8 Ways to Legally Pay Less Tax and Save Money
There are many ways to legally shelter your income from tax so you save money. Laura explains 8 ways to reduce your taxable income so you pay less tax. You can take advantage of some or all of them, no matter how much or little money you make, to keep more of your hard-earned money.
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There are many ways to legally shelter your income from tax so you save money. But you may overlook strategies because you’re not aware that they exist or you don’t understand the often-complex rules.
In this post, I’ll explain 8 ways to legally reduce your taxable income so you pay less tax. You can take advantage of some or all of them, no matter how much or little money you make, to keep more of your hard-earned money.
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8 Ways to Legally Pay Less Tax and Save Money
You can't avoid taxes, but there are ways to legally pay less when you qualify for certain deductions. Try as many of the following tactics that fit your situation:
1. Adjust your tax withholding.
If you get excited about receiving a big tax refund each year, that may be a sign that you need to adjust your tax withholding. Getting a refund means you overpaid tax during the previous year by giving too much money to the IRS. They settle your account many months later by sending you your own money.
I don’t know about you, but I’d rather keep my own money throughout the year, instead of handing it over to the government as an interest-free loan. When you have bigger paychecks, you can put it to work by beefing up your emergency savings or investing it in a retirement account slowly throughout the year.
In last week’s post, How to Fill Out a W-4—Plus, 7 Reasons to Adjust Your Tax Withholding, I explain when and how to update this important tax form. To reduce your refund and increase your take-home pay, complete a Form W-4 and submit it to your employer any time during the year.
2. Claim any unreimbursed job expenses.
Do you ever spend money on goods or services related to your job that your boss doesn’t reimburse you for? Maybe it’s shelling out for expenses like:
- industry conferences
- continuing education
- subscriptions to trade publications
- dues to professional organizations
- uniforms or protective clothing
- tools, supplies, and safety equipment
- business licenses and fees
- passport fees for a business trip
- gifts for customers
- using your vehicle (other than for regular commuting)
- travel, lodging, and meals related to your work
Many people overlook the fact that the IRS allows you to claim a tax deduction for “employee business expenses.” These are expenses that are considered ordinary or necessary to perform your job, but that your employer doesn’t cover.
Qualified expenses don’t have to be required by your employer to be considered necessary. You make the call about whether an expense is necessary to do your job.
Bunching up deductions in a single tax year, instead of spreading them out of 2 years, may help you qualify to claim them and save more money.
Some tax deductions are subject to certain limitations, and that’s the case with these types of unreimbursed, job-related expenses. You must meet 2 requirements to claim them:
- You must file taxes on Form 1040 and itemize deductions on Schedule A. You enter job-rated expenses in the section of Schedule A titled "Job Expenses and Certain Miscellaneous Deductions."
- You can only claim the amount that exceeds 2% of your adjusted gross income.
For example, if your income is $50,000, 2% is $1,000. So only the amount above $1,000 would be tax deductible. If your job-related expenses total $2,500, you could deduct $1,500 ($2,500 - $1,000)—not the full amount of $2,500. If your total expenses were less than $1,000, you don’t get to claim them.
If you fall short of having enough expenses to meet the 2% threshold, delay paying as many as possible until the following tax year. Bunching up deductions in a single tax year, instead of spreading them out over 2 years, may help you qualify to claim them and save more money.
Or if you know you’ll have plenty of job-related expenses to qualify for the deduction in the current year, prepay expenses when possible. Qualifying for a tax deduction every other year is better than not qualifying for a deduction at all.
The expense examples I mentioned are not a complete list, so check out IRS Publication 529 to learn more. There are more limitations on certain types of expenses, such as meals and entertainment, which you can learn more about in IRS Publication 463.
If you have frequent or high expenses related to your job that come out of your own pocket, speak with a tax accountant about the best way to document them so you can use them as legitimate tax deductions.