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How to Pay Less Taxes and Save Big in 2020

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Recent changes in tax law have put a lot more money in people's pockets. Unemployment is at historic lows, real wages have risen, Americans are saving more, and taxes are lower. There are fewer deductions than there used to be, which panics some people who want to know how to pay less taxes, and tax refunds are smaller. 

Yet the smaller refunds are because the government is taking less from people's paychecks in the first place, and fewer deductions have simplified the tax code (a bit) even as people keep more of what they earn. Yet you can still maximize your savings to make sure you're keeping as much of your hard-earned money in 2020 as possible.

How to Pay Less Taxes Legally

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​1. Contribute to Your 401(k), 457 or 403(b) Plan

Your tax rate is determined by how much assessable revenue you earned throughout the year. But earning less money isn't the smartest method for how to pay less taxes. Why not grow your retirement fund, instead? Your taxable income is determined by your adjusted gross income. One of the most popular methods for reducing this number is making a pretax contribution to a qualifying retirement plan.


In 2019, the maximum pretax contribution you can make to a 401(k), 403(b) or 457 is $19,000. For taxpayers who are 50 or older, an additional $6,000 annual contribution is allowed. There are two tax benefits related to making these pretax contributions. First, you save money on your tax bill next year. Second, you won't pay income taxes on the returns from these investments until you withdraw them or are forced to take the required minimum distributions in the year you turn 70-and-a-half. This tax free growth more than makes up for the fact thatyou'll have to pay taxes on the gains when you finally take them out.

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2. Make Student Loan Payments

A lot of us are drowning in student loan debt. In fact, The Institute for College Access & Success reported that 65% of graduating college seniors had student loan debt in 2017. What many graduates don't know is they can reduce their assessable revenue by $2,500 for the interest paid on their student loans. This reduction happens "above the line", meaning you can take this deduction even if you don't itemize your deductions.


Keep in mind, however, that your deduction may be limited or even eliminated if your income is too high. For example, in 2018, the deduction began to phase out with a modified AGI of $65,000 ($135,000 if married filing jointly) and phased out completely at $80,000 ($165,000 if married filing jointly). 


Your modified AGI (adjusted gross income) is similar to AGI, except you'll have to add back certain types of deductions, such as student loan interest, qualified tuition expenses and IRA contributions. If you find yourself in the 25% tax bracket, by claiming the full $2,500 reduction you can save yourself $625 on your tax bill in 2020.

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3. Buy a House

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The middle class, in general, is in a good position to buy a house. Doing so can help you save money on your taxes because the property taxes on your home and the interest on your mortgage is deductible.


It's important to keep in mind, though, that there are still limitations. For the tax years of 2018 to 2025, you can only deduct interest from the first $750,000 of mortgage debt, or $375,000 for married couples filing separately, those who are filing head of household or those who are filing single. You may also deduct up to $10,000 of state and local taxes paid, such as state sales or income tax and local property taxes. If you're not married filing jointly, you can deduct up to $5,000 per year.


Finally, it's important to understand that you have to itemize your deductions on Schedule A. In 2018, the standard deduction was $12,000 for everyone except married couples filing jointly. When married filing jointly, the standard deduction was $24,000. If you don't have more itemized deductions than your standard deduction, buying a house isn't a method for how to pay less taxes.

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4. Select the Correct Filing Status

Your filing status is one of the most significant components of how to pay less taxes. It affects both your tax rate and the size of your standard deduction. For example, you may have a standard deduction of $12,000 because your filing status is "single". But if you qualify to file under the head of household status, your standard deduction becomes $18,000. Moreover, the tax brackets are far more generous than those for people filing under the status of single. Most people have the option to choose between two of the five filing statuses. Here's a quick rundown:

Single

Head of Household

Qualifying Widow(er)

Married Filing Jointly

Married Filing Separately

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5. Continue Your Education

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Is there an academic interest you want to explore? Do you want to finish your college degree or take a few extra courses to enhance your career prospects? Signing up for a college class can help you reduce your tax bill. You may be surprised by how many education expenses qualify for tax breaks.


