How to Save Money on Taxes
Filing your taxes in the U.S. or anywhere else is always a hassle, but it is possible to save some money in the process. Start by using your retirement funds and other savings accounts to their full advantage. Make charitable donations and keep track of your receipts. Look into all possible deductions and be prepared to itemize, if needed. You can also consult with a CPA who may be able to find even more ways for you to save.
Managing Income and Donations
Use tax credits.If you are a low to moderate-income taxpayer, then you may qualify for the earned income tax credit. If you are making less than ,000 a year, then it is a good idea to investigate this instant credit. This credit can save you thousands of dollars and will come directly from the tax that you owe.
- You can also apply for the little-known American Opportunity Tax Credit, which counts if you are pursuing a college degree. The Lifetime Learning Credit also helps adults who are advancing their formal education or training.
Contribute to tax sheltered retirement funds provided by your employer.If your employer allows to get your take home pay after subtracting contributions to retirement funds, then take advantage of this option. This is one way to lower your taxable income, while also receiving the benefit of future security. In addition, if your employer offers a matching contribution, you can save even more tax-free.
Go for a HSA.If you employer allows you to contribute to a medical reimbursement account or health savings plan (HSA), it is a good idea to do so. These plans will lower your taxable salary, diverting some of your original funds to pay for future medical expenses. There is a maximum amount that you can contribute, so be aware of that limit for your particular year as well.
Set up a Keogh Fund or Individual Retirement Account (IRA).A banker or accountant can help you to set up these accounts and can also help you to budget for maximum tax-deductible contributions. If you contribute funds to these accounts, then they do not count as taxable income. You can also fund a Roth IRA for a relative, so that they can benefit from the tax-free growth.
- A Roth IRA is also a great way to save for a home. With certain restrictions, it is possible to withdraw up to ,000 tax-free for use in the purchase of your first home.
Calculate your charitable contributions.Make sure to keep all receipts showing any type of funds used for charity, including purchases that you make to benefit a charitable organization. You can add these costs up alongside any direct cash contributions to determine how much of a deduction you are owed. Keep in mind that you will need to file for an itemized deduction in order to fully claim your contributions.
- A legitimate charitable organization will be able to provide you with a receipt for tangible donations, such as clothing or toys. Make sure that the receipt is fully dated and signed.
Maximizing Your Deductions
Take advantage of home office benefits.If you are a self-employed individual and work out of your home office on a regular basis, then you can deduct certain qualifying home-office expenses. This can include even a fraction of your home utility bills and home maintenance costs. This is if you itemize. However, you can also claim a general dollar amount deduction per square foot of space used.
- Self-employed persons are also eligible for many other tax deductions. You can itemize deductions such as website preparation and maintenance fees, the cost of professional publications, and office supplies.You will list these deductions on your schedule C form. This is separate from your schedule A form, which is for itemized deductions.
Keep track of medical expenses.Make sure to hold onto all receipts related to the medical care of yourself and others in your family. You can deduct the costs of lodging when seeking out medical care, the expenses of making medically necessary modifications to your home, and even certain medicines.
- You can also deduct mileage that you drive to and from medical appointments.
Deduct mortgage or student loan interest.All of your mortgage interest payments can count as tax deductions. You can maximize these savings by making an extra mortgage payment before the end of the tax year. Paying your mortgage just a few days early can result in substantial savings.
- You can also deduct the interest paid on student loans. If you paid student loan interest during the year, you should receive the necessary paperwork from your loan servicer.
Improve your home with energy efficient products.Check out the yearly Energy Policy Act for details on how you can enroll in certain energy efficient programs and make particular changes to your home to result in tax savings. These deductions change often, so make sure to do your homework. For example, you can often deduct the cost of installing solar panels or energy efficient windows.
Deduct child-care expenses.Children can provide a great tax break in multiple ways. The funds that you use to pay for child-care are considered pre-tax monies if organized into an employer-based savings account. So, if your employer offers a child-care reimbursement account, especially with matching, make sure to take advantage of it.
- You can also count your children as additional dependents. And, you can claim a child tax credit if they are under 17 years of age.
