Strategies To Lower Your Tax Bill For Future Tax Years 

Reducing your tax bill involves taking advantage of often overlooked tax deductions and credits. By doing so, you can potentially lower your tax liability and avoid a big tax bill, or even get a bigger refund. Keeping detailed tax records throughout the year can help you maximize these money-saving deductions and credits when you file your tax return next year.

Even if you claim the standard deduction, detailed receipts can still be beneficial. Here are some examples of deductible expenses:

• Energy-efficient home upgrades: Including energy-efficient windows, home energy audits, and solar panels.
• College expenses: Certain college expenses or scholarships are deductible, but this excludes room and board, transportation, sports and hobbies, non-credit courses, insurance, and medical, personal, living, or family expenses.
• Childcare expenses: Costs for a nanny, babysitter, or daycare can be deducted.
• Medical expenses: These can be deducted if paid using a Health Savings Account (HSA) or Flexible Spending Account (FSA) or if you plan to itemize deductions.

Organized receipts not only track your spending but also protect you if the IRS selects your return for an audit.

Consider Life Changes and 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 affect 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 turn 17 years old this 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 2024 tax year, a non-child dependent can’t make more than $5,050 in gross taxable income to qualify as a dependent.

Use the IRS’s Interactive Tax Assistant to determine who you can claim as a dependent on your 2024 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. Failing to do so can result in penalties, further increasing your tax bill. The penalty for missing an estimated quarterly tax payment deadline is 0.5% of your unpaid taxes for every month (or partial month) the payment is late.

Check Retirement Contributions

Lower your tax bill by contributing to retirement accounts. You can contribute a portion of your income tax-free until you make withdrawals. For 2024, contribution limits for traditional 401(k), 403(b), and the federal government’s Thrift Savings Plan have increased to $23,000. 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, making early retirement withdrawals (before age 59½) will increase your tax liability. The money you withdraw will be counted in your taxable income, and you might also face an additional tax penalty of 10%.

2024 Federal Income Tax Brackets

Not all 2024 tax changes will cost you more money. In fact, you might see your 2024 tax bill reduced without any effort. Federal income tax brackets increase yearly to account for inflation.

This is good news if you didn’t get a raise at your job. Even if you did, the tax bracket adjustment might help you avoid paying 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 impact your tax bill.

• Earned Income Tax Credit (EITC): An increase in income or change in the number of dependent children can reduce the amount of credit you qualify for. To learn more about the earned income tax credit (EITC) read our article What Is Earned Income Tax Credit & How Do I Qualify?
• 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.

Updating withholdings now can impact your 2024 tax bill, so adjusting them could prevent a surprise tax bill next year. Use the IRS’s Tax Withholding Estimator to help determine if you should adjust your withholdings for 2024.

Conclusion

Lowering your tax bill involves proactive planning and understanding the various deductions, credits, and life changes that impact your tax liability. Keeping detailed records, paying estimated taxes, contributing to retirement accounts, and regularly checking your tax withholdings can all help you avoid an unexpected tax bill next year.

Need Help With Back Taxes?

Contact a tax specialist today to explore how to reduce, resolve, or eliminate your back taxes with the IRS Fresh Start Program.

For more information or assistance, click here or call us directly at (800) 607-7565 for immediate support.