- Everything from making a major purchase to giving to charities and non-profits can help to reduce your overall income taxes. Even though some options for lowering taxes take considerable planning and preparation on your part, other ones involve simple lifestyle choices that will help to minimize your tax bill over time.
- Build up your retirement nest egg and save on your taxes at the same time. Eric Tyson, in "Personal Finance for Dummies," explains that retirement plans serve as one of the few simple and completely legal ways to reduce taxable income. You can contribute either to employer-based 401(k) or 403(b) accounts or to independent retirement plans, such as Keoghs and SEP-IRAs.
- Further your education and minimize your taxes as well. Tyson explains that many educational expenses, such as cost of tuition and books, can be deducted from your taxes if your education is related to your career. While you cannot deduct educational expenses to change careers, you can often write off continuing education classes and expenses.
- Avoid capital gains taxes on the sale of your home by making it your permanent residence. Stephen Fishman, in "Easy Ways to Lower Your Taxes: Simple Strategies Every Taxpayer Should Know," explains that you can enjoy a number of tax benefits from staying put, including not having to pay taxes over time for the continued appreciation of your home.
- Local government entities, such as your local water district, issue bonds as a way to raise money. Fishman explains that, if you purchase a municipal bond in your home state or locality, then "the interest earned on municipal bonds is usually exempt from not only federal tax, but also state and local tax." Investing in municipal bonds can help to lower your overall tax rate.
- Invest in your children's college. The U.S. government, Fishman explains, has created two types of educational savings accounts, Coverdell ESAs and 529 savings plans, that function largely tax-free. Although your contributions are not tax free, any withdrawals used for educational purposes remain tax-free.
- Search for work in your field of employment, and you will likely be able to deduct many of the expenses incurred. Tyson explains that you can deduct expenses for everything from traveling to and from interviews to mailing resumes and hiring a career counselor. If you decide, however, to change careers, you will most likely be unable to itemize related expenses on your taxes.
- Deduct medical expenses that exceed 7.5 percent of your adjusted gross income, and reduce your taxes as a result. Kimberly Lankford, in the article "10 Ways to Lower Your Taxes," explains, however, that you have to itemize deductions to qualify for this tax break and that you have to be able to provide proof of expenditures through medical bills and receipts.
- Check to see whether you might qualify for any tax credits when you file your taxes. Leonard Weiner, in the article "5 Smart Ways to Reduce Your Taxes," explains that "whether you itemize or take the standard deduction, tax credits can be claimed in addition to those amounts." For example, you might be able to claim a tax credit for driving a hybrid car or for paying for child care.
- Defer your bonus, if you can do so, as well as other possible additions to your income until the following year. Tyson explains that if you know that you will fall into a higher income bracket in the current tax year, and you can choose when to receive bonuses and additional income, then you should choose to receive the income in the coming year when you might fall into the lower income bracket.
- Open up your pocketbook and give generously to charities, and you will notice a reduction in your taxes. Lankford explains that "you can write off charitable contributions if you itemize your deductions." She encourages tracking your giving throughout the year, including cash gifts and non-cash donations, as many of these can qualify as charitable contributions.
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