Because the tax code can be dense, and the rules are ever-changing, however, many people aren’t fully aware of all the legally allowed deductions (which lower your taxable income) and tax credits (which directly reduce your tax bill) they may be entitled to.
In many cases, a married couple will come out ahead by filing jointly. Typically, this will give them a lower tax rate, and also make them eligible for certain tax breaks, such as the earned income credit, the American Opportunity Credit, and the Lifetime Learning Credit for education expenses.
Generally, the lower your income, the lower your taxes. However, you don’t have to actually earn less money to lower your tax bill. Instead, you can reduce your gross income (which is your income before taxes are taken out) by making contributions to a 401(k) retirement plan, a 403(b) retirement plan, a 457 plan, or an IRA.
Health care expenses are typically only deductible once they exceed 7.5% of your AGI (and only for those who itemize their deductions). But with today’s high cost of medical care and, in some cases, insurance companies passing more costs onto consumers, you might be surprised how much you’re actually spending on health care.
If you have children who may attend college in the future, or who attend or will attend private school, it can pay off to open a 529 savings plan. Even if your children are young, it’s never too early to start setting aside money for their education.
While this move won’t technically lower your taxes, it could help you avoid a higher than necessary tax bill at the end of the year. That’s because income tax in the United States works on a pay-as-you-go system.