Paying taxes is an unavoidable part of life, but there are many legal ways to reduce your tax bill. While outright tax evasion is never recommended, taking advantage of deductions, credits, and other strategies can help lower the amount you owe each year.

In this blog post guide, we’ll explore 18 effective ways you can potentially reduce your tax liability through legitimate means.

18 Ways to Reduce Your Tax Bill Legally

1. Maximize your retirement savings contributions

One of the easiest ways to lower your taxable income is to contribute more to retirement accounts like 401(k)s and IRAs. Not only do these contributions reduce your taxable income for the year, but the money grows tax-deferred inside the account. For 2021, you can contribute up to $19,500 to a 401(k) and $6,000 to an IRA. If you’re 50 or older, you may be eligible for catch-up contributions.

2. Make charitable donations

You can deduct cash donations made to qualified charities. The standard deduction for 2021 is $12,550 for single filers and $25,100 for married couples filing jointly, so itemizing could make sense if your donations push you over that threshold. Consider donating appreciated securities rather than cash to avoid capital gains tax as well.

3. Take advantage of family status deductions

Filing as head of household rather than single filer could qualify you for a larger standard deduction of $18,800. You may also be able to claim dependents like children under credits like the Child Tax Credit worth up to $2,000 per child. Check your eligibility for credits based on your family status.

4. Itemize deductions if eligible

In addition to charitable donations, other itemized deductions include mortgage interest, property taxes, medical expenses over 7.5% of your AGI, and more. Run the numbers to see if your total itemized deductions exceed the standard deduction amount.

5. Defer income to future years

If possible, consider delaying a bonus or side income to a year when you anticipate being in a lower tax bracket. You may also qualify for 0% capital gains tax rates based on your overall taxable income.

6. Take qualifying education credits

The American Opportunity Tax Credit is worth up to $2,500 per student for the first four years of college. There’s also a Lifetime Learning Credit of up to $2,000 for other courses. Check eligibility requirements based on your income levels.

7. Utilize flexible spending accounts

FSAs allow you to set aside pre-tax money from your paycheck to pay for qualified medical, dental, and vision care expenses. They lower your tax burden and any unused funds are forfeited, so estimate your expenses carefully.

8. Consider health savings accounts

If you have a high-deductible health plan, you may qualify to contribute pre-tax funds to an HSA. Not only are contributions deductible on your return, but distributions are tax-free when used for medical costs. Unused balances roll over year to year.

9. Take home office deductions

If you have a qualifying home-based business, you may be able to deduct a portion of expenses like rent, utilities, insurance, and more based on the office space percentage. Strict documentation is required, so check IRS rules carefully.

10. Write off work expenses

Track unreimbursed costs associated with your job like travel, transportation, supplies, uniforms, technology or educational costs. Some have additional floor thresholds, such as 2% of AGI for miscellaneous itemized deductions.

11. Claim applicable tax credits

Do you owe money overall? You may qualify for valuable refundable credits that could help lower or eliminate your tax bill, like the Earned Income Tax Credit or child and dependent care credit. Run your tax situation through a preparer to check eligibility.

12. Consider tax-exempt investments

Interest from municipal bonds issued in your state generally escapes federal income tax, and possibly state/local tax as well depending on the bonds. Look at your portfolio holdings and muni exposure.

13. Apply capital losses against gains

If stock sales resulted in investment losses for the year, you can use up to $3,000 to offset other taxable income. Excess capital losses roll over to future years to do the same.

14. Carefully track sales of assets

Calculate your capital gains rate based on your taxable income level, which could be 0%, 15%, or 20%. You may also qualify for certain exclusions or partial exclusions on primary residences and small businesses.

15. Postpone income recognition

Instead of cashing in stocks or funds with large embedded gains, consider transferring them to your living trust or inheriting them by naming beneficiaries. This defers tax until assets are liquidated later.

16. Rent out unused property

You may be able to write off expenses on a rental property, vacation home, or even equipment/vehicle rentals on platforms like Airbnb. Be sure to properly classify and report the income and deductions. Consult a tax professional.

17. Make your spouse a sole proprietor

File a joint return reporting your spouse’s self-employment income on Schedule C. Wage earner spouses may qualify for valuable deductions and credits they otherwise wouldn’t based on joint AGI levels.

18. Consider year-end tax planning moves

With proper planning, you may be able to shift income and deduction recognition between years for greater tax advantage. Discuss year-end strategies with your accountant like timing bonus payments, charitable donations, capital losses, and more.

Final Words!

While every situation is unique, following these tried-and-true methods can potentially lower the tax obligations incurred from salaries, investments, and other sources of income. Always consult regulations, receive proper documentation, and follow disclosure guidelines to avoid audit risks down the road.

Approach your tax preparer before year-end to explore the options that make the most sense for your goals and personal finances. With diligent planning, you may be surprised by how much your tax bill can decrease through legal maneuvers.