If you work for a publicly traded company, you may be eligible to enroll in an Employee Stock Purchase Plan (ESPP). When you sign up for your ESPP, you'll deduct the money from your after-tax paycheck with the intention of buying shares in your company and, in many cases, you'll be offered a discount (typically around 15%) on the stock price that's only available to employees. One of the easiest and potentially most beneficial ways to reduce your taxable income is to contribute to a pre-tax retirement account, such as an employer-sponsored 401 (k) or a traditional IRA. With any of these tax-advantaged investment accounts, the money in your paycheck (in the case of a 401 (k) plan) or your bank account (in the case of a traditional IRA) is deposited before paying taxes.
A credit lowers your taxes, giving you a greater refund of your withholding, but certain tax credits can give you a refund even if you don't have any withholding. While there are many types of retirement savings accounts to choose from, below are two of the most common types that can help reduce taxable income in the fiscal year in which a contribution is made. While student loans can be a burden, the interest you've paid can be a simple deduction from your taxable income. Taxpayers (or their spouses) who have employer-sponsored retirement plans can also deduct part or all of their traditional IRA contribution from their taxable income.
When determining the benefit of a tax deduction versus a tax credit, it's essential to understand the difference between the two. The increase in standard deductions under the Tax and Employment Cuts Act (TCJA) provided tax savings for many (even though the TCJA eliminated many other itemized deductions and the personal exemption). Traditional contributions to the IRA can be deducted from an individual's tax return, reducing the taxes owed in the tax year of the contribution. Business owners or those with deductible professional expenses can make the next necessary purchases or expenses before the end of the fiscal year.
The tax deduction reduces a person's tax liability by reducing their taxable income. Because a deduction lowers your taxable income, it reduces the amount of taxes you owe, but by decreasing your taxable income, not by directly reducing your taxes. Basically, collecting tax losses means using investment losses to offset the taxes you would pay on other investment gains and, otherwise, reduce your taxable income. From retirement account contributions to self-employment expenses, learn more about the five most common tax deductions from the experts at H%26R Block.
The tax reform eliminated many itemized deductions for most taxpayers, but there are still ways to save for the future and cut your current tax bill. And, when it's time to pay taxes, when you've reaped investment losses, use tax software such as TurboTax or H%26R Block to make it easier to correctly answer and claim those tax losses, which will hopefully lower your overall tax bill. A long list of deductions is still available to reduce taxable income for taxpayers who are self-employed full or part time. The lifetime learning credit is non-refundable, so if you don't have any taxable income or your tax liability is reduced to zero, no refund will be generated.
