Pre-tax retirement contributions, flexible spending account contributions, charitable donations, tax credits and tax deductions reduce the amount of income tax owed. Certain expenses, including qualifying medical expenses, interest, property taxes and business expenses, help taxpayers save on taxes owed.Continue Reading
Pre-tax contributions, such as qualifying retirement accounts or flexible spending accounts, reduce the taxpayer's taxable income. For example, a taxpayer who earns $30,000 annually and contributes $2,000 to a flexible spending account has a taxable income of only $28,000. This means a smaller amount of taxes owed.
Qualifying deductions also lower taxable income. The amount a particular deduction reduces taxable income depends on the type of deduction and the tax rate for that particular taxpayer.
Tax credits lower the amount of the taxes owed rather than lowering taxable income. The credits go to qualified taxpayers for specific events or expenses, such as college expenses or child care. One example is the Earned Income Credit, which is designed for families with low to moderate income.
Taxpayers should review changes in the tax laws each year to maximize deductions and tax credits. For consumers with numerous deductions or those who don't feel comfortable with the legal aspect of filing a tax return, a tax preparer or accountant can complete the return per the most recent guidelines.Learn more about Income Tax