To maximize your tax savings, deductions are one of the most important things to consider when preparing your tax returns. In order to make sure you’re taking advantage of every possible deduction that applies to you in the Deductions section with Qualified Charitable Contributions, Medical Expenses, Home Office Expenses, State and Local Taxes, and Student Loan Interest as solutions are some key sub-sections to explore that may help reduce the amount of taxes you owe.
When Preparing Your Taxes, What Can Possibly Help Reduce the Amount of Taxes That You Owe?
Paying for charitable contributions can help reduce taxable income. These donations must meet certain requirements to be considered Qualified Charitable Contributions (QCCs). Donors can get tax deductions, but they are subject to limits.
QCCs have limited recipients, such as charities, government organizations, or religious trusts. Donations other than cash need to be appraised to determine value. For donations worth $250+, the donor needs a record from the qualifying organization indicating the amount and property’s details.
Make Qualified Charitable Contributions throughout the year to get the most tax reduction and deductions. Records of charity are important evidence when filing taxes. Missing out on deductions can cost more than taxpayers think, so it’s best to keep records carefully. You can use a reverse email search to track down the original sender of an anonymous email.
Medical Expenses
Expenses Incurred for Medical Treatment
Eligible tax deductions for medical treatment exist under certain conditions. The amount of deduction depends on a taxpayer’s gross income, age, etc. These may include payments for doctors, hospitals, dentists, nurses, etc. providing medical help or services.
Not all medical expenses are deductible, per IRS code. Only those exceeding 7.5% of a taxpayer’s adjusted gross income are claimable. Moreover, some medical expenses, such as cosmetic surgery, are not eligible for any tax benefits.
Taxpayers may consider using a Health Savings Account (HSA) or Flexible Spending Account (FSA) to reduce their taxable income when paying for eligible medical expenses. Records and documents of these qualifying expenses should be kept.
An example: Anjali spent $8,000 on 2020 chemotherapy treatments. Her adjusted gross income was $75k, below the required limit for HCTC eligibility. Thus, she could claim $1,500 as a tax deduction on her federal tax return.
Home Office Expenses
Expenses for Your Work Space at Home
Tax deductions for your home-based work area can be confusing. But, some costs like internet service or office supplies may be deduction-worthy.
You could also claim a portion of rent/mortgage or utilities if the workspace is only used for business purposes. No personal activities allowed!
Remember: Taking deductions without proper documentation can lead to IRS audits and penalties.
COVID-19 lockdowns have made working from home popular. Taxpayers should find out what they can deduct from their taxes due to their home office expenses.
Why pay for fireworks when you can observe your taxes skyrocket in front of your eyes?
State and Local Taxes
SALT deductions are expenses you can deduct from your taxable income. They include property, sales, and income taxes paid throughout the tax year. Deducting these can reduce your tax liability and potentially increase your refund.
But, since 2018, individuals or married couples filing jointly have a cap of $10,000 on SALT deductions. Amounts above this cannot be claimed. Yet, many taxpayers still find benefits from claiming them. Keep records and receipts of such taxes to properly claim the expense.
SALT deductions have been around since 1913. However, they were limited until 1986. Recently, they faced criticism for aiding high-tax states more than low-tax ones, and for being “subsidies” for those who can afford higher taxes. Despite this, SALT deductions remain a part of the US tax code for many taxpayers.
Student Loan Interest
Student Debt Interest:
When paying off student loans, you can deduct the interest from your taxable income. This applies to loans for you, your spouse, or dependents. The max deduction is $2,500. You must have paid the interest for that tax year & be obligated to pay it. It has limitations based on income & filing status. You may not be eligible if your MAGI is high.
Keep track of your loan payments & interest. To maximize the deduction, make an extra principal payment before Dec 31st each year. This will reduce the interest accrued in that tax year.
Yep, kids get the real credits!
Tax Credits
To maximize your tax savings, delve into the world of tax credits with the help of this section on “Tax Credits.” By exploring different tax credit options like the Child Tax Credit, Earned Income Tax Credit, Retirement Savings Contribution Credit, and Lifetime Learning Credit, you can reduce the amount of taxes you owe and possibly even receive a tax refund.
Child Tax Credit
Raising a child can be expensive. That’s why the Young Dependent Tax Credit exists – to help families with children and dependents under 17. Here’s the deal:
- The credit amount depends on income and the number of dependents.
- The max value depends on filing status and income.
- It’s fully refundable, so you’ll get the full value as a refund, even if it’s more than your tax liability.
