How to Reduce Your Tax Bill in 2024? [US Guide]

Whether you're a freelancer, homeowner, investor, or military member, here are 20 plus intelligent tactics to help you optimise your tax situation in 2024.

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1. Boost your retirement savings and cut taxes

If you are contributing to retirement accounts such as a 401(k) or IRA, it can reduce your taxable income, potentially lowering your tax liability. By deferring taxes on these contributions until retirement, you can save currently and invest in your future. Keep track of your contributions for accurate reporting on Form 5498.

Example:

Sarah, a 35-year-old marketing manager, contributes $6,000 to her IRA every year. This contribution reduces her taxable income by $6,000, lowering her tax liability. By the time she retires, she will have a significant nest egg, and she has saved on taxes every year she contributed.

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2. Make the most of workplace FSAs

Flexible Spending Accounts (FSAs) let you set aside pre-tax dollars for medical or dependent (if eligible) care expenses, reducing your taxable income. If your employer offers FSAs, take advantage to save on healthcare or childcare costs. Maintain records of your expenses for accurate claims on Form 2441.

Scenario:

John, an IT specialist, sets aside $2,500 in his Flexible Spending Account (FSA) for medical expenses. Throughout the year, he uses this money for prescription medications, doctor's visits, and dental work. By using pre-tax dollars for these expenses, John lowers his taxable income and saves money on healthcare costs.

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3. Deduct expenses from your side hustle

Freelancers and side jobbers can qualify for various business deductions to offset earnings. Keep detailed records of expenses like supplies, equipment, or mileage, and report them on Schedule C (Form 1040) to lower your taxable income.

Example:

Emily runs a small graphic design business on the side. She spends $1,200 on a new laptop and $500 on design software. By keeping detailed receipts and reporting these expenses on Schedule C, Emily reduces her taxable income from her side hustle by $1,700, effectively lowering her tax bill.

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4. Home office deductions

If you use a part of your home exclusively for business, you may be eligible for deductions on expenses like utilities, rent, or mortgage interest. Use Form 8829 to calculate and claim the home office deduction, ensuring you meet IRS eligibility criteria.

Scenario:

Tom works from home as a freelance writer. He has a dedicated office space in his apartment. Tom calculates that 15% of his apartment's square footage is used for business. He deducts 15% of his rent, utilities, and internet costs on Form 8829, significantly reducing his taxable income.

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5. Rent your home for business use

Renting your home for business meetings or events can generate extra income and allow you to deduct related expenses such as cleaning, repairs, or utilities. Keep detailed records of rental agreements and expenses to claim deductions on your tax return.

Example:

Lisa rents out her home for a weekend business retreat. She earns $1,000 in rental income and incurs $200 in related expenses for cleaning and utilities. Lisa can deduct the $200 in expenses, reporting the net income of $800 on her tax return.

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6. Business travel deductions

You can deduct expenses for the business portion of trips, including airfare, lodging, and meals. Keep detailed records, including receipts and itineraries, to substantiate your deductions on Schedule C (Form 1040).

Scenario:

Mark travels to a conference in another state. He spends $500 on airfare, $300 on lodging, and $200 on meals. By keeping all receipts and documenting the business purpose of the trip, Mark deducts these expenses on Schedule C, reducing his taxable income by $1,000.

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7. Accelerate depreciation on business assets

Speeding up depreciation allows you to deduct the cost of business assets more quickly, reducing your taxable income in the current year. Use Form 4562 to claim depreciation deductions for eligible property like equipment or vehicles.

Example:

Rachel purchases new machinery for her small manufacturing business. The machinery costs $10,000. By opting for accelerated depreciation, Rachel deducts a significant portion of the machinery's cost in the first year, lowering her taxable income substantially.

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8. Optimise your compensation structure

Shifting part of your compensation from wages to distributions, such as dividends or profit distributions, can reduce your taxable income / overall tax liability. Consult a tax professional to explore optimal compensation strategies.

Scenario:

Steve, a small business owner, pays himself a salary of $50,000 and takes $20,000 in dividends. By adjusting his compensation structure, Steve reduces the amount of Social Security and Medicare taxes he pays, effectively lowering his overall tax liability.

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9. Reduce self-employment tax

Self-employed individuals pay both the employer / employee portions of Social Security and Medicare taxes. However, you can deduct half of these taxes on Schedule SE (Form 1040), reducing your taxable income and overall tax bill.

Example:

Anna, a self-employed consultant, earns $100,000 in net income. She pays $15,300 in self-employment taxes (both employer and employee portions). However, she can deduct half of this amount ($7,650) on her Form 1040, reducing her taxable income.

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10. Benefit from education credits

The Lifetime Learning Credit and American Opportunity Tax Credit provide tax credits for qualified higher education expenses. Determine your eligibility and claim these credits on Form 8863 to offset education costs and reduce your tax liability.

Scenario:

Mike pays $4,000 in tuition for his part-time MBA program. He qualifies for the Lifetime Learning Credit, which provides a 20% tax credit of qualified education expenses, up to $2,000. Mike claims an $800 credit on Form 8863, reducing his tax bill.

