Most of us probably spend at least a few days’ worths of time every year contemplating the fact that we, as individuals, pay a higher percentage of our income in taxes over the course of that same year than most millionaires. Whether or not you’ve ever found yourself musing over this particular conundrum, There are bound to be ways that you can decrease your personal tax burden. Here are a few to think about.
1. State & Local Taxes are Often Deductible
That’s right! You can claim the paid state property tax on residences, rental properties, and vehicles as a deduction against your federal taxes. As long as you actually paid taxes on these properties in the given year.
2. IRA Contributions are a ‘Double Whammy’
Yes, most people know that IRA contributions are non-taxable, but most of us don’t connect the dots to note that this is functionally decreasing your taxable income each year on the front-end, in the same way, that the eventual deductions do on the back-end. The secret is the “Saver’s Credit” which, depending on your household income level, may allow you to claim some percentage of these contributions as deductions.
3. The Home Office Deduction
This one feels incredibly relevant, given how many of us made the switch to working from home this year, and probably spent more on office supplies in 2020 than in the several years leading up. Thank COVID-19 for that, but remember, home office expenses are deductible!
4. Lifetime Learning Credit
Much like its more well-known cousin, The American Opportunity Credit, The Lifetime Learning Credit provides a significant incentive, Covering 20% of costs, up to a total of $2000 in tax credit each year for those who choose to continue their college education as adults.
5. The Residential Energy Credit
Anyone will tell you that solar energy, and solar roofing, are going to have a major impact on our global infrastructure. If you are looking to get in on the paradoxical ‘ground floor’ of the solar roofing movement, now is a good time. If you installed a solar roof in 2020, you can claim 26% of the installation costs as a deduction. If you waited until just now to make this decision, you will only be able to claim 22% come next tax season if you install in the coming year.
6. Take Credits Over Deductions
Not that you shouldn’t collect both types of tax breaks, but it’s important to remember that a credit will reduce your tax burden dollar for dollar, while Deductions are calculated based on the relevant tax bracket. E.g. If you’re in the 24% bracket, a dollar of deduction lifts $0.24 off your tax burden.
Stay safe this tax season, and don’t pay the government any more than you must.