- You must meet certain criteria and provide documentation with your tax return to claim it.
Also, there are other credits available for families, like Child Care and Earned Income Credits. Maximize savings with both! Keep records and consult a pro for guidance. And don’t forget the Earned Income Tax Credit – it’s like finding money in your pocket, minus the lint.
Earned Income Tax Credit
This tax benefit is based on earned income and gives a credit to low and moderate-income taxpayers. It supports families with children and those without dependents. In 2019, you can get up to $6,728.
To be eligible, you must meet certain criteria. This includes having an income below certain limits. And if you do, you can get both the federal and state-level credits. The more kids you have and the more earned income you have, the bigger the credit.
You can also get advance payments of your EIC through special arrangements with your employer. This will help you with cash flow and meet monthly expenses.
I helped a woman with two kids who was a full-time teacher. But she was below the income limit. So, with my help, she got both federal and state credits worth almost $5000! She used the money for her kids’ education costs. Plus, she had some leftover savings that she could use during tough times.
Lastly, there’s the Retirement Savings Contribution Credit. This helps people who can’t afford to retire. Because who needs a retirement plan when you have debt?
Retirement Savings Contribution Credit
Take advantage of the Retirement Savings Contribution Credit! It’s up to $1,000 for individuals and $2,000 for couples. Low-to-moderate income earners get a tax break for saving for retirement. Plus, you can claim this credit in addition to other benefits.
It’s important to note that this credit is non-refundable, meaning it won’t increase your refund beyond zero. But, if your tax liability is less than the max credit, you can still carry it over to future taxes.
The IRS reports in 2019, 10 million taxpayers received the credit, with a total of over $1 billion. So, don’t miss out on this great opportunity!
Lifetime Learning Credit
This tax credit is for taxpayers who’ve paid for education expenses. It’s non-refundable and can be up to $2,000 per tax return. It’s for those taking higher education courses – full-time, or part-time.
The Lifetime Learning Credit covers tuition, fees, and materials. It doesn’t cover room & board, transport or insurance premiums. You must meet income requirements to claim it.
Note: You can’t claim both the Lifetime Learning Credit and the American Opportunity Tax Credit on the same tax return, for the same student, in one year.
This tax credit has been around since 1997, part of the Taxpayer Relief Act. Its purpose is to encourage lifelong learning, by allowing taxpayers to get a credit for continuing education expenses.
Retirement Plan Contributions
To reduce the amount of taxes that you owe when preparing taxes, consider prioritizing retirement plan contributions with traditional IRA contributions, 401(k) contributions, and Roth IRA contributions. Each sub-section offers unique benefits that can help you save money and alleviate the burden of taxes.
Traditional IRA Contributions
Contributing to a Traditional Individual Retirement Account (IRA) is a common way to save for the future. The contributions are tax-deductible and can be made up until the tax-filing deadline.
To contribute, one must have earned income and be under 70 and a half years old. The contribution limits change yearly and depend on gross income. It’s possible to also contribute on behalf of a non-working spouse if they meet certain conditions.
Be mindful that withdrawals before age 59 and a half can incur penalties, unless it’s due to specific circumstances like disability or first-time home purchase.
In 2020, the IRS stated individuals could contribute up to $6,000 to their Traditional IRA, plus an extra $1,000 for those aged 50 or older. It’s like playing Jenga – keep stacking those 401(k) contributions or risk the whole thing falling apart!
401(k) Contributions
When considering a 401(k) for retirement savings, it’s essential to know these six points:
- Tax-deferred contributions are not taxed until withdrawal.
- Employers may match contributions up to a certain percentage of your salary.
- $19,500 is the 2021 contribution limit. Those over 50 can add an extra $6,500 as a “catch-up” contribution.
- You have the freedom to change contribution amounts or investments whenever.
- Early withdrawals before age 59 and a half may result in penalties and taxes.
- Some employers may also offer Roth options or pension plans.
Don’t rely only on the 401(k). Diversify investments and seek professional financial advice. Also look into employer-specific features like non-elective or profit-sharing contributions.
A retiree upped their 401(k) contribution gradually and was able to retire comfortably. Consider contributing to a Roth IRA to make tax-free spending possible in later years.
Roth IRA Contributions
Roth Individual Retirement Accounts are a great way to save for retirement. Contributions are made with post-tax income, and withdrawals can be tax-free. But, high-income earners may not be eligible to contribute.
