Reducing the amount of taxable income you take home can lighten your burden come tax time. It also means you have more money in your paycheck each pay day. Depending on your circumstances, you might have several options for lowering your income before you pay taxes on it. Keep in mind that in some cases, skipping taxes now means paying more taxes later.
Contribute to Retirement Plan
Make contributions to a 401(k) or other retirement plan offered through your employer to reduce the amount of tax you pay each pay period. At the time of publication, you can contribute up to $17,000 per year to a 401(k) plan. If your employer has a matching program, you further benefit, as you save on taxes at the moment and receive free money from your employer. Keep in mind that you will have to pay taxes on your 401(k) contributions when it is time to withdraw during retirement.
Pay Health Insurance Premiums
If you have a job that includes a health insurance plan, the amount of the premiums may be deducted from your income before you pay tax on it. You will never have to pay tax on the premiums. Check with the payroll department at your job if you are not sure if the premiums are deducted pretax. Some employers give you the option of opting in or out of pretax premiums each year. If you are self-employed or do not have health insurance through your job, you can deduct the cost of the premiums on your tax return.
Take Public Transportation
At the time of publication, the IRS allows employees to deduct up to $125 a month from their income for taking public transit. This includes taking the bus or commuter rail. You can choose to deduct less if you do not need the full $125 each month. Not all employers offer the program, though. If you use public transit, ask your HR office if it offers Transitchek or a similar program. Employers also get a tax break when they offer commuter benefits.
Start an HSA
A health savings account is a bank account to which you contribute to pay for medical expenses. To open an HSA, you need to have a high-deductible health plan and no other medical coverage. At time of publication, you can contribute up to $3,100 to the account each year. The amount you contribute is deducted from your taxable income. You will not need to pay taxes on it as long as you use the funds to pay for medical expenses.