How To Properly Optimize Your Tax Deductions

How To Properly Optimize Your Tax Deductions, June 2021

Around tax time, we are all looking for strategies to help with the same goal: how to optimize your tax deductions. Because, let’s face it, nothing is worse than having to pay an unexpected tax bill, especially if the amount is more than you bargained for. 

Luckily, there are legal ways to change up your tax planning so that when you need to file your taxes, you are paying exactly what you owe, or even better, you are increasing your tax refund.

So, if you are in need of simple tax planning maneuvers to help you discover how to pay less taxes and how to optimize your tax deductions, read my 7 tips to help you keep more money in your account during tax season.

Top 7 Tips for How to Optimize your Tax Deductions

1. Take Advantage Of Tax Deductions That Already Exist

This first strategy for how to pay less taxes is useful for all people, because it does not require you to reinvent the wheel.

Check out these commonly overlooked tax deductions that are currently being offered and keep in mind that the ones you are able to use apply to your tax planning can help with how to optimize your tax deductions.

Contributions to Charity - Any out of pocket expense that you put towards a charity or charitable event, big or small, can help you out when it comes to how to optimize your tax deductions.

As well, this donation does not have to be monetary; if you have donated clothing, food, or household items to a reputable charity and received a receipt, keep hold of it because you can use it during tax planning to increase your tax deductions.

State Sales Tax - You state and local sales tax may be eligible as a tax deduction to help with how to pay less taxes. The IRS has an online calculator to help you discover just how much you can deduct based on your state and local sales tax.

Childcare or Dependent Care - If you had to pay for childcare or dependent care for a qualifying individual so that you could work or seek employment, you may be eligible for the Child or Dependent Care Credit.

One individual can claim up to $3000 under this credit, and a couple who is filing together could claim upwards of $6000, which can make a big difference when it comes to how to optimize your tax deductions.

Keep in mind that if your filing status is married filing separately, you may not be able to take this credit, however there are some expectations to that rule to help out couples who are living apart from each other.

Student Loan Interest - Many of us have interest that we pay on top of our student loans, but did you know that you can deduct it to reduce taxable income?

Even if you are not the one who paid the student loan, you can still take advantage of this deduction during tax planning as long as it is your loan that you are required to pay. 

Earned Income Tax Credit - Tax payers who earn a low to moderate income may be eligible for the Earned Income Tax Credit, or EITC. Individuals who qualify for EITC can get a tax break to help them out, and it may come in the form of reducing taxable income or increasing your tax refund.

Beyond your income, factors such as having children, dependents, or a disability can factor into how much you benefit from this credit.

As well, through the Taxpayer Certainty and Disaster Tax Relief Act of 2020, if your income in 2019 was higher than the income you made in 2020, the IRS is allowing you to use your 2019 income amount to claim your Earned Income Tax Credit in the 2020 tax year, which can increase the credit you are qualified for.

2. Contribute Money To Your Retirement Savings Account

If you do not already have one, opening up and contributing to your IRA (Individual Retirement Account) can give you a big advantage when it comes to tax planning and how to pay less taxes.

Essentially, contributions that you made to your traditional IRA can reduce taxable income. And, the funds you add to your IRA acquire tax free interest to grow until you begin making withdrawals in your retirement.

Keep in mind that there is a cap on how much money you can contribute to your IRA in a given tax year; for example, for 2021 in most cases you cannot contribute more than $6000 to your IRA.

However, this contribution cap increases for taxpayers 50 years of age or older who are using catch up contributions to increase the amount of money in their IRA.

As well, it is important to note when you are looking into how to optimize your tax deductions, that if you decide to withdraw money from your IRA, the money you take out is then taxable.

You have up until the April 15 tax filing date to make a contribution to your IRA. 

3. Alter Your W-4 Form

The W-4 form is typically completed by employees upon hiring, to indicate how much tax money they want taken off from their paychecks.

This amount can be increased or deducted depending on your situation to potentially reduce your taxable income. It can be amended at any time.

For example, if in the past you paid a high tax bill, you can use the W-4 Form to increase the amount of tax your company's payroll is taking from your regular paychecks, in order to reduce your taxable income and help you owe less during tax time.

Alternately, you can reduce the amount of tax you owe on each paycheck if you know you are going to get a big tax refund, and that way you can enjoy more money coming to you in each paycheck. 

4. Take Advantage Of Your 401(k)

Your 401(k) is the retirement account that your employer sets up for you to make regular contributions to through your paycheck.

But, did you know it can help with how to optimize your tax deductions by reducing your taxable income?

The money that you contribute from your paycheck to your 401(k) is not taxed by the IRS.

Keep in mind that any contributions you make to your 401(k) must be done by the end of the calendar year in order to qualify as a tax deduction.

In the 2020 and 2021 tax year, you can contribute up to $19,500 a year to your 401(k), which can greatly reduce your taxable income. 

5. Claim Your Medical Expenses

When discovering how to optimize your tax deductions, you are going to want to save and include your hospital or other medical receipts for your tax planning.

If your qualified medical expenses add up to be more than 7.5% of your income, you may qualify to deduct these costs when you are filing your taxes.

Medical miles can also count towards a tax reduction for how to pay less taxes. In the 2020 tax year, you might be able to claim 17 cents per mile if you are driving your vehicle for the purpose of medical related travel.

These miles can add up to reduce your taxable income, but keep in mind that the IRS is very particular about what counts as medical moving, and what does not. For example, a trip to your doctor’s office for your general check up will likely not qualify for a medical mileage credit.

6. Benefit From Tax Deductions For Taxpayers Who Are Self Employed

If you are self employed or do a side job that is either part time or full time, you may be eligible to claim even more tax deductions. Your freelance work or side gigs can qualify as part time work to maximize your tax savings.

In order to make these deductions work for you while tax planning, you must keep an organized record and receipts of all your payments.

This includes advertising fees, shipping costs, business related car mileage or travel expenses, home office fees, website fees and more.

As you can imagine, as long as you have proper documentation to back up the claims, these additional deductions can really add up when you want to know how to optimize your tax deductions. 

7. Keep Your Tax Planning On Time

One of the simplest strategies when it comes to how to optimize your tax deductions is to pay close attention to the calendar.

Consider making your tax deductible payments before the end of the calendar year, December 31st, in order to have more eligible claims when you are filing for that year’s taxes.

For example, if you pay your January mortgage fee in December, you could deduct some extra mortgage interest on your present tax filing.

If you have a big medical procedure scheduled for January, try to move it up to December in order to count it towards that year’s Medical Expenses claim as well. 

How To Optimize Your Tax Deductions: The Bottom Line

In all, while there is no magic wand to wave and dramatically reduce your tax bill, you can employ these simple strategies to ensure that when tax time rolls around, you are only paying the IRS exactly what you owe. 

By ensuring that you are getting the maximum benefits from all the tax deductions available to you, you will feel more confident about how to pay less taxes. 

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