Claim alimony payments that you made.If you've been paying alimony, then you'll want to include those payments in your deductions. You will not pay taxes on that income. Instead, the recipient will report it as their income.
Deduct job-hunting expenses.If you’ve searched for a new job in the past year and if you looked for a position in the same general line of work as you had before, then you are eligible to deduct these expenses. Make sure to keep the receipts and you can deduct the cost of food or lodging when travelling for interviews.
Keep track of moving costs.This deduction does not apply for all moves. You must be moving to pursue a new job that is at least 50 miles from your current location. You can deduct the total cost of moving both you, your family, and any belongings that you own. You can even deduct mileage costs and tolls.
Filing Your Taxes
Dodge hefty penalties.Make sure to avoid any penalties by filing your taxes on time and by providing all of the necessary paperwork. You can also avoid penalties by following the rules regarding retirement and savings withdrawals. When in doubt about a particular financial action, it is good idea to check first.
Add in a dependency exemption.If you have a child, whether born to you or adopted, then you are able to claim them as a dependent on your returns. An additional dependent can literally save you thousands of dollars off your taxable income. Make sure to also adjust your W-4 allowances with your employer.
- Be aware that associated adoption expenses can also count as a tax credit.
Hire a certified public accountant (CPA).If you’ve had a particularly complicated tax year or if you simply don’t feel comfortable filing your taxes, then look into hiring a professional. The fees charged by CPAs will vary according to location, demand, and experience. Make sure to shop around a bit and look for a CPA who has positive reviews online and can provide references as well.
Check for free tax assistance.Depending on your financial status, you may be eligible to receive fee tax assistance from the IRS. Contact the IRS directly for more details. This assistance may also apply to you if you’ve experienced issues when dealing with the IRS in the past, such as excessive delays in communication.
Do your own taxes.You can now buy one of a variety of computer programs which will provide step-by-step guidance as you complete your taxes. This is less costly than hiring a CPA, however, you will need to invest the time in gathering and properly presenting your paperwork.
QuestionHow can retirees save on taxes?
Certified Public AccountantCertified Public AccountantExpert AnswerThere are ways for a retiree's tax bill to be reduced. You should contact a tax professional or a financial planner to explore the most common methods that are right for your situation.Thanks!
QuestionDo you have to pay taxes on money in a savings account?
Certified Public AccountantCertified Public AccountantExpert AnswerThere is no tax on the money you put in. Taxes are payable on the amount of interest earned by the money in the savings account.Thanks!
QuestionHow can you reduce your taxable income?
Certified Public AccountantCertified Public AccountantExpert AnswerPlanning. Certain expenditures are tax deductible and should be maximized where possible. Investing in tax-free bonds and placing money in tax-deferred savings such as an IRA account can help. Contact a tax professional to discover many ways available to do these things.Thanks!
QuestionHow can I avoid paying so much tax?
Certified Public AccountantCertified Public AccountantExpert AnswerPlan your annual income and expenditures to maximize tax savings at year end. There are only three ways to reduce a tax bill, those are to eliminate, defer, or reduce taxable income.Thanks!
QuestionWhat is more beneficiary NSC or PPF?wikiHow ContributorCommunity AnswerYou will want to consider your individual financial and tax circumstances as they both have benefits. For example, a PPF requires a regular investment of funds, whereas a NSC can be a one-time deposit. PPF returns are also subject to taxation, whereas NSC returns are tax exempt.Thanks!
QuestionWhy does making an extra house payment give me an additional tax deduction?wikiHow ContributorCommunity AnswerBecause the extra payment includes additional interest. Therefore, all mortgage payments are useful in lessening your tax burden. This is why some people choose to make an additional payment at the very end of the tax year.Thanks!
- Tax policies will soon update with the new 2019 tax law.
- The article focuses primarily on U.S. federal taxes. Consult an accountant or government tax agency for guidance on state, local, and non-U.S. taxes.
- Make sure that you report your correct address to the IRS. Otherwise, unless you choose direct deposit, you may miss out on your refund check.
Video: Tax Deductions - How To Save Money On Your Taxes!
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