Paying taxes is unavoidable, but did you know that there are many ways to get a lower income tax? Here are the three things you can do to reduce your tax bill and get the most of your money.
Save for your retirement.
The easiest way to reduce your tax is to save toward your retirement and maximize your monthly contributions for it. If your employer is offering an employer-sponsored plan, such as the 401(k) and 403(b) plans, have your contributions deducted before tax and set the limit to the maximum. This will significantly reduce your income while increasing your retirement savings at the same time.
Now, if you are self-employed or if your company does not offer an employer-sponsored plan, Individual Retirement Arrangement (IRA) is a good alternative. IRA has a maximum contribution limit of $5,500 as of the 2015 tax year with catch up provision of an additional $1,000 for those over the age of 50.
Consider Flexible Spending Plan (FSA)
FSAs allow pretax savings plan that can be set up through an employer. It allows you to set aside a portion of your monthly income for certain expenses such as medical costs and dependent care. The total balance must be used annually or it will be forfeited by the employer. The money deducted from the payroll for your FSA is not subject to tax, enabling you to make substantial savings. You can contribute to a maximum of $2,550 in your FSA account.
An alternative to FSA is Health Savings Plan or HSA. The latter also allows you to make pretax contributions for your health care expenses; however, its maximum contributions is higher than that of FSA. Also, its contributions can be rolled over if you do not use them within the year which they are saved.
Track down your business deductibles.
If you are self-employed, you can use your business expenses to significantly lower your income tax. Ten percent of your household costs for electricity, insurance, mortgage interest, repairs and the like can be deducted from your gross income. Travel, shipping, advertising and marketing expenses can also be used to lower your annual tax bill.