Can You Be Paying Less Tax?

While you should never avoid paying taxes, there are ways you can use tax credits and deductions to pay less in taxes. You may be able to lower the amount of federal income tax you owe by claiming tax credits or taking advantage of deductions. Tax credits reduce your overall income-tax bill on a dollar-for-dollar basis, while deductions reduce the amount of your taxable income.

The IRS offers two kinds of deductions: itemized and standard. An itemized deduction is an expense that you can use to reduce your taxable income. Examples of common itemized deductions include charitable contributions, medical expenses, state taxes paid, mortgage interest, real estate taxes, and investment interest. A standard deduction is a set amount that the IRS allows taxpayers to subtract from their taxable income; the amount of the standard deduction depends on your filing status and age.

You can also take advantage of tax credits, which reduce your taxes dollar-for-dollar. Tax credits are more beneficial than deductions because they offer a greater reduction in taxable income. Examples of credits include the earned income tax credit, child and dependent care credit, adoption credit, education credits, retirement savings contributions credit, and various other credits.

Once again, no reliable or professional service will ever condone tax evasion – not paying what you owe. However, this doesn’t mean that you can’t reduce what you owe in the first place.

States with No Income Tax

Of course, one of the best ways to pay fewer taxes is to move somewhere that has no income tax. While some states do have an income tax, several don’t – Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Several of these states also offer exemptions for Social Security benefits as well as other retirement plans.

In addition to the above states that don’t have an income tax, several others don’t collect income taxes on Social Security benefits or other types of retirement income. These include Arizona, Arkansas, Hawaii, Mississippi, and Pennsylvania.

What if you’re an expat? Well, the way that you Forward Your Mail can make a difference. With a South Dakota mail forwarding service, you can have an address in South Dakota and pay no state income tax on your Social Security benefits. Plus, other retirement plan distributions are exempt from South Dakota taxes as well.

Even while living abroad, you can be eligible for some tax credits and deductions provided by the IRS. The Foreign Tax Credit, in particular, is designed to help U.S. citizens who are living abroad and paying taxes in another country to reduce their tax liability if the foreign taxes are higher than what they would pay in the U.S.

If you’ve not seen a mail forwarding service before, it works by having all of your mail addressed to a location in the state of your choice (such as South Dakota). The service then forwards the mail to you wherever you are. This is a great way to maintain an address for your tax and banking needs without physically being there all the time.

With many digital services these days, you can view your mail using an online portal, and forward or print it out as you wish. This means that even though you may be thousands of miles away, you can still stay on top of your finances and other affairs. If mail is irrelevant, you can even have it shredded rather than wasting money forwarding it to your address.