Anyone with a source of income knows that taxes are inevitable and that failure to keep up with your annual tax payments can result in a heavy tax fine. This is why the IRS advises taxpayers to check on their withholdings throughout the year to avoid a surprise bill when April rolls around.
When planning your taxes it is important to start far ahead of the deadline and make sure to itemize your deductions. But if you are still behind on your tax payments, don’t despair. These quick and easy tips can help you save money on your taxes at the end of the year as well.
Earn A Tax-Free Income
There are certain types of income that are exempt from taxes. A fool-proof way to save money is to earn a tax-free income. While it is not the most common way to make a living, there are many routes you can go to earn a tax-free income.
If you are a homeowner, selling your property is a good way to avoid taxes through certain exclusions that are applicable to the sale of homes. Other ways to earn a tax-free income include saving for your kid’s education or contributing to a health savings account.
Make Use Of Tax Credits
Another great way to save money when filing is through tax credits. This is even better than a deduction because It can save actual dollars on your taxes. In recent years, the government has offered a variety of tax credits and continues to add new ones each year.
You can get credits for things such as buying a car or making improvements to your home like adding a solar energy panel to your roof or a solar water heater. Families with children can also get tax credits for child care and education.
Take Advantage Of Tax Deductions
One of the most common ways to save some money on your tax bill is through deductions. The more deductions, the lower the tax bill. The government offers various deductions with different eligibility criteria. If you are a business owner, you can deduct expenses on your operating expenses and travel costs.
Taxpayers need to itemize their deductions based on their situation. Deductions can include home mortgage payments or charitable contributions. As of 2018, the number of standard deductions has been doubled, so only people with higher incomes need to itemize.
Lower Your Tax Rate
The tax rate for your federal income tax varies and ranges from a low of 0% to a high of 37%. As a taxpayer, you can reduce this tax bill by earning income from long-term investments like property, stocks, or mutual funds. These types of investments are taxed using a capital gains rate which can lower your federal income taxes.
For high-income taxpayers who are in the 35-37% income bracket, the capital-gains tax rate can be as high as 20%. For people in the 22-32% income bracket, the capital gains tax rate is 15%.
Take Advantage Of Your Filing Status
Many people don’t really consider their filing status when preparing their taxes but this can have a large impact on your tax bill. This filing status determines your amount due and can determine the tax bracket you fall under. The income bracket impacts your standard deduction.
The standard deduction is used when people don’t have enough deductible expenses to itemize their deductions. As of 2019, individual taxpayers can deduct $12,200 from their tax bill, while joint taxpayers can claim a standard deduction of $24,400. This amount is higher for taxpayers who are 65 or older.
Contribute To An IRA
A great way to save on your tax bill is to contribute to a retirement account like an IRA. There are two major types of IRAs, the Roth IRA and the traditional IRA. The deduction for your retirement account contribution depends on your marital status, your coverage, and your annual income.
If you are married and covered by a retirement account at work, you may not qualify for a deduction. There are also limits on how much you can contribute to an IRA Roth account. For 2019, the limit is $6,000 per year or $7,000 for people above the age of 50.
Modify Your W-4
Filling in the W-4 is an important part of filing your taxes because it lets your employer know exactly how much should be withheld from each paycheck. In order to reduce your tax bill or avoid any surprise fines, you can modify your W-4 to suit your needs.
If your previous tax bill was really high, you can tweak your W-4 to increase your tax withholding, which can lower the amount you owe in the following year. However, if your tax refund was much higher than expected, you can lower that tax refund and increase your monthly withholding.
Save For College
For taxpayers with children, saving for education is not only a great way to secure your children’s financial future but also lower your tax bill. Many parents choose to make contributions to a 529 plan, which is a savings account run by the state or an educational institution.
You can’t use this contribution as a deduction on your federal income taxes, but you can take advantage of this when filing your state returns. There is also a chance that you may have to pay a gift tax if your contributions exceed $15,000 annually.
Contribute To Your FSA
The IRS gives taxpayers the opportunity to contribute a portion of their paycheck to an FSA account each year. Hence, if your employer offers a flexible spending account option, it would be wise to put some money into that account each month.
The money that is contributed to the account has to be spent during the calendar year. The funds can be used for eligible medical and dental expenses for yourself or your dependents. The contribution limit for this type of account was $2,500 in 2019 and $2,750 for the year 2020.
Keep A Record Of Your Medical Expenses
If you have had a visit to the hospital during the year or any medical expenses, it is important to keep a record of all the receipts. If your medical expenses are higher than 7.5% of your gross income, this can be used as a deduction on your tax bill.
