If you have more than your tax liability withheld, you're probably better off having that extra amount included in your paycheck so that you can put it in your own savings or investment account.
What if you don’t have enough tax withheld from your pay? In that case, you may owe money to the IRS when you file your taxes. You can even be hit with IRS penalties and interest if withholding is too far below your ultimate tax liability.
So, how do you make sure you’re having the right amount of tax withheld from your paycheck? You can adjust your tax withholding at any point by filling out a new Form W-4 and giving it to your employer. They will then modify your withholding according to the information on the new form.
Use TurboTax’s W-4 Withholding Calculator to help you complete a new W-4 form and determine the right amount of tax to have withheld from your pay.
9. Move 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. People nearing retirement who have the flexibility to relocate may find it easier to take advantage of this opportunity.
There are 9 states with no income tax, while other states exempt a significant amount of your retirement income from Social Security, military pension benefits, and more. Some states might offer ways to save on other types of taxes, such as reduced personal property taxes.
If you can afford the move and don't mind relocating, you may want to consider reviewing this list of states with the lowest taxes.
10. Work with a tax professional near you
We’ve just described a small handful of the many tax savings tips and strategies that might be available to you. If you’re looking for more, consider working with a CPA, enrolled agent, or other qualified tax professional. They likely can uncover other ways to save on taxes that fit your particular financial situation and goals.
If you do decide to team up with a tax pro, you might ask yourself: “Should I find tax help near me?” While working with a local tax professional isn’t necessarily required, it’s often a good idea to find someone in your general area. Some of the benefits of hiring a tax professional near you include:
- It’s generally easier to communicate with a local person, and you can meet face-to-face.
- A local tax professional will likely be more familiar with state and local tax laws that affect you.
- A tax professional near you might be able to refer you to other local professionals – like lawyers, bankers, and financial planners – who can help with other aspects of your finances.
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