Most tax savings for ordinary US taxpayers come from a few well-established rules rather than clever schemes. This is a general overview; limits change every year, so check the IRS figures for the current year.
1. Use tax-advantaged accounts
- Workplace retirement plans. Contributions to a traditional 401(k), 403(b) or similar plan reduce taxable income now. Roth contributions do not, but grow tax-free.
- Traditional IRAs. Contributions may be deductible depending on income and whether you have a workplace plan.
- Health savings accounts. If you have a qualifying high-deductible health plan, HSA contributions are deductible, growth is untaxed, and withdrawals for medical costs are tax-free.
2. Know credits from deductions
A deduction reduces the income you are taxed on. A credit reduces the tax itself, dollar for dollar, which usually makes it more valuable. Commonly missed credits include the Earned Income Tax Credit for lower-income workers, education credits, the child and dependent care credit, and the Saver's Credit for retirement contributions by lower and moderate earners.
3. Standard deduction or itemise?
Since 2018 the standard deduction has been large enough that most households do not itemise. If your mortgage interest, state and local taxes (subject to a cap) and charitable gifts are close to the standard deduction, "bunching" deductible expenses into alternate years can help.
4. Check your withholding
Getting a large refund means you lent the government money interest-free; owing a lot can mean penalties. The IRS Tax Withholding Estimator helps you adjust your W-4.
5. Harvest investment losses
In a taxable brokerage account, selling investments at a loss can offset gains and up to $3,000 a year of ordinary income, with the rest carried forward. Beware the wash-sale rule, which disallows the loss if you buy the same or a substantially identical investment within 30 days.
6. Keep records and file on time
Many deductions are lost simply because receipts or forms cannot be found. Free filing help is available through the IRS Volunteer Income Tax Assistance programme for eligible taxpayers.
What to avoid
Promoters of schemes that promise to eliminate tax, such as abusive trusts or inflated charitable deductions, are a recurring IRS target. If it sounds too good to be true, it usually is.
Sources
General information about the law as it stood when this page was updated, not financial, tax or legal advice. Rules and limits change; check the official source or a qualified adviser before acting.