The running joke throughout the world is that there are only two things guaranteed in life: death and taxes. It’s sarcastically spoken, but there’s a great nugget of truth in there. Everyone at some point will have to be faced with dealing with paying taxes, and the action itself has become synonymous with stress.
It doesn’t have to be so bad, though. If you know what you are doing or you work with a tax expert, your tax bill can be cushioned from the blow it may otherwise have landed you.
Whether you are doing your taxes solo or getting help from a pro, here are 10 powerful ways you can save money on your tax bill this year.
10 Ways to Reduce Your Taxes
1. Begin with the end in mind as you organize. Taxes are not something you should put off until right before you go to do them. If you get a process in place to keep your receipts, books, and finances organized in the beginning, it becomes a simple matter of a few steps you can do each day or week.
2. Claim everything that you are eligible for. Be sure you are claiming all of the tax deductions that you can and all of the tax credits that you can. This is where a tax expert comes in handy. For more information on reputable tax companies, view here.
Deductions can be performed in one of two ways. You can take a standard deduction, in which case you will receive the basic deduction given by the IRS to millions of Americans, or you can itemize your deductions if you think that your individual deductions will add up to more than the standardized one.
3. Don’t forget to donate! It may seem counterproductive, but donating to charities is considered a good cause and you can claim it on your taxes. As long as the charity you are donating to is considered to be a qualified charity (your children and your spouse don’t count), you can write off donations of money, goods, and stocks as long as you save the receipts.
4. Consider your future. The government does not want to have to be fully supporting you when you retire, so they look favorably on retirement plans and people who plan ahead. Contributions towards your retirement account are tax deductible and can help you reduce your taxes.
5. Healthcare is also a tax relief. While you may have to spend money in a Health Savings Account, a Flexible Spending Account, or straight to the medical provider, these expenses may be able to be used to cushion your tax bill if they meet certain requirements. They are funded with pretax money. An HSA can only be used if you have a qualifying health insurance plan that has a high deductible.
The caveat with an FSA or HSA is that you have to use up the majority of your contribution annually or it disappears. Some employers give you a grace period, but not everyone. There’s also a contribution limit, so be careful when you place your pre-tax money in one of these accounts and make sure you are not going over the annual contribution limit.
6. Don’t immediately cash in on your investments. Short-term assets are taxed at a regular income tax rate, which can be quite expensive and decrease the capital gain you would have otherwise had. Instead, try to keep the asset for over one year, turning it into a long-term holding. This reduced the tax rate, helping you to save some money.
7. Consider your mortgage. Buying and selling a home makes a huge impact on your taxes the following year. If you purchase a home, you now have monthly mortgage payments with lots of interest. The good news about this significant interest is that it is tax deductible if you are itemizing your deductions.
Selling your home makes a big impact, too, so you have to be careful when you decide to make this change. There’s a home sale exclusion rule in which you can exclude a big chunk of the gain of your home’s sale if you follow the rules carefully. If you don’t fit this exclusion, you can expect to pay a hefty tax on your gains.
8. Be sure you are using the correct filing status. Read up on what each of the filing statuses means. If you can qualify for “head of household,” you can get better tax rates and a higher standard deduction, giving you a smaller overall tax bill.
Married couples can decide whether the numbers make more sense to do “married filing separately” or “married filing jointly.”
9. Watch for changes in the tax codes. Part of what makes filing taxes so overwhelming to a lot of people is that they are always changing. Sometimes these changes are for your benefit, though, so pay attention to them as much as you can.
If you know about the tax codes early enough, you may be able to use them to reduce your tax bill. For instance, recent changes capped deductions for income, sales and property taxes at $10,000, so if you were planning on deducting more, you may have to rethink your tax strategy. On the other hand, the marriage penalty is almost gone, so if that was keeping you from tying the knot, you can go full speed ahead!
10. Hire a tax professional. When it comes to your taxes, it’s not financially smart to play around with them if you don’t know what you are doing. Sure, a professional may cost you an upfront fee, but they may also be able to save you that fee and much more!
Money Matters: Keep Your Money in Your Pocket
No one wants to pay more to the IRS than they have to, but they also don’t want to mess up and bring the wrath of the IRS down on them, either. Knowing the tax code and how to file your taxes correctly can help you do exactly what you need to do and still save money on your tax bill every year.