How to Save Money on Income Taxes

Nobody likes paying income taxes, but they are a necessary evil. Income taxes pay for programs like critical infrastructure, national defense, social and education programs, to name a few. Try these ideas to trim your income tax bill. With any luck, you'll get a refund.

Difficulty: Moderately Challenging

Instructions

1. Contribute to your employer-sponsored retirement fund to save money on your income taxes. Your employer will deduct your contribution from your gross pay before calculating your income taxes owed. Reducing your gross income reduces the overall income tax you pay. As of 2007, the maximum contribution an individual can make to a 401(k) or 403(b) is $15,500 per year. After 2007, the maximum contribution limit will adjust up as a function of increases in the cost of living index.

2. Make a catch-up contribution. If you're 50 or older, you can make a catch-up contribution to your employer-sponsored retirement account. As with regular retirement account contributions, catch-up contributions reduce your pre-tax gross income meaning you pay less income tax. For 2007, the most you can contribute is $5,000 and, as with regular contributions, that cap will adjust up based on the cost of living index for 2008 and beyond.

3. Clean out your closets and make a charitable donation to Goodwill, The Salvation Army or another charitable organization. Just make sure you get a receipt. Charitable donations, be they cash, goods or services, are deductible.

4. Participate in your employer-sponsored flexible spending plan. If you pay child care expenses or have out-of-pocket medical expenses for co-pays, over-the-counter medicines or medical equipment and other such items, you can submit your receipts to a dependent care or medical care flexible spending account to get reimbursed with pre-tax contributions that your employer deducts from your paycheck. The money comes out of your gross pay before taxes are deducted, which reduces the overall amount that gets taxed. That means you save money on your federal income taxes.

5. Invest in energy efficient and solar power home improvements. Thanks to the Energy Policy Act of 2005, homeowners who make certain energy efficient home improvements or install certain solar power equipment are eligible for tax credits of up to $2,000, which is a dollar-for-dollar reduction of your net income tax owed.