For example, if your tax bill is $10,000 for the year then $7,000 can qualify as a deductible. If you earn an income of $40,000, anything above $3,000 in medical expenses can be used as a deductible.
Put Money Into Your 401K
The lower your taxable income, the lower the amount you need to pay in taxes. A common way to lower your tax bill is to contribute to your company’s 401K account. While this may lower your monthly income, it is beneficial in the long-term as it also lowers your tax bill.
As of 2019, the maximum contribution that can be made toward this account is $19,000 and this increases to $19,500 for 2020. If you are above the age of 50, the maximum contribution is $6,500. If your employer doesn’t sponsor a 401K account, you still have the option of opening your own.
Subsidize Dependent Care
In addition to contributions to a traditional FSA account, you can also make annual contributions to a dependent care FSA account to lower your tax bill. Contributions up to $5,000 will be excluded by the IRS when you make contributions to a dependent FSA account.
This means that you can save tax dollars on this amount. This is a huge benefit for parents with kids who can use this money for preschool, daycare, or camping trips. The level of coverage offered by a dependent FSA account depends on the employer.
Donate To Charity
An easy way to get a deductible on your tax bill is through charitable contributions. These donations don’t necessarily need to be in cash, as food and clothes donations can qualify for a deductible as well. As long as you have the receipt from the donation, you can count it as a deductible.
There are many tax programs online that can estimate the value of the items you donate. So before you drop off the bag at a charity of your choice, you can predict how big your deductions will be.
Make Estimated Payments
Every individual taxpayer is expected to make an estimated tax payment if their total tax payment for the year is above $1,000. These estimated payments are also referred to as quarterlies because you calculate the total amount you owe in federal taxes for the year and then divide this amount by four.
While these payments should be made quarterly, it is not too late to make them at the end of the year as well. As long as the payment is made before the tax deadline, you will not be subject to any tax penalties.
Talk To A Tax Advisor
Although getting legal or tax advice when filing your returns each year does not qualify as a deductible, it is still important to talk a professional so that you can make the best use of your tax returns. The devil is in the details and there’s a lot of money to be saved in the nuances of filing your taxes.
Enlisting the help of a tax pro can save you a lot of time and money on your deductibles. They can provide information on tax-saving alternatives that you may not be aware of. For example, some small business owners are not aware that they can save money by listing their daily operating costs as a deductible.
Start Your Own Business
Many deductions, like unreimbursed employee expenses, are no longer eligible for deductions. Other deductibles such as employee expenses may not be as attractive to taxpayers. However, these deductions are available to taxpayers who are self-employed.
If you are looking to go into business for yourself and want to reduce your tax bill, this is the perfect time to do so. Business owners can use their daily operating costs to lower their tax bill. A financial advisor can help you plan the best course of action to get the best value from your tax returns.
Move To A Lower Tax Rate State
When filing state and federal tax returns, the total amount of deductibles is set at $10,000 according to Schedule A. For taxpayers who live in a state with high property tax rates, this could affect your ability to qualify for a deductible in your state.
Hence, if you are looking to invest in property, buying a home in a state with a low property tax can save you a lot of money. If you are considering moving to a different state with cheaper real estate, it can be a great way to lower your tax bill.
Buy More Things
While this may seem counterintuitive, spending more can help you save money on your taxes in the long-term. This is especially true for business owners who are able to deduct their expenses over time. As of 2018, businesses can deduct expenses up to $1 million.
Other tax reforms have also made the depreciation of fixed assets like vehicles more favorable. It can often be tricky to make the best use of these deductibles so it is advisable to talk to a tax advisor before spending any money.
Contribute To An HSA
Like the FSA, another great way to lower your tax bill is to contribute to an HSA, or health savings account. These contributions are tax-exempt and the money can be used to fund any future medical expenses. However, you need to make sure that you are eligible for the deductible.
As of 2019, the maximum contribution to an HSA account is $3,500 and as of 2020, this amount has increased to $3,550 for individuals. For families, the contribution is set at $7,100 in 2020. If your employer doesn’t offer an HSA account, you can open your own account elsewhere.
Plan Ahead For Your Taxes
When it comes to taking advantage of your tax filing, the key is to plan ahead of time. In the case of a tax deduction, even a few months can have a huge impact on your wallet. If you have large expenses with a deductible coming up, you should decide if you want to pay for it this year or next.
Alternatively, when it comes to monthly expenses like mortgage payments, think about whether you want to deduct the interest this year or in the following one. These small deductibles can add up and significantly affect your total tax bill.