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11. Invest in a 529 plan

Contributing to a 529 plan allows you to save for education expenses with potential tax benefits, such as tax-deferred growth / tax-free withdrawals for qualified expenses. Keep track of contributions and withdrawals to comply with IRS rules.

Example:

Jane contributes $5,000 to her daughter's 529 plan. The money grows tax-deferred, and when her daughter uses it for college expenses, the withdrawals are tax-free. This strategy helps Jane save for her daughter's education while enjoying potential state tax deductions.

Learn more about Inkle Tax. 

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12. Earned income tax credit (EITC)

The EITC offers a refundable tax credit to low-to-moderate-income individuals and families, potentially resulting in a significant tax refund. Check your eligibility based on income and filing status, and claim the credit on Schedule EIC (Form 1040).

Scenario:

Paul, a single father with two children, earns $30,000 a year. Based on his income and filing status, he is eligible for the Earned Income Tax Credit (EITC) and receives a $3,000 tax refund, which significantly boosts his financial situation.

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13. State sales tax deductions

If you live in a state with no income tax or make significant purchases subject to sales tax, itemising state sales tax deductions can maximise your savings. Use Schedule A (Form 1040) to itemize and claim these deductions.

Example:

Karen lives in a state without an income tax but makes significant purchases throughout the year. By keeping receipts and itemising her state sales tax deductions, Karen reduces her overall tax bill.

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14. Charitable donations

Donating to qualified organisations can provide tax deductions, reducing your taxable income. To claim deductions, maintain records of donations, including receipts, and report them on Schedule A (Form 1040).

Scenario:

David donates $1,000 to a local charity. He keeps the receipt and reports the donation on Schedule A. This reduces his taxable income by $1,000, and he supports a cause he cares about.

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15. Donate RMDs to charity

If you're required to take minimum distributions from retirement accounts, consider donating all or part of your RMD directly to charity. This satisfies your distribution requirement without increasing your taxable income.

Example:

Mary, a retiree, has to take a $5,000 required minimum distribution (RMD) from her IRA. Instead of taking the distribution herself, she donates it directly to a qualified charity. This satisfies her RMD requirement without increasing her taxable income.

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16. Adjust capital gains tax basis

Adjusting the cost basis of investments can minimise capital gains tax when selling assets. Keep accurate records of purchase prices, reinvested dividends, and capital improvements to calculate your adjusted basis on Form 8949.

Scenario:

Alex buys 100 shares of stock for $1,000. Over the years, he reinvests $200 in dividends. When he sells the stock for $1,500, his adjusted basis is $1,200 ($1,000 + $200), so his taxable gain is $300, not $500.

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17. Donate appreciated stock

Donating appreciated stock to charity avoids capital gains tax on the appreciation while allowing you to claim a charitable deduction for the stock's fair market value. Consult a tax advisor to explore this strategy.

Example:

Linda donates stock worth $5,000 to a charity. She originally paid $3,000 for the stock. By donating the stock, she avoids paying capital gains tax on the $2,000 appreciation and claims a $5,000 charitable deduction.

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18. Military service deductions

Military members may qualify for various tax benefits, including deductions for unreimbursed expenses and combat pay exclusions. Report military-related income and expenses accurately to take advantage of these benefits.

Scenario:

James, an active-duty military member, incurs $1,500 in unreimbursed expenses for uniforms and travel. He deducts these expenses on his tax return, lowering his taxable income.

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19. Energy-efficient home improvements

Investing in energy-efficient home improvements can qualify you for tax credits and deductions. Explore available credits on Form 5695 and claim them for eligible improvements to reduce your tax liability.

Example:

Susan installs solar panels on her home for $10,000. She qualifies for a 26% federal tax credit, reducing her tax liability by $2,600. This not only helps the environment but also provides significant tax savings.

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20. State and local tax breaks

Research and claim available state and local tax deductions, credits, and incentives to maximise your savings. These may include property tax deductions or mortgage interest deductions.

Example:

Lisa pays $3,000 in property taxes and $2,000 in state income taxes. By itemising these deductions on Schedule A, she reduces her overall federal taxable income by $5,000.

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21. Mortgage interest deductions

Deducting mortgage interest on your primary or secondary residence can provide significant tax savings. Keep records of payments and report them on Schedule A (Form 1040).

Scenario:

Robert pays $12,000 in mortgage interest on his home. By itemising his deductions on Schedule A, he reduces his taxable income, providing substantial tax savings.

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Closing thoughts

Dealing with taxes can feel daunting, but it doesn't have to be. By trying out these 20 smart strategies, you can cut down your tax bill and boost your savings in 2024. Whether you're freelancing, owning a home, investing, or serving in the military, these tips offer practical ways to make better financial decisions. It's never too early to start planning. Take charge of your finances now and make the most of these tax-saving opportunities to keep more of your hard-earned money in your pocket.

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