Consider other means of reducing tax liability.
The steps listed above are only a few of the ways your tax liability can be diminished. Some others you might want to consider are:
But there's a caveat. Ideally, you should pay your entire tax balance at the time you submit Form 4868 based on what you think you owe. Otherwise, you're likely to accrue interest and penalties on any unpaid balance. If you don't have the money, remit at least as much as you can.
- Make “green” home improvements. Residential energy-efficient home improvements (like solar water heaters and solar panels) may provide you with a tax credit of up to 30% of the cost of the improvements. [11]
- Earn tax-free income. Some income or benefits may not be subject to income tax, thus lowering your tax liability. Consider investing in tax-exempt bonds [12] or opening a health savings account.[13] Tax-free income sources may still trigger alternative minimum tax in some cases, so it's smart to consult with a tax accountant for advice.[14]
- Look into a child-care reimbursement account. If your employer offers one, use it. You'll be paying your child-care bills—but with pre-tax dollars. Let's say you have $5000 in child care expenses per year. You'd probably have to earn about $7500 to net that $5000, because of the taxes on that income. With a child-care reimbursement account, you avoid both income and Social Security taxes.[15]
- See other wikiHow articles, including Save Money on Taxes and Pay Less in Taxes, for more tips.
But payroll deductions may be a big surprise if you’ve sued, and several years later are settling. You might be expecting a big check without tax withholding. Many people are surprised that a former employer can withhold taxes when you no longer work for them. How can a payment be “wages” subject to withholding, you might ask, if you haven’t been an employee for years? If you sue for wrongful termination and settle many years later, isn't there a time limit?