There are several ways to potentially lower your tax bill when you understand all of the deductions, credits, and strategies that are available to you.
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1. Choosing Itemized vs. Standard Deduction
The standard deduction takes one fixed lump sum off your bill. If you incurred several tax write-offs that add up to more than that amount, consider itemizing for the best result.
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2. Open a Health Savings Account (HSA)
Contributions can be deducted from your taxes (even if you don’t itemize), plus account withdrawals for medical purposes are tax-free.
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This account requires a high-deductible healthcare plan.
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3. Use Credits for Dependents
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The partially refundable Child Tax Credit puts $2,000 toward your tax bill for dependents under age 17 up to a certain level of income. If you’re a caregiver for a parent or other adult, you can claim a $500 nonrefundable tax credit.
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4. Create an Energy Efficient Home
Any eco-friendly upgrades you made to your home in 2020 could qualify you for a tax credit of up to $500.
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5. Write off Student Loan Debt
If you’re paying off student loans, you can deduct up to $2,500 of the interest from your taxes. The CARES Act suspended student loan interest in 2020, but this is still a good credit to use for tax year 2021.
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6. Sale Home Exclusion
Eligible homeowners who sold their primary residence for more than they originally paid won’t be taxed on the gain. For example, if you bought your home for $200,000 and sold it in 2020 for $400,000, you wouldn’t owe tax on the $200,000 increase. Gains from an investment property on the other hand would be taxed.
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