During the 2019 tax filing season, the IRS received nearly 156 million income tax returns. Filing and paying taxes can be a hassle each year, but it doesn’t have to be expensive. Besides paying attention to money-saving tips when filing your return, being aware of which tax breaks to claim on your return can help you maximize your potential tax refund.
Last updated: March 13, 2020
Ways To Save Money When Filing Taxes
According to the National Society of Accountants, the average tax preparation cost to file a tax return without itemizing is $188, and that amount jumps to $294 if you itemize deductions. Here are 16 solutions for how to save money when filing taxes:
1. Keep Receipts Throughout the Year
It can be hard to remember what you did yesterday, much less what you did throughout the previous year — but that’s exactly what you’re asked to do when you file your taxes. Forgetting some of your expenses, such as gifts to charity, business expenses or medical costs, could cause you to pay more in taxes than you’re required. To save the most money when filing taxes, keep records throughout the year of any expenses that qualify for tax deductions and tax credits, so you’ll have a full list when tax time comes around.
2. Be Prepared To Pay Taxes on Time -- Even if You Can’t Afford It
When it comes to collecting what it’s owed, the IRS can be, well, demanding. Even if you file for a tax extension, you’re required to pay the amount you owe by the original filing date (typically, April 15). Failure to do so can trigger a wave of IRS penalties and fees.
To avoid this situation, one option is a personal loan from an institution like PenFed. Personal loans at a credit union like PenFed can start with interest rates as low as 6.49%¹, which is much lower than most credit cards, for example. IRS late payment fees can reach as high as 25% of the amount owed, so you’d be wise to save money on interest rates if you don’t have the cash to pay your taxes upfront.
3. Utilize Taxpayer Assistance and Counseling Programs
The IRS has multiple programs to help low-income taxpayers file their income taxes for free. The Volunteer Income Tax Assistance program has sites that you can visit to have your taxes prepared for free if your income is $56,000 or less, and VITA sites have IRS-certified volunteers who can file your return electronically. In addition, the Tax Counseling for the Elderly program specializes in providing free tax assistance for taxpayers ages 60 and older.
4. Use IRS Free File
You might still qualify to use the IRS’ Free File Software if your income is too high to qualify you for VITA assistance. When your income is less than $69,000, you can use the software from the IRS to file your federal tax return online for free. Plus, you might also be able to file your state tax returns for free.
When your income is $69,000 or more, you can use free, fillable forms from the IRS instead, but you have to know how to do taxes yourself as the instructions on the forms only provide basic guidance.
5. Make a Last-Minute IRA Contribution
For most deductions, if you haven’t qualified by the end of the calendar year, it’s too late when you file your taxes. The deadline for making IRA contributions, however, is your tax-filing deadline, not including extensions.
When you’re looking for a last-minute way to lower your tax bill, and you haven’t already maxed out your traditional IRA, you can contribute. Tell your financial institution to count the contribution for the prior year, or it will default to a current tax year IRA contribution.
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6. Defer Income
Your income tax liability is directly tied to the amount of income you report in any given year. Thus, if you can lower the income you generate in a particular tax year, you can also lower the amount of tax you owe. While it doesn’t make sense to lower the actual income you’re paid just to avoid taxes, you may be able to defer some of your income into the next tax year, thereby avoiding tax on that money until the following year.
For example, if you’re paid a year-end bonus, see if you can request that it’s paid to you in January rather than in December. This way, you won’t have to report that income until the next tax year.
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7. Give To Charity
No, you shouldn’t give all of your money away simply in an effort to avoid taxes. However, Americans by nature are generous of spirit. In 2018, for example, Americans made nearly $428 billion in charitable donations. If you’re a giving individual to begin with, don’t forget to claim your monetary reward by claiming those deductions on your taxes.
Granted, you’ll need to make a lot of donations to generate any additional tax benefit, as those claiming the standard deduction don’t enjoy any additional tax benefit from making charitable contributions. However, if you’re already itemizing — or if you can make enough charitable contributions to exceed the personal deduction threshold — then you can be financially rewarded for doing your good deeds.
8. Group Medical Expenses
Medical expenses are another tax benefit that doesn’t apply to those taking the standard deduction. However, even if you’re itemizing, there’s a tough hurdle to clear if you want to write off your medical expenses. For tax year 2019, you can only deduct expenses that exceed 7.5% of your adjusted gross income. For tax year 2020, that level jumps to 10% of your AGI.
To help you reach this amount, try to bundle your medical expenses into a single year. For example, if you have a procedure that costs 7% of your AGI, you won’t get credit for it as a deduction unless you have additional expenses to add on — so make this the year that you also go in for all of your regular checkups or any other medical procedures or costs you have been putting off.
9. Open a Health Savings Account
A health savings account is a great way to lower your lifelong taxes because there are so many tax benefits attached to it. In addition to getting a tax deduction on your contributions, your earnings grow tax-deferred, and you can actually withdraw all of your contributions and earnings tax-free if you use the money for qualified health expenses.
