Taking Control of Your Tax Bill with Smart Strategies

Taxes are often seen as an unavoidable burden. They’re an annual ritual that can leave many feeling powerless over their financial outcomes. With a careful approach and a basic understanding of the tools available, taxpayers can impact their tax situation. 

Knowing how to leverage your deductions, credits, and withholding (W-4) adjustments, and employing tax planning strategies, can help lower your tax bill and align with your broader financial goals. 

Understanding tax deductions and credits 

Tax deductions vs. credits 

Tax deductions and credits work in very different ways. A tax deduction lowers your taxable income, which means you pay federal income taxes on a smaller amount. These are deductions such as mortgage interest, property taxes, or charitable contributions.  

In contrast, a tax credit directly reduces the amount of tax you owe, dollar for dollar. For example, if you qualify for a $1,000 credit, your tax bill drops by $1,000. Credits often provide greater savings than deductions, making them a powerful tool for taxpayers who qualify. 

Here are some of the most widely applicable options for deductions and credits for how to reduce your tax bill: 

Common tax deductions 

• Capital loss deduction: Investors who realize losses on stock sales can deduct those losses, helping to offset gains and reduce taxable income. 

• Charitable contribution deduction: Taxpayers who donate to qualified charities can deduct these donations, encouraging philanthropy while lowering their tax bill.  

• Home office expenses: Self-employed individuals who work from home may be eligible to claim the home office deduction, even getting to choose from two different methods. 

• Medical expense deduction: If unreimbursed medical related expenses exceed 7.5% of your adjusted gross income (AGI), you may be able to deduct the excess. 

• Property tax and interest deduction: Homeowners can deduct interest paid on mortgages and property taxes, making homeownership more affordable. Interest paid on margin loans is also deductible based on the amount of your qualifying investment income. 

• Deduction for tips and overtime: Certain service industry workers can deduct tips and overtime, ensuring fair taxation on variable income. 

• Senior deduction: For those age 65 and older, certain circumstances allow for an additional deduction of $6,000 per qualifying taxpayer.  

Valuable tax credits 

• Adoption credit: Most parents who have adopted a child can claim this credit to offset adoption-related expenses. 

• American opportunity credit: Undergraduate students can benefit from this four-year maximum credit to help pay for higher education. 

• Lifetime learning credit: This educational credit is available for attending accredited courses for those who no longer qualify for the American opportunity credit. 

• Child and dependent care credit: Individuals who pay for day care or similar costs for dependents can claim this credit. 

• Child tax credit: Parents and caretakers with eligible dependents can reduce their tax liability. 

• Credit for people who are elderly or disabled: Retired individuals on disability may qualify. 

• Earned income tax credit: Designed for taxpayers below specific income thresholds, this credit can provide significant relief. 

• Retirement saver’s credit: Taxpayers below a certain income level who contribute to an IRA can benefit from this credit. 

• Foreign tax credit: For those with foreign tax amounts paid or withheld on foreign sourced income, this credit helps avoid double taxation. 

• Car and truck deduction: Self-employed taxpayers who use their vehicles for work can deduct related expenses using one of two methods to lower their income.  

Optimizing tax withholding 

While deductions and credits are essential, many overlook the impact of their W-4 form. This is the document that tells employers how much tax to withhold from each paycheck. You can adjust your W-4 preferences at any time during the year. This flexibility offers opportunity to manage cash flow and tax obligations. 

W4 withholding strategies 

• Increase withholding to lower tax bill: If you want to avoid a large tax bill at year end, consider increasing your W-4 withholding. Electing single status even when married, or adding extra withholding per paycheck, can help ensure you don’t owe money come tax season. 

• Reduce withholding to increase income: Prefer more take-home pay throughout the year? You can reduce your W-4 withholding — but be mindful that this may result in a higher tax bill when you file your return. You can also consider quarterly estimated tax payments, if needed.  

These adjustments are not limited. You can make changes as your financial situation changes, ensuring your tax strategy remains aligned with your goals, as well as mitigating penalties.  

Taking advantage of professional guidance 

Navigating the complexities of the tax code can be daunting. While the strategies above offer a starting point, working with a qualified tax professional can help you lower your tax liability as well as maximize tax deduction options. They can also help you avoid costly mistakes and unnecessary interest and penalties.  

Tax professionals are required to stay current on changing tax laws and can tailor advice to your personal situation. This includes planning for retirement, managing investments, or supporting a family. 

Key takeaways 

Taxes don’t have to be a source of stress or uncertainty. By understanding the tax benefits available, making strategic W-4 adjustments, and seeking professional advice, you can transform your tax experience from reactive to proactive. 

Remember, proactive tax planning is not just about minimizing what you owe — it’s also about creating opportunities for financial growth, security, and confidence. 

If you’re ready to take control of your tax bill, consider reaching out to a trusted advisor. Mercer Advisors offers tax preparation and planning as well as comprehensive wealth management. Let’s talk.