Personal Finance

3 Best Tax Avoidance Strategies

Death and taxes

Tax avoidance and tax evasion are not the same thing. Tax evasion means breaking the law to avoid paying taxes; tax avoidance means getting your tax bill as small as possible using legal methods. Here are some ideas for cutting back on your taxes that won't land you in jail.

Go back to school (or send your kids)

There are two fabulous educational credits just waiting for you to claim them.

The American Opportunity Credit can reduce your tax bill by up to $2,500, and this credit is partially refundable (meaning that even if your taxes owed are lower than the credit amount, you can receive part of the credit amount as a refund). It's available for students pursuing a four-year degree (taxpayers with dependents in college can also claim it). The credit applies to qualified education expenses such as tuition, fees, and required course materials. You can claim the full amount of such expenses up to $2,000, and 25% of the next $2,000. If you already have a four-year degree, or if your adjusted gross income is $180,000 or higher (for married-filing-jointly taxpayers) or $90,000 or higher (everyone else), you can't claim this credit.

Then there's the Lifetime Learning Credit , which is available to taxpayers who pay qualified higher-education expenses for themselves or an eligible spouse or dependent. The LLC allows you to claim up to 20% of the first $10,000 in qualifying educational expenses for any sort of postsecondary class, including job-related courses. In other words, the credit can cut up to $2,000 off your tax bill, although it's not refundable, which means you can't take more than the amount of your taxes owed. You must have a modified adjusted gross income under $131,000 (if married filing jointly) or $65,000 (all other filing statuses) to qualify for this credit.

Death and taxes

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Save for retirement

Saving for retirement is a necessity for just about everyone, so why not make it a double whammy by getting a tax break for it as well? If you're a married-filing-jointly couple with adjusted gross income under $62,000, a head of household with AGI under $46,500, or any other tax filer with AGI under $31,000, then you may be eligible for the Savers Tax Credit. This credit allows you to chop up to $2,000 off your tax bill if you contributed to any sort of tax-deferred or Roth retirement savings account.

If you don't qualify for the Savers Tax Credit, you may still be able to deduct the contributions you made to your tax-deferred IRA. This deduction is available to anyone who doesn't have access to an employer-provided retirement plan. If you are covered by such a plan, then in order to take the deduction, you must have an adjusted gross income under $119,000 if married filing jointly, $10,000 if married filing separately, or $72,000 as a single filer or head of household.

Finally, contributions to a tax-deferred workplace plan such as a 401(k) come out of pre-tax dollars, so those contributions are automatically subtracted from your taxable income and thereby reduce your tax bill for the year.

Have children

OK, so maybe you shouldn't have kids just to save some money on your tax bill (trust me, the diapers alone will cost you more than any tax break). But if you're already a parent, you need to know about the tax credits that may be available to you.

First, there's the Child Tax Credit, which knocks up to $1,000 off your tax bill per qualifying child. A child must be under the age of 17, related to you, living with you, and your dependent. The Child Tax Credit is not refundable, but if it's more than your tax bill, you may qualify to also take the Additional Child Tax Credit , which is refundable.

Next, there's the Child and Dependent Care Credit, which gives you a tax credit for day care expenses you incurred for your under-13 child, so long as the day care was necessary to allow you to work or look for work. The amount of the credit you can claim is based on your adjusted gross income; if your income is over $43,000, the credit is capped at 20% of up to $3,000 in expenses if you have one qualifying child, or $6,000 in expenses if you have multiple qualifying children. This credit is nonrefundable.

Finally, your kids can also make it easier for you to qualify for other credits, such as the Earned Income Tax Credit or the aforementioned education credits.

Other tax breaks

Owning a house, contributing to charities, and making student loan payments can all result in significant tax breaks, but there are plenty of other ways to save on your taxes. To get the best possible deal, have a tax pro prepare your return instead of trying to do it yourself -- they'll probably save you more than enough to cover the cost of their fees. And did I mention that tax preparation fees can be deductible, too?

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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