Before you contribute, however, be sure you are eligible. You’ll need to have a high-deductible health plan to qualify, which means a plan with a deductible of at least $1,400 for individual coverage, or $2,800 for family HDHP coverage for tax year 2020.
10. File For a Tax Extension
When you’re pressed for time to get your income tax return done by the April deadline, you can file for an extension to avoid a penalty. The IRS imposes a failure-to-file penalty equal to 5% of the taxes owed for each month or partial month that the taxes are late, up to a maximum 25% penalty. When your tax bill is $0, however, a penalty will not apply, as the penalty is the smaller of a fixed amount or a percentage of the amount you owe, which is zero.
Filing for an extension is free, but it doesn’t extend the time you have to pay. You’ll need to pay what you expect you’ll owe to avoid additional interest and penalties being assessed. If you can’t afford to pay your tax bill now, don’t just skip paying. Consider your options, like using a personal loan or even a home equity line of credit to pay your tax debt, so you don’t face future penalties. You might not realize it, but HELOCs can be used for things like paying off debt, such as the tax money you owe the IRS. If you have equity in your home, this might be a good option since failing to file and pay your taxes can result in a maximum 25% penalty, but a HELOC through PenFed can come with a fixed APR as low as 3.49%.²
11. Go Green
Using solar panels and driving an electric car aren’t just ways to address the environment. You can actually financially benefit from these green actions as well. The Solar Investment Tax Credit provides a 30% tax credit for tax year 2019 (26% for tax year 2020) on both residential and commercial solar systems. For tax year 2019, you can earn a tax credit of between $2,500 and $7,500 for purchasing a new electric vehicle.
12. Trash Your Worthless Investments
Although the stock market has been booming for years, until recently, it’s entirely possible you have a worthless investment or two in your portfolio. If that’s the case, you can use that “trash” and turn it into cash, in the form of reduced taxes.
Although you can’t usually sell a truly worthless security on the open market, most firms allow you to sell valueless investments for $0.01, thus allowing you to report the transaction on your taxes and deduct your loss. You can also claim it as worthless by completing IRS Form 8949 when you file your taxes. The added benefit of selling a worthless security is that you won’t have to look at it on your statements any longer.
13. Offset Capital Gains With Losses
Securities don’t have to be worthless to trigger a tax benefit. If you’ve been racking up taxable gains left and right in the recent bull market, don’t be afraid to sell some of your losing positions to offset those gains. The IRS allows you to match losses with gains to reduce your taxable income. Additionally, if you have losses that exceed your gains, you can offset up to $3,000 in regular income as well.
If you go down this path, be aware of the wash sale rules, which disallow any losses if you buy or sell the same security — or a “substantially identical security” — within 30 days of your trade.
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14. Contribute To a 529 College Savings Plan
Are you tucking away savings for your kids’ future college expenses? Consider a 529 College Savings Plan. Contributions to these plans are tax-deductible, and earnings within the plans can be withdrawn tax-free if used for qualifying college expenses. Rather than tucking your college funds into a savings account at a local bank, you can generate immediate tax benefits for yourself by choosing a 529 plan.
Of course, 529 plans aren’t as flexible as bank savings accounts, as the money is dedicated to school expenses and can’t be withdrawn without penalty. However, they can reduce your current income tax liability, so talk with your financial and tax advisers and see if they make sense for you.
15. Don't Be Afraid of Deductions
Some taxpayers are so afraid of audits that they avoid taking certain deductions that they are legitimately entitled to. The home office deduction is a great example. There have been many articles published about how the home office deduction is a “red flag” for audits. However, if you legitimately use a home office, you are entitled to take that deduction. Audits overall remain rare — in 2019, for example, only 0.45% of returns were selected for audit. But, even if you are audited, you have nothing to fear if you have the documents to back up your deductions.
16. Don't Forget About Your Children and Other Dependents
Before the tax law changed in 2018, filers could claim exemptions for each of their children. Although those exemptions are now a thing of the past, tax filers can still claim a child tax credit, which is worth up to $2,000 per child. Up to $1,400 of that credit is refundable, meaning you’ll actually receive a check from the IRS if the credit exceeds your tax due.
Other credits exist as well, including the credit for other dependents. This credit applies to children ages 17 and older who are still dependents. The maximum amount of this credit is $500 per dependent.
Keeping More of Your Return
No matter what your income, you have options to save money when you file your return. From free-file options to making sure you get every deduction you’re entitled to, following these tips minimizes the expense of filing your taxes. Paying what you legally owe is required, but paying a fortune isn’t.
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Michael Keenan contributed to the reporting for this article.
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¹Annual Percentage Rate (APR) effective March 1, 2020, and subject to change.
² The fixed rate is eligible for all Home Equity 10/20 applications received by March 31, 2020. This offer is only available for advances processed on the day the Home Equity account is opened. If a balance is remaining on the advance on April 21, 2021, the rate will revert to the note rate.