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Taxes are certainly a necessary evil in society, but let’s face it, they’re far from enjoyable. It’s not easy to find anyone who’s excited about paying more to the government. In fact, most people try to find ways to reduce their tax bills. Here are ten tax breaks you can take advantage of to potentially lower your taxes.
Keep in mind, taxes and the related loopholes are incredibly complex, and this article doesn’t offer tax advice. I'm not a tax expert, so it’s best to consult a professional before acting on any of these strategies.
10. Saver’s Credit
The Saver’s Credit is available to individuals with low to moderate incomes who contribute to a retirement plan. The credit amount is 50%, 20%, or 10% of your retirement or IRA contributions, with a cap of $2,000 ($4,000 if married and filing jointly).
In order to qualify for the full 50% credit, your adjusted gross income (AGI) must not exceed $30,000. If your AGI is between $30,000 and $40,000, you’re eligible for a 20% credit. However, if your AGI is above $40,000, you can only receive a 10% credit.
One of the advantages of this tax credit is that you can claim the Saver’s Tax Credit regardless of whether you itemize deductions or opt for the standard deduction.
9. Use of HSA for Medical Expenses
If you have a high-deductible health plan, you can utilize a Health Savings Account (HSA) to cover medical expenses. Contributions made to your HSA are tax-deductible, and the funds can be used to pay for eligible medical expenses without paying taxes on them.
You can access funds from your HSA at any time to cover medical costs. Additionally, if you don’t use the funds in a given year, the money can be rolled over to the following year.
An HSA can be a valuable account to have, but it's not suitable for everyone. Are you in good health and looking to create a financial cushion for medical emergencies or plan for retirement? Consider this question carefully before deciding whether a Health Savings Account is the right option for you.
Advantages of an HSA:
- Contributions are tax-deductible
- Enjoy triple tax benefits: contributions, interest, and earnings are all tax-free when spent on qualified medical expenses
- It can cover both current and future medical expenses
- No expiration on funds: money can be rolled over from one year to the next
8. Deduction for Unrecoverable Debt
If you have debt that cannot be collected, you may be able to claim it as a bad debt deduction. While this loophole was initially intended for businesses to write off uncollectible debts, its broad wording now allows anyone to deduct the amount of bad debt they are unable to recover.
In order to qualify for the deduction, the amount must be a genuine debt, not a gift, and you must have made a reasonable effort to collect the debt. Honestly, this could be a useful way to shed some of the financial burdens in your life.
Here’s how to claim this deduction:
- The money should either have already been included in your income or be cash that was readily available to you.
- Once you determine that the debt is uncollectible, there’s no need for a court hearing. You can claim the deduction in that same year.
- Report it as a short-term capital loss.
If you’re uncertain, consult with your tax preparer or accountant—they can provide guidance on the necessary forms and documentation to support your claim.
7. Deduction for Gambling Losses
If you enjoy gambling, you can deduct your gambling losses up to the amount of your winnings. This could be a good way to offset a bad weekend in Vegas, in my opinion.
The catch is that this deduction is only available if you itemize your deductions. You’ll also need to keep records of both your wins and losses. It’s also possible that this deduction won’t provide significant savings if you don’t have other deductions to claim.
Keep this in mind when considering whether to use this deduction. If you’re single, you’d need over $12.5K in deductions, or over $25.1K if you’re married and filing jointly.
6. Deduction for Home Office Expenses
You’re not just a stay-at-home parent running an Etsy shop; you’re an e-commerce business with a small national team. Since you operate as a fully remote company, part of your home is dedicated to business activities. You can deduct a portion of your rent or mortgage interest, insurance, and utilities that apply to your business use of the space.
To qualify for this deduction, you must use the space regularly and exclusively for business purposes.
Using the home office deduction can be an excellent way to save on taxes. It might be time to turn that guest bedroom into a productive business space instead of letting it sit empty until your in-laws visit once a year.
Consulting with a tax professional about your business could open up a variety of other deductions. In certain cases, even landscaping expenses might be deductible.
5. The Roth IRA Backdoor Trick
If your income is too high to contribute directly to a Roth IRA, you can still enjoy the benefits by contributing to a traditional IRA and then converting it to a Roth IRA.
This loophole is often referred to as the Roth IRA backdoor.
To be eligible for the conversion, you must hold the traditional IRA for at least five years. And you will owe taxes on the amount that you convert. Getting the benefits after five years will be worth it, though. Remember, these are the benefits you get once it’s a Roth IRA.
- Both the growth and the withdrawals are tax-free
- Your heirs can inherit the money tax-free if you do it right
- Your contributions can be withdrawn without penalties.
- Almost anyone can contribute to a Roth IRA
- No required distributions
4. Go Ahead and Write Off That Pool for Medical Reasons
Have you always wanted to have a personal pool? This might be the way to do it. First, you need to have a doctor prescribe swimming as a way to treat either a medical condition or illness. The types of illnesses and conditions that will get you a doctor’s approval are the ones that hydrotherapy treats well. These could include the following:
- Severe Arthritis
- Fibromyalgia
- Chronic Pain
- Chronic Heart Failure
Make sure to keep all your documentation, as the IRS will review it. You must be able to prove that the pool is not for general exercise or personal use. If you do get a prescription, the costs for construction and maintenance of your pool can be deducted.
3. I’ve Got My 529 Savings—Look Out, Private Schools
If you have children, you can save for their education using a 529 plan. While contributions to a 529 savings plan are not tax-deductible, the earnings in the account are not taxed when used for qualified education expenses. Qualified expenses include:
- Tuition
- Fees
- Books
- Room and board
A lesser-known benefit of the 529 plan is that it’s not just for college expenses. You can use it to cover tuition at private schools from kindergarten through 12th grade. You’re allowed to withdraw up to $10,000 per student for tuition tax-free. Pretty neat, right?
2. Donate to Charity—It Benefits You and Them
By making a charitable donation, you can deduct all or most of the amount from your taxes. The deduction percentage varies depending on the type of charity. For instance, cash donations to public charities allow a deduction of up to 50% of your adjusted gross income. On the other hand, if you donate property like a car or a boat, you can deduct the full market value.
However, there are a few things to remember when donating to charity:
- The charity must be a qualified, tax-exempt organization as defined by the revenue code.
- You must keep records of all your donations, and if a non-cash donation exceeds $5000, you’ll need to have it appraised.
- If you’re not itemizing, you can deduct $300 if you're single or $600 for a couple.
A pass-through business allows business owners to avoid higher tax rates by having the business's income taxed at the individual's personal tax rate instead of the business rate. This setup is ideal for self-employed individuals seeking tax benefits.
If you're self-employed, consider establishing a pass-through business to potentially reduce your tax obligations. In this type of business, the earnings are directly transferred to the owner and taxed at their personal rate, which typically results in lower taxes.
The most common structure for a pass-through business is a sole proprietorship, although other forms, such as S corporations and partnerships, are available. Consult with an accountant to determine if a pass-through business structure fits your needs.
