7 Tax Breaks to Take Advantage of This Year

Let’s face it: The United States tax code is complicated. Save money on your taxes with these tips.
taxes

Each year, we’re responsible for filing our taxes, taking into account our sources of income, whether from wages, investments, inheritance or any other revenue stream. Calculating what we owe can be convoluted and complex, even on relatively simple returns.

When you’re building wealth and planning for retirement, it’s important to not leave any money on the table. That’s why it’s important to point out that a fiduciary financial advisor can help you optimize a tax strategy and identify savings opportunities to lower your tax liability.

An advisor can also help you manage assets and plan for retirement, so you can worry less about meeting your financial goals. According to a 2021 Fidelity study, financial advice can add between 1.5% and 4% to account growth over extended periods.

7 Tax Breaks to Take Advantage of This Year

Mortgage Interest Deduction

The mortgage interest deduction has a reputation as a boon to the middle class. In fact, it gives a sizable tax break to wealthy filers, too.

There are two reasons for this. First, any tax deduction is more valuable the higher your tax bracket. Second, the more expensive your house, the more you deduct. Third, you can also claim the mortgage deduction on second homes.

Deductible IRA Contributions

Say you have a 401(k) through work that you fund with pre-tax dollars. That automatically reduces your taxable income.

If you’re low- or middle- income, you can get an even bigger tax break by contributing to a traditional IRA and taking an above-the-line tax deduction when you fill out your tax returns. Your taxable income decreased by the amount you contribute to your IRA.

A wealthy individual in the same position would not be able to deduct his or her IRA contributions.

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The Home-Sale Exclusion

If you sell your home and realize a profit, you won’t owe the IRS long-term capital gains taxes on the first $250,000 in profit (or $500,000 for a married couple filing jointly).

Since most middle-class folks won’t see more than $250,000 in profits from the sale of their primary residence anyway, the home-sale exclusion represents a nice tax break for the middle class. It’s one of the reasons owning a home can make financial sense.

The Saver’s Tax Credit

Working class Americans who manage to put together some savings can claim the Saver’s Tax Credit when they fill out their returns. It’s a tax break designed to give people an incentive to save money.

This is especially important because so many people lack an emergency fund and have zero or insufficient retirement savings.

The Saver’s Tax Credit is not refundable. It can reduce your tax bill to zero, but if the amount of your credit is greater than what you owe the IRS you won’t get the difference refunded to you.

One smart way to save money on your taxes each year is through tax breaks, in the form of deductions and credits. A financial advisor well-versed in tax law can help identify which you could qualify for to potentially save on your taxes.

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American Opportunity Tax Credit

The American Opportunity Tax Credit provides a tax credit for eligible students participating in a higher education program after high school.

You can get 100% of the credit on your first $2,000 of annual educational expenses and 25% of credit on the next $2,000 in expenses per student. Even if the qualifying educational expenses are more than $4,000 per year, you can only receive a maximum credit of $2,500 per year for each student for a maximum of four years.

The credit is also partially refundable if the credit ultimately brings your total tax bill to $0. In this case, you may be able to receive up to 40% of the credit amount (up to $1,000) refunded to you.

Lifetime Learning Credit

This credit is for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution.

This credit can help pay for undergraduate, graduate and professional degree courses – including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. It is worth up to $2,000 per tax return.

Tax-Deductible Donations

Donations to qualified charities are tax deductible. For the very wealthy, regular giving – of money, stock, art and other valuables – is a tried-and-true way of minimizing taxes.

To qualify for the deduction, the charity must be eligible and you must be able to document that you received no goods or services in exchange for your donation.

The Best Way to Save on Taxes

The tax code is extremely complex and can be difficult to understand if you’re not an expert.

If you’re looking for a way to decrease your tax burden, we recommend finding a financial advisor. They can help you understand your options and look for ways to save money on your tax bill, make smart investments and plan for retirement.

If you need help finding a financial advisor, we created a free quiz to help Americans find and vet qualified financial advisors who serve their area.

This quiz asks you a few questions, then matches you with up to three fiduciary financial advisors. You can compare your advisor matches based on their specialty, pricing, and more. You even earn three free consultations with each of our matches, so you can compare them and be fully prepared to pick a financial advisor.

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