If you feel like your accountant or accounting software sprinkles magic dust over your shoebox of receipts and then shakes a Magic Eight Ball to come up with the amount of tax money you owe every year, it's time to take action -- especially if you aren't convinced that you're receiving of all the deductions you deserve.
The first step is to understand the basics of federal taxes, including ways to save. Simply put: The more deductions you can claim, the less you'll pay out-of-pocket (or the more you'll get back) at the end of the fiscal year. If you've experienced any major life changes, such as a marriage or a new baby, then you can usually benefit from additional tax breaks. However, you don't need a major life event to save money on your taxes. Commonly overlooked tax cuts include the deductions available for charitable gifts, moving expenses, job-hunting costs and transportation expenses sustained during volunteer work [source: Bank Rate].
Keep in mind that you may be living in your biggest tax break of all: your home. The interest you pay on a mortgage and the property taxes you pay can be deducted from the taxes you owe [source: U.S. Department of Housing and Urban Development]. And if you cut household energy costs or install new, energy-saving appliances, you could qualify for tax credits [source: Energy Star].
You can also save on your taxes by increasing the amount you contribute to your future retirement. Many employers offer, and will sometimes match, 401(k) savings accounts. If you are self-employed, or if your employer won't help fund a 401(k), open a Roth Individual Retirement Account (IRA) and contribute the maximum each year, which, as of 2011, was $5,000 for those younger than age 50 and $6,000 for those 50 years and older. Both types of accounts will help reduce the amount of taxes you owe because your contributions are deductible [source: Franklin].
To reduce the amount of income tax that you pay, you may be able to designate part of your wages to pay for childcare or medical expenses. Many employers offer flexible spending accounts. You can contribute pre-tax money to these accounts, which means you won't pay income tax or Social Security tax on the funds [source: Franklin].
If you'd really like to slash your tax bill, consider starting a home-based business. Even part-time concerns offer significant tax deductions, including those for vehicle mileage, office supplies, computer equipment, telephone service, Internet access, business travel, meals, entertainment expenses and a portion of your home's utilities [source: Edwards].
If you hire a professional to prepare your taxes, as of 2011 you could expect to spend $400 or more if your return required more than just a basic form [source: Barrington]. If you opt to complete tax forms using tax preparation software, you can save money by looking for online coupon codes or by asking the financial institutions with which you already do business whether they offer a discount. If your income is below the $58,000 mark, you can go to the Internal Revenue Service's Web site to prepare and file your federal tax return at no cost -- as long as you're comfortable with filling in your tax forms on your own. The site also provides a list of companies that may provide assistance at little or no cost [source: IRS].
- Bank Rate. "Overlooked Tax Breaks." (Oct. 14, 2011) http://www.bankrate.com/finance/video/overlooked-tax-breaks.aspx
- Barrington, Richard. "How Much Will it Cost to Get Your Taxes Done?" GetRichSlowly.com. March 16, 2011. (Oct. 14, 2011) http://www.getrichslowly.org/blog/2011/03/16/tax-prep-costs-how-much-will-it-cost-to-get-your-taxes-done/
- Bell, Kay. "Complete our 10-point Tax Return Checklist." (Oct. 14, 2011) Bank Rate. http://www.bankrate.com/finance/money-guides/complete-our-10-point-tax-return-checklist-1.aspx
- Edwards, Paul. "Tax Tips for Home Business Owners." Entrepreneur. Feb. 24, 2006. (Oct. 14, 2011) http://www.entrepreneur.com/article/83754
- Energy Star. "Products, Home Improvement, Buildings and Plants, New Homes." (Oct. 14, 2011) http://www.energystar.gov/index.cfm?fuseaction=find_a_product.
- Franklin, Mary Beth. "71 Ways to Cut Your 2010 Tax Bill." Kiplinger's Personal Finance. May 2010. (Oct. 14, 2011) http://www.kiplinger.com/features/archives/2009/04/diyalltaxpayers.html
- Internal Revenue Service. "FreeFile." http://www.irs.gov/efile/article/0,,id=118986,00.html
- U.S. Department of Housing and Urban Development. "Common Questions for First-time Homebuyers." (Oct. 14, 2011) http://hud.gov/buying/comq.cfm