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. In 2020, the IRS allows you to 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).
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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 2020, you can contribute up to $2,750 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.
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 a maximum of four years.
The maximum credit you can claim over your lifetime 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:
- Any 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. The IRS only allows you to claim one tax credit per student per year.
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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 those costs through the 2021 tax year with two tax credits:
- Nonbusiness energy property credit
- Residential energy efficiency property credit
These credits allow you to claim a credit for 10% of the cost of qualified energy efficiency improvements and 100% of certain residential energy property costs, with a maximum of $500 for all years combined, from 2006 to its expiration.
Within the Nonbusiness Energy Property Credit, different types of property have different limits for the credit. Residential Energy Efficient Property (solar, wind, and geothermal) has a 26% limit.
Equipment that qualifies for these tax credits includes solar, wind, geothermal, and fuel-cell technology. Fuel cells have a limit of $500 for each half kilowatt of power capacity (or $1,000 for each kilowatt), or 26% of the fuel cell costs.
5. Homeowners can appeal property taxes
In 2020, 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.
Seven 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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