The AOTC, or American Opportunity Tax Credit is available only for the first four years of undergraduate education. To qualify, you must be enrolled at least half-time in a program with the intention of getting a degree. This can be used to reduce your tax liability by up to $2,500. If only a portion of the credit is required to bring your tax liability to zero, up to 40% ($1,000) of the remaining credit is refundable.


The Lifetime Learning Credit is far more generous. There is no limit to the number of years you can claim it. Moreover, you're not required to take a class that will improve your job skills or enroll in a degree program. Publication 970 offers you all the rules and limitation related to education tax benefits.

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6. Save Your Donation Receipts

If you donate your money to a charity or charities recognized by the IRS, you can claim a deduction for this donation. However, you'll want to get and keep receipts for any donations you make. Depending on whether you donate cash or other property and the monetary value of your donation, the documentation requirements will differ.


If you donate property valued under $250, you'll need to keep reliable records or get a receipt from the recognized organization. If your non-cash contribution was worth $250 or more, you will need to get contemporaneous written acknowledgement of the donation. If the donation is worth $5,000 or more, you will need to get an appraisal in addition to keeping a record of the written acknowledgement of donation.


Review the Instructions for Form 1098-C carefully for limitations and reporting requirements if you plan on donating a vehicle to charity. Information you'll need include the mileage on the vehicle and the vehicle identification number.

Cash to Charities

Quid Pro Quo Donation

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7. Double-Check Old Returns

This isn't the most exciting method for how to pay less taxes, but it's an important one. Do you think you missed out on tax credits or deductions in prior years? Those tax savings might not be lost yet. If it has been fewer than three years since that year's tax return was filed, you can file an amended return and claim that tax break.


All you need to do is file Form 1040X and a check or direct deposit from the IRS will follow shortly. Just make sure you have all your ducks in a row in case the IRS decides to audit you. Organization and preparedness on your part will make life easier for everyone involved.

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8. Have Your Taxes Prepared By a Professional

Many Americans have straightforward tax situations and can file their own taxes or use free tax preparation software. If your financial is anything but simple, a Certified Professional Accountant or tax consultant may notice opportunities for how to pay less taxes that you may have missed. Look for a tax professional who guarantees a reimbursement if you end up paying more than you should on your taxes.


Remember, a qualified tax preparer, such as an enrolled agent or CPA, will cost you more than a non-credentialed tax preparer. However, they are required to adhere strictly to a code of ethics. In some states, CPAs have to sit through and pass an ethics exam in addition to all the other exams. Moreover, these professionals must also take several hours of continuing education every year to remain certified. This means that these professionals are staying abreast of changes in tax laws, resulting in a larger refund or lower tax bill for you.

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9. Contribute to a Roth IRA

Are you wondering how to pay less taxes in retirement? The answer is to contribute $5,500 to a Roth IRA. If you are 50 or older, you can contribute up to $6,500 per year. There are several advantages to making Roth IRA contributions in addition to your company-offered retirement plan.


First, nobody can predict what tax rates will be like when you retire. Even if they remain constant, you'll probably be pulling out more every year than you're making right now because you'll have more expenses (travel, home health care, doctor's visits).


Since your tax bracket is based on assessable revenue, you may end up in a lower tax bracket if some of your money has already been taxed. More importantly, opening up your own Roth IRA gives you access to more options regarding stocks and mutual funds. You may discover potential investments with lower fees and greater returns with the same risk as you'd find through employer-provided plans.

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10. Contribute to an SEP

The gig economy is growing exponentially, but the self-employed must pay both the employer and employee parts of FICA. While you can deduct the employer portion of FICA, it's not a credit, so it won't reduce your tax bill dollar-for-dollar. Enter the SEP, or simplified employee pension plan. A business of any size, even a business of only one employee, can set up an SEP. If you're self-employed, you can contribute up to $55,000 and save money on your taxes.

The Bottom Line

Now that you know how to pay less taxes legally, what are you waiting for? Contribute to your retirement nest egg, pay off extra interest on your student loans and get looking for a house. For more information on what you can do to save money on your taxes in 2020, talk to a fee-only financial adviser or certified tax consultant.

Featured Photo by Kelly Sikkema on Unspslash

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