Taxes might be an inevitable part of life, but still, the majority of people wouldn’t want to hand over a portion of their earnings to the government. “Tax bills might ruin your day” as Craig Ferrantino, president of Craig James Financial Services in Melville, said.
Luckily, there are many completely legal ways through which you can lower the amount you pay the taxman every year. These might include credits, deductions, and other advanced investment strategies.
In fact, some tax savings are only available to small venture owners or even the self-employed, but other options can be easily used by everyone. The tax code might change frequently, but here’s how to pay fewer taxes based on the current laws:
Contribute to a Retirement Account
Retirement account contributions are definitely one of the easiest ways to reduce your taxable income. In fact, it is one of the strategies that everyone can use. Contributions to traditional 401(k) and IRA accounts can be deducted from your taxable income, thus reducing the amount of federal tax you have to pay.
All these funds might become tax-free until retirement. Also, don’t forget about Roth accounts that might be funded with after-tax dollars. Even if you don’t get a tax deduction, money in the account might become tax-free and can be even withdrawn tax-free in retirement.
Contributions to the workplace 401(k) accounts should be made by the end of the calendar year. However, tax-deductible contributions could be easily made to traditional IRAs over April 18 tax-filing deadline.
Open a health savings account
In case you already have an eligible high-deductible medical plan, then I guess it’s fair to say that contributing to a health savings account is a proper way to lower your taxable income. “That is money that will never get taxed as long as you spend it on medical expenses” as Tatiana Tsoir, a certified public accountant and transformative business and finance coach explained.
Contributions to any of these accounts come with an immediate tax deduction, grow tax-deferred, and can be easily withdrawn tax-free for various qualified medical expenses. Any balance that might be left at the end of the year will roll over indefinitely, the same way as assets do in a retirement account.
Check for flexible spending accounts at work
If you don’t have any high-deductible health insurance plan, you might still pay for medical expenses with some tax-free dollars, as long as your employer offers flexible spending accounts. FSAs might use payroll deductions to fund an account, which might be even used to pay for expenses ranging from insurance copays to dental cleanings, and even over-the-counter medication.
“Why would you need real dollars, when you could simply use pretax dollars?” Ferrantino asked. There are a lot of employers who offer FSAs for both health care and dependent care, too. In both of these cases, there are different limits to how much you can deposit, and money might be forfeited, if they’re not used by the end of the year.
Use your side hustle to claim business deductions
Self-employed individuals might be able to get scores of tax deductions, and Tsoir actually encourages people to start all kinds of side gigs, in order to take advantage of them. This basically means your freelance projects or time spent as an Uber driver, for example, might land you tax savings.
A couple of business deductions that are available might include many things: business-related vehicle mileage, shipping, advertising, website fees, percentage of home internet charges that are used for business, professional publications, dues, memberships, and even business-related travel, office supplies, and many other expenses incurred to run your business.
Claim a home office deduction
If you are currently working for yourself or you have any kind of side business, don’t be afraid to take the home office deduction. You might be wondering if you qualify for this deduction. Well, if the space you regularly use is only for business purposes, then you do.
For example, if an extra bedroom is used only as a home office and it constitutes one-fifth of your apartment’s living space, then you can easily deduct one-fifth of rent and utility fees.
Rent out your home for business meetings
Because of the Augusta rule, also known as the Augusta exemption or the 14-day rule, homeowners might rent out space in their homes for 14 days and decide not to report their income to the IRS. The catch is that the home might not be the owner’s primary place of business.
For some business owners who chose not to have a home office, this might be a way to reduce taxes. They could rent out a room in their own house for a business meeting, or even deduct the cost from their business taxes and then decide not to claim the rental fees on their own personal tax return.
Write off business travel expenses, even if you’re still on vacation
You can actually combine a vacation with a business trip, and you might even reduce your vacation costs by simply deducting the percent of the expenses you spent for business purposes. This might also include airfare and part of your hotel bill, depending on the time you spent performing business activities. The best thing is to talk to a tax professional about how to make this calculation right.
Deduct half of your self-employment taxes
The government requires a 15.3% Federal Insurance Contributions Act tax on all earnings to pay for the Social Security and Medicare programs. As employers split the cost with their workers, self-employed individuals could be responsible for paying the whole amount themselves.
To compensate for the extra expense, the government might let you deduct 50% of the amount that’s been paid from your income taxes. You won’t even have to itemize to claim this specific tax deduction.
Get credit for higher education
The government gives valuable tax credits to offset the cost of higher education. The American opportunity tax credit could also be claimed for the first 4 years of college, and could also provide a maximum credit of $2,500 per student a year.
And since we’re talking about credit, the amount can be deducted from any tax you might owe the government. If it exceeds the amount of taxes you have to pay, up to $1,000 could be refundable to you.
Check if you qualify for an earned income tax credit
Even if you don’t have to pay federal income taxes, you could still get a refund from the government. The EITC is calculated with a specific formula that calculates your income and family size. The income limits for the credit range from $21,430 for those who are single taxpayers with no children to $57,414 for married people filing jointly.
Itemize State Sales Tax
Taxpayers who decided to itemize their deductions might include their state income tax or state sales tax on their Schedule A form. The state sales tax break could be an amazing option if you live in a state where there are no income taxes.
Even if taxpayers might use a table given by the IRS to easily claim their tax deduction, they should still remember to add on the sales tax from any important purchase, like a car or a boat.
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