Your Income Tax: 3 Little-Known Ways to Reduce It

 Income tax is a burden that almost everyone shares. Most of us also share the desire to lessen that burden. You don’t have to commit tax fraud to do so. In fact, there are several lesser known ways to reduce your income tax legally of which you may not be aware. Below are three.

Paying Fees Smartly

Thankfully, there are plenty of methods you can use to decrease how much you pay in income tax. Many of them involve planning ahead, moving things around and being aware of timing. “If you have both an individual retirement account (IRA) and a non-IRA account that are both being charged investment fees, consider paying all those fees from the non-IRA account. The IRA fees are not tax deductible whereas the non-IRA fees are,” certified financial planner (CFP) Daniel Zajac of Simone Zajac Wealth Management Group says. This is a simple way to pay fewer taxes without changing your investment habits. (For more, see: 7 Most Overlooked Tax Deductions.)

Deductions Can Help

If you itemize your taxes, there are probably areas you can deduct. State sales tax is a common deduction many people fail to include on their itemized list. Mileage driven for charitable reasons or going to a doctor's appointment are also deductible. You can deduct business expenses that are not reimbursed if they exceed 2% of your adjusted gross income (AGI). You can also deduct investment fees, which are part of miscellaneous itemized deductions. This can be especially helpful for professional investors or anyone who invests heavily over the course of the year. (For more, see: An Overview of Itemized Deductions.)

Even if you don't itemize your deductions on form 1040, you can take what are known as above-the-line tax deductions, or adjustments to your gross income. Two examples: Teachers can deduct up to $250 for out-of-pocket expenses for classroom supplies. And if you have a Health Savings Account (HSA), you can claim an above-the-line deduction for contributions to your HSA.

Think Ahead for Retirement

If you’re thinking about how much money you’ll owe in taxes once you retire, start planning now. If you make contributions to a Roth 401(k) or Roth IRA account, you can avoid paying taxes on that amount when you withdraw that money at retirement. Unlike traditional 401(k) and IRA accounts, with Roth 401(k)s and Roth IRAs you don’t have you pay taxes when you withdraw. You can also roll over a Roth 401(k) to a Roth IRA once you retire. If you have that option through your employer, consider opening a Roth 401(k) instead of a traditional 401(k). You will have to pay taxes if you roll over your traditional account to a Roth, so do the match before you convert those accounts.
Another method is to decrease the expenses you’ll have in retirement. The less you have to withdraw, the fewer taxes you’ll pay on it if you have a traditional retirement account.
Think about your current lifestyle and consider any changes, large or small, you could make to decrease your cost of living in retirement. Most people can probably cut their expenses somewhere without feeling a significant negative effect. If you pay off your mortgage before retirement, for example, this could be a simple way to lower your retirement expenses. (For more, see: 10 Most Overlooked Tax Deductions.)

The Bottom Line

Taxes cannot be avoided, but a needlessly high tax bill can be. There are probably lots of ways you can decrease your own tax bill this year. You don’t have to be a professional to find information about decreasing your taxes – you only need time and patience. If you have further questions, consider consulting a certified public accountant (CPA) or other tax professional for more advice. They'll be able to give you more customized help and support.