How to Pay Less Tax Legally

Today I want to touch on the issue of how to pay less tax. Paying taxes has always been a thorny issue for many citizens. This is why the concept of being able to pay less tax would be welcomed by many.

There are various reasons why the government needs to collect taxes. Among them is

  • The need to collect revenue to help finance its spending.
  • Redistributing wealth and income in the economy.
  • Need to manage the aggregate demand
  • Reorganization of the economy
  • Correcting market failure and environmental targets like pollution
  • Ratifying the value of money

It is commonly thought that the more money one makes, the more taxes they pay. That is not necessarily true

Even though in most countries, the tax code is set in a way that has high earners pay a higher tax rate, the rich normally take advantage of laws that help them reduce their effective tax rate.

I cannot think of anyone who wouldn’t like to pay less of what they earn to the government.

The good thing is that there are a number of ways to lower your tax bill or raise your tax refund legally.

Tax credits and deductions are simple ways to cut your tax bill but are not constant as Congress makes changes to tax law every now and then.

Below are some ways on how to pay less tax. These remain significant every year, barring legislative action.

how to pay less tax

How to Pay Less Tax

1. Start a Business

Other than to generate extra income, a side business gives many tax advantages.

If, for instance, used in the course of daily business, many expenses can be easily deducted from your income hence reducing the overall tax obligation.

Additionally, by firmly adhering to Internal Revenue Service (IRS) (or the relevant authority operating in your country) guidelines, a business owner may deduct some of their home expenses with the home office deduction.

Internet and other utilities used in the business may also be taken from income.

2. Contribute to a 401(k), 403(b), or 457 Plan

This is one of the most common ways on how to pay less tax.

You pay less tax when you have less income, but you don’t really have to make less money to reduce your tax bill.

Adjusted gross income (AGI) is the standard for calculating taxable income.

If you have a higher AGI, the more tax you can expect to pay. The main word here is “adjusted,” which means that there are some ways to lower your gross income.

One way is by making pre-tax contributions to a 401(k) retirement plan, 403(b) retirement plan, or the 457 plan.

When you contribute more to a pre-tax retirement account, you are able to reduce your AGI more and also the amount you’ll owe in taxes.

The maximum 401(k) contribution stands at $19,500 for 2020. If you’re age 50 or older, you can add to your contribution as “catch-up” of $6,500, making your total 401(k) contribution limit $26,000.

The limits for 403(b) and 457 plans are the same.

The advantages of contributing to these plans, in terms of tax, are double.

First, you reduce your taxable income for the year you contribute.

Secondly, paying income taxes on the investment returns in your retirement plan is not a must, until you withdraw them upon retirement.

Beginning with the year you turn 70½; you must start taking required minimum distributions.

Your money can, therefore, grow tax-free until you require it for retirement.

The SECURE Act, which was enacted on December 20, 2019, in the United States allows employers to give annuities as investment options within the 401(k) plan.

If you are a small business owner, the Act offers tax enticements to employers to put in place automatic enrollment in saving and retirement plans for its staff, or they can put together many employer plans and give retirement options to their workers.

3. Get a Credit for Higher Education

The Federal government gives valuable tax credits to offset the cost of higher education.

The American Opportunity Tax Credit could be claimed for the first four years of college, and it offers a maximum credit of $2,500 per student per year.

Because it’s a credit, that amount is removed from the tax you might owe the government.

In case it exceeds more than the amount of taxes you owe, up to $1,000 may be refundable to you.

The Lifetime Learning Credit is good for adults advancing their education and training.

This credit is up to $2,000 annually and helps to cater for college and other educational expenses that boost your career skills.

Don’t you think this is a favorable idea on how to pay less tax?

Also Read: Best Cars for College Students

Moving on…..

4. Keep a Record of Your Medical Expenses

If you have been in hospital or incurred other costly medical or dental care, keep the payment receipts well.

Generally, you can remove professional medical expenses that are more than 7.5% of your adjusted gross income for the specific tax year.

In case your adjusted gross income is $51,000, for instance, anything past the first $3,750 of your medical bills, 7.5% of your AGI could be deductible.

If you rang up $11,000 in medical bills, then $7,250 of that amount could be deductible in this case

tax deductions

5. Give it to Charity

Donations to charity are among the ways on how to pay less tax.

Charitable giving is deductible, and the donations don’t necessarily have to be in the form of cash.

If you have donated food, clothes, or household items, this can reduce your tax bill if the donations went to a bona fide charity, and you received a receipt.

Many tax software programs include modules that approximate the value of every item you donate, therefore come up with a list before you issue the donations as it can lead to huge tax deductions.

6. Receive IRS Credits

There are numerous IRS tax credits that help lower taxes, like the Earned Income Tax Credit.

For the year 2019, a low-income taxpayer without children was receiving as much as $529 in credits.

Other taxpayers with three or more children may get up to $6,557 in credits.

The American Opportunity Tax Credit gives at most $2,500 each year for students that qualify.

There is also the Saver’s Credit for moderate and lower-income people who wish to save for retirement. Normally, they can get a credit of up to half their contributions to a plan, an IRA, or an ABLE account.

Finally, the Child and Dependent Care Credit can (which is dependent on income) help pay up the expenses of raising children with up to $6,000 in credit.

7. Hire a Professional to Do Your Taxes

In case your tax situation is clear, filing on your own or using free tax preparation software from either TurboTax or H&R Block can help you save.

For more complex tax returns, however, a professional may be able to identify tax saving opportunities that you might have missed. I think this should be one of the easiest ways of paying less tax for any individual regardless of the income level.

Some tax experts even offer a guarantee so that in case it turns out you paid more, you are able to get a refund from the tax preparer.

A qualified tax professional, like an enrolled agent or CPA, might charge more than a non-credentialed person, but they’re expected to adhere to a code of ethics and acquire a specified number of continuing education hours annually.

With these, they keep up to date with changing tax laws and is also a way for you to pay less tax. You can easily reach out to a qualified tax pro near you by searching the IRS’s database of credentialed preparers.

In conclusion, the above are just some of the ways on how to pay less tax. There are other ways that you can do it. Paying less tax is possible while you are still operating within the law. In case you have any question, leave a comment or send me an email.

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