No one likes owing the government at tax time, especially if you’re raising a family. Every dollar counts when it comes to giving your kids the most advantages and experiences you can provide. Unfortunately, federal, local, and state governments take a chunk of your income each payday, but that doesn’t mean you can’t minimize your tax burden. Using these foolproof tips, you can save on taxes and have more money for the people you love.
Buy an Electric Car
It seems counterintuitive to make a five-figure purchase to save money, but when you buy an electric car, you’re cutting your tax bill dramatically and could end up putting cash in your pocket. The Qualified Plug-In Electric Drive Motor Vehicle Credit, or Form 8936, gives you a tax credit between $2,500 and $7,500 depending on the vehicle, plus any incentives or tax breaks offered by your state of residency.
Not only will you get cash back on your new purchase, but you’ll also save money on fuel costs for as long as you own the car.
Claim Child, Elderly, or Non-Relative Dependents
Claiming dependents is another way to save on your taxes. The Child and Dependent Care Credit gives you a $4,050 exemption per dependent on your taxes, including elderly relatives, non-relatives such as friends, and children. While many filers take this $4,050 credit, don’t forget about the Child Tax Credit, which can lower your tax bill by an additional $1,000 per dependent.
These credits are also the focal point of some fraudulent tax filings, so be aware of the potential pitfalls. A tax professional can help you manage these credits so you don’t struggle with any issues.
Contribute to Your Retirement Fund
Whether you’re self-employed or an employee, you have several ways to save for retirement while reducing your tax burden at the same time. If you’re employed, enrolling in a 401(k) is a no-brainer. These funds reduce your adjusted gross income (AGI) up to $18,500, and many employers match your contribution.
Self-employed individuals have a similar tool to cut their tax bill. With a traditional Individual Retirement Account (IRA), you can add up to $5,500 of pre-tax money ($6,500 if you’re over 50) that lowers your AGI for the year. Whichever account you add money to, you can save up to an additional $2,000 thanks to the Retirement Savings Contributions Savers Credit.
In both the 401(k) and traditional IRA situations, you’ll have to pay taxes when you pull money out during retirement, but you’ll be taxed at your current income rate rather than the tax bracket you were in when you earned the income.
Open a Health Savings Account
If you have a high-deductible health plan and no coverage from your employer, a Health Savings Account is a blessing. It allows you to contribute money to help pay for medical expenses not covered by your health plan, or cover the difference between your medical bill and the deductible. Families can contribute up to $6,750 a year, which lowers AGI and leads to lower taxes.
With these tax tips, cutting your tax bill is easy. The only thing you’ll have to do is decide whether to take the kids on vacation or start saving for their college education.