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The goal when filling out your federal income tax return should be to pay what you owe — but not a penny more. You can make sure this happens by taking advantage of the numerous tax deductions, credits, and other incentives in the lengthy U.S. tax code to make sure your bill is as low as possible.
There’s no way I can discuss all of the different benefits available to taxpayers in a short article. But I can tell you the most lucrative tax breaks that I use to make sure my tax bill is as low as possible. Here’s what they are and how you can take advantage as well.
1. Retirement savings
This is (by far) the largest tax break I get each year. I’m technically self-employed, which comes with its own tax burdens, especially the self-employment tax. In a nutshell, I’m considered both the employee and employer, so I pay twice as much Social Security and Medicare tax as W-2 employees do.
On the other hand, I also get to use special retirement accounts with high contribution limits. I use a SEP-IRA for retirement savings, and other options include SIMPLE IRAs and Solo 401(k) accounts. My SEP-IRA has a sky-high contribution limit of $69,000 or 25% of compensation (whichever is less) for 2024, and while I don’t necessarily plan to max it out, that’s a lot of pre-tax income I can set aside.
If you’re not self-employed, you could still increase your retirement contributions to save money on taxes. If you have an employer-sponsored retirement plan like a 401(k) or 403(b), you can choose to have as much as $23,000 of your compensation contributed to that account, and even more if you’re 50 or older. And if you qualify, you can put as much as $7,000 into a traditional or Roth IRA for 2024 ($8,000 if you’re 50 or older).
2. Tax breaks for parents
It would be dishonest of me to say that my kids save me money. Any parent can tell you that raising children isn’t cheap — and mine aren’t to the age yet where they’re doing anything particularly expensive like driving or going to college.
However, my kids have been one of the biggest money savers when it comes to my taxes. Technically, this is a few tax breaks in one, but here’s what I save because of my kids:
- Child Tax Credit: Worth $2,000 per year for each of my kids.
- Child and Dependent Care Credit: 2024 will be the first year when neither of my kids are in daycare, but we still pay for after-school care, and that qualifies. This tax break is worth 20% to 35% of qualifying expenses up to $3,000 for one child or $6,000 for more than one child.
- College savings: I regularly contribute to 529 Savings Plans for both of my children. While the contributions aren’t deductible on the federal level, most states allow 529 plan contributions to be deducted on the state tax return.
3. Tax breaks for real estate
I’m both a homeowner and a real estate investor, and there are excellent tax breaks for both. For one thing, homeowners are allowed to deduct the interest they pay on as much as $750,000 in mortgage principal. I’m fortunate to have a 3% interest rate on my mortgage, but this could be an especially big tax break for people who buy homes in the current market.
You’re also allowed to deduct any state and local taxes you pay (including real estate taxes) up to $10,000 if you itemize deductions.
If you own rental property, you can use any expenses of owning the property to help offset your rental income. This includes management fees, taxes, marketing costs, homeowners association dues, licensing fees, and more. Plus, rental properties get a special deduction called depreciation that can save you thousands of dollars.
The bottom line
There are plenty of tax deductions and credits available, and while no two taxpayers are the same, there are likely to be some breaks that you can take advantage of. Explore your options by consulting with a tax professional or making use of the best tax software. By knowing how some of the most valuable tax breaks work, you can put yourself in the best position to pay less in taxes and keep more money in your pocket.
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