Knowing how to lower your tax bill requires understanding your tax situation. Several factors contribute to your overall tax liability, including (but not limited to) a change in income and aging dependents. And receiving a tax refund last tax season doesn’t guarantee you will receive one this year.
Staying up-to-date on federal tax changes and state tax changes can help you understand how to pay less in taxes on your income than you need to. Here are some tips.
Lower your tax bill with deductions and credits
Tax deductions, tax credits, and exemptions can potentially lower your tax liability and help you avoid a big tax bill (or get a bigger refund). Keeping detailed tax records throughout the year can also help keep you from missing out on those money-saving deductions and credits when you file your tax return next year.
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This is especially important for self-employed taxpayers who write off business expenses. Some common expenses self-employed workers can deduct include printers, office supplies, and laptops. Many can also write off a portion of their home’s expenses relative to their home office with the home office deduction.
But don't just estimate your expenses. One study found that self-employed workers overpaid an average of over $3,000 in taxes. That's mainly because some people guess at expenses only to find that their actual expenses are higher.
You will need all of your receipts when using the “actual expense” method to calculate your home office tax deduction. You can multiply your home’s expenses by the percentage of your house devoted to your home office. The “simplified method” is based on the square footage of your office relative to your home, and you won’t need receipts. However, you’ll lose out on deducting other home costs as business expenses, so you could pay a lot more in taxes when using the simplified method.
W-2 workers (employees who have Medicare, Social Security, or income tax withheld from pay) can benefit from keeping detailed receipts as well. Some examples of expenses that can be deducted include:
- Energy-efficient home upgrades (energy-efficient windows, home energy audits, solar panels, etc.)
- Some college expenses or scholarships (excludes room and board, transportation, sports and hobbies, non-credit courses, insurance, and medical, personal, living, or family expenses.)
- Childcare expenses (nanny, babysitter, daycare costs)
- Charitable donations (if you itemize deductions)
- Medical expenses (if you use your Health Savings Account (HSA) or Flexible Spending Account (FSA) to pay them or if you plan to itemize deductions)
Having organized receipts will tell you exactly how much you spent, but being able to document your expenses can also protect you if the IRS chooses your return for a tax audit.
Consider life changesand your tax liability
Life changes can drastically impact your tax liability, sometimes without you even realizing it. While the following list does not cover all situations that can impact your taxes, you might see a bigger tax bill if any of these applied to you last year.
- Collecting retirement benefits while continuing to work: Social Security retirement benefits are subject to federal income tax, and some states tax retirement benefits
- Age of dependents: Dependents who turned 17 years old last year will not qualify for the child tax credit.
- Work status of dependents: If your dependent is not a qualifying child (for example, a domestic partner) and exceeds the income threshold, you cannot claim them as a dependent. (For the 2023 tax year, a non-child dependent had to make less than $4,700 in gross taxable income to qualify as a dependent. )
You can use the IRS’s Interactive Tax Assistant to find out who you can claim as a dependent on your 2023 tax return.
Pay estimated taxes (if you need to)
The IRS reminds taxpayers to make estimated tax payments if they expect to owe more than $1,000 in federal taxes (after accounting for deductions and credits). Employees can opt to have more taxes withheld from their paychecks.
If you do not have taxes withheld throughout the year, you’ll likely need to pay estimated taxes each quarter. If you don’t, the IRS could penalize you, further increasing your tax bill. When you miss an estimated quarterly tax payment deadline, the penalty is 0.5% of your unpaid taxes for every month (or partial month) the payment is late.
Check retirement contributions
You can also lower your tax bill by taking advantage of retirement contributions. You can contribute a portion of your income tax-free (until you make withdrawals).
Retirement savings plan contribution limits for 2024 (returns you'll file in early 2025) have increased $500 from last year to $23,000 (for traditional 401(k), 403(b), and the federal government’s Thrift Savings Plan. And 2024 traditional IRA contribution limits have also increased to $7,000, up from $6,500 last year. Not counting that money toward your taxable income means the IRS will take less in taxes.
Note: Roth IRA contributions are not tax-deductible, but earnings grow tax-free.)
However, your tax liability will increase if you make early retirement withdrawals (before age 59 ½ ). The money you withdraw will be counted in your taxable income, but you might also face an additional tax penalty of 10%.
Review tax changes
Casual online sellers won't likely see a 1099-K for the 2023 tax year just because they receive payments for goods and services through third-party payment platforms like PayPal and Venmo. That's because the IRS has delayed the $600 1099-K reporting rule.
Remember: The IRS requires you to report all your taxable income, whether you receive a 1099-K or not.
2023 federal income tax brackets
Not all 2023 tax changes will cost you more money. In fact, you might see your 2023 tax bill reduced without any effort. Federal income tax brackets are increased yearly to account for inflation.
This is good news if you didn’t get a raise at your job, but even if you did, the tax bracket adjustment might help you avoid having to pay a higher percentage of taxes on that income.
Check your tax withholdings
The IRS reminds taxpayers to reassess their tax withholdings each year, regardless of their tax liability the previous year. (Sometimes, even minor changes can have an impact on your tax bill).
- Qualification for the Earned Income Tax Credit (EITC): An increase in income or change in the number of dependent children can reduce the amount of the credit you qualify for.
- Placement in a higher tax bracket: An increase in your income could push you into a higher federal income tax bracket, (sometimes called "bracket creep," which means you might pay a higher tax rate on some of your earnings.
Although withholding changes made now won't impact your 2023 tax bill, updating withholdings could prevent a surprise tax bill next year. You can use the IRS’s Tax Withholding Estimator to help you determine if you should adjust your withholdings for 2024.
Related Content
- Big IRS Tax Changes to Know Before You File
- 2023 and 2024 Tax Brackets and Federal Income Tax Rates
- What's the 2023 Standard Deduction?
