Want to lower your tax bill? Of course you do. Fortunately, there are several ways that you can cut your taxes without incurring the wrath of the IRS.
Contribute to a 401(K). Your tax due is based on your Adjusted Gross Income, or AGI. The higher your AGI, the more you'll owe the government. The key here is the word 'adjusted,' which refers to the fact that you can affect this important total by depositing pre-tax contributions into a 401(K) or similar account. The more you contribute to your 401(K), the less you'll end up owing in taxes. And since the funds in a 401(K) are never taxed if wait until retirement age to withdraw them, you'll actually be saving money TWICE – when you put the money in and when you take it out to spend it.
Don't pay off your student loans. Normally you're advised to pay off debts ASAP so that you won't have to pay as much interest. In the case of student loans, that interest you're paying actually helps you at tax time because you can apply it against your AGI, thus reducing your taxes. Pay off those credit cards by all means, but save your student loans for last so that you can wring out every possible penny in deductions.
Buy a house. Having a mortgage can save you a ton of money on your taxes because mortgage interest is deductible. For the first few years after purchase, practically your entire house payment goes against the loan's interest – which means you'll be able to deduct a huge sum. As a bonus, you also get to deduct the money you pay each year for property taxes.
Pick the right filing status. Your filing status (single, married, head of household, etc.) has a major impact on your tax situation. Filing status determines both your tax rate and your standard deduction rate. Whatever your personal situation, you will probably have a choice of two or more filing statuses. For example, if you are married you can choose between Married Filing Jointly and Married Filing Separately. Single parents can file as Single but will often get a better deal on their taxes by filing as Head of Household.
Take college classes. If you have any unexplored interest in Mycenean pottery or ancient Chinese marketing strategies, pull out your local college's catalog and sign up for a course. Taking a college course makes you eligible for the Lifelong Learning Credit, and the class doesn't have to be job-related. Another option is to deduct your class-related expenses, which may end up saving you more than you'd get for taking the eduction credit.
Keep receipts. Charitable donations are a valid itemized deduction, so always get a receipt when you give and you'll be repaid for your generosity by the IRS. Other itemizable deductions include health care expenses, work-related expenses, and taxes paid to other entities (usually state and local governments). You can even deduct some of the costs you incur while job-hunting, like cab fares and employment agency fees. Save receipts for all of these expenses and odds are you'll end up with more to deduct – and a lower tax bill – than if you'd chosen the standard deduction.
Double-check old returns. If you missed some juicy deduction or credit on a return within the past three years, you have the option to file an amended return form. This can save you a lot of money if you forgot about a new dependent or missed an unusual credit. You'll need to fill out a fresh 1040 and also complete the 1040X form, which details the change. Note that the IRS tends to check amended returns more closely than regular returns, so be very sure that your information is accurate and complete.
Have your taxes prepared by a professional. Not only will an expert be more likely to get you the best possible deal, but you can even deduct your tax preparation fees! Many tax pros will offer guarantees so that if it turns out you paid more than you should, you'll get a reimbursement from the preparer. For added security, choose a CPA or Enrolled Agent to prepare your taxes.
Each year, check for new credits that may apply to you and review the IRS' rules for deductions. If you decide to do your own taxes, many programs exist that can walk you through your return. Finally, the most important tax-saving measure is taking the time to review your return carefully before you submit it.