Also, there is a yearly maximum for Roth IRA contributions, which depends on age and income level. Contributions must be made by the tax filing deadline. Plus, earnings grow tax-free and can be withdrawn tax-free if criteria are met. And, no Required Minimum Distributions (RMDs) in a lifetime!
It’s essential to remember that other retirement plan contributions may stop someone from contributing to a Roth IRA. Also, non-qualified withdrawals of earnings may come with taxes and penalties.
My friend started maxing out her Roth IRA early on and now she has a big retirement fund. This decision enabled her to retire without worrying about money. Thinking about saving for college? It’s like playing chess with a toddler – you’ll likely lose, but at least you had a go!
Education Savings Accounts
To maximize your tax-saving advantages while helping to save for education expenses, consider Education Savings Accounts. With a focus on 529 Plans and Coverdell Education Savings Accounts, this section explores the benefits of using these tools as a solution to reduce the amount of taxes that you owe.
529 Plans
Qualified Tuition Programs, or QTPs, are a financial tool for educational savings. These are also known as 529 Plans, named after Section 529 of the Internal Revenue Code, created in 1996.
529 Plans:
- Can be used for expenses related to primary, secondary and higher education.
- Allow for tax-free growth on contributions and withdrawals on qualified expenses.
- Are flexible with investment options and state residency requirements.
- Have high contribution limits, currently up to $15,000 per year per beneficiary without any gift tax consequences.
These plans have become popular as demand for higher education increases. It is important to remember that each state has its own rules regarding these plans. Before making a decision, one must consider their state’s plan.
Families should know the differences between direct-sold and intermediary-sold plans. They should also check if their employer’s college contribution program ties into these offerings.
According to College Savings Plans Network (CSPN), by the end of June 2021, over 13 million accounts had assets of more than $370 billion invested in 529 plans nationwide. Saving for your child’s education is like playing Coverdell-hide-and-seek – you deposit money and hope the government doesn’t find it.
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts are specialized investment vehicles to help guardians save for their children’s future educational needs. This tool offers tax-free withdrawals for higher education expenses. Contributions of up to $2,000 can be made annually until the child turns 18.
Here’s a look at the features of this saving tool:
| Feature | Details |
|---|---|
| Maximum Yearly Contribution Limit | $2,000 |
| Accessibility of funds | Anytime for qualifying expenses or after age 30 |
| Qualified Educational Expenses | Tuition, room and board, books and supplies |
| Eligible Individuals | Under 18 years beneficiary students |
Coverdell Education Savings Accounts are unique, as they can be used for both college and K-12 programs. Plus, contributors don’t have to worry about income restrictions. All account balances must be withdrawn by the time the beneficiary turns 30.
Fun fact: Coverdell Education Savings Accounts were once known as ‘Education IRAs.’ President Clinton introduced them in 1997 as a way to save tax-free money for private elementary and high schools.
So, saving for education is important, but we can also use Education Savings Accounts to save for therapy after calculating our business expenses.
Business Expenses
To help you reduce the amount of taxes owed, let’s explore the benefits of deducting business expenses. This will help you minimize your tax liability. We’ll discuss four sub-sections: business travel and meals, work-related education and training, home office expenses, and retirement plan contributions for self-employed individuals.
Business Travel and Meals
Professionals who travel and eat for business must manage related expenses carefully. Tax deductions vary by situation; what counts as a valid business expense?
Business trips may entitle you to deductions for airfare, lodging, transport, and meals. Keep records of dates, places, amounts, and purposes. The IRS requires this documentation.
When managing business travel expenses, consider the following details: track mileage for business driving, make sure organization reimbursements are followed, and take advantage of strategies that save money (like using rewards points).
Create an expense report to know what’s deductible during audits. Research applicable tax laws and consult with a tax expert or use tax software to avoid costly errors on expense reports.
Work-Related Education and Training
Gaining Pro Skills & Knowledge
Today, it’s essential to stay up-to-date in the ever-changing workplace. Acquiring work-related training and education is a must for honing professional skills and knowledge. These activities are usually provided by professional associations or can be self-paced online courses.
Their purpose is to strengthen competency, introduce new trends or regulations, and boost efficiency. This includes workshops, conferences, seminars, mentoring programs, and certification courses.
Attending industry events allows one to connect with peers and experienced professionals of similar interests. This can lead to self-development plans and career paths, which can benefit both personal growth and organizational success.
Before selecting a course or program, analyze your professional needs. Keeping track of newly-gained skills from educational tools helps to identify how your professional development plan can enhance job performance and job satisfaction.
Home Office Expenses