Paying taxes is inevitable if you work and even if you collect Social Security disability or unemployment. A number of credits are available to reduce your tax burden, however. Throughout the year, take the time to scout ways to increase the number of deductions you’re eligible for and reduce your income tax liability.
Take the earned income credit. Most of the people who take it either have kids under the age of 19 or under the age of 24 if they’re still in school and the tax filer meets the income requirements, but you don't have to have kids to qualify. Income levels for taking the credit change from year to year. As of 2012 you could take the credit even if you didn't have children and earned $13,980 or less. The limit was $19,190 if you’re married and filing jointly.
Save receipts. You’d be surprised at the number of line items on the itemized tax forms that are allowable deductions that can reduce your tax liability. For example, during previous years, you could take deductions for expenses related to a job search. You could also take them for unreimbursed work-related expenses, medical and healthcare related bills, energy-efficient appliance purchases and purchases of a hybrid vehicle. The deductions change from year to year so it pays to be prepared to take advantage.
Open a traditional IRA or join a 401K retirement plan at work. The money that goes into these retirement accounts is pre-tax, which reduces the amount of income on which you have to pay taxes. You’ll pay the taxes on it after you retire and start using the money, but by then you’ll be in a lower tax bracket and might be eligible for additional tax breaks.
Save receipts from the donations and charitable contributions you make throughout the year. These can be deducted from your taxes.
Items you will need
- Pay yourself each year by investing in mutual funds, stocks, bonds and real estate. The taxes you pay on the profits earned from those investments are called capital gains and usually carry a much lower tax rate than you pay on your salary and wages. For example in 2012, capital gains tax went as low as five percent for some taxpayers, while the income tax rate went as high as 35 percent.
- Since healthcare reform started in 2012, there are going to be a lot of changes to keep up with to get the proper credit for payments you make on your health insurance. For example, the Health Coverage Tax Credit pays 72.5 percent of your health insurance premiums through tax credits when you meet certain income guidelines. (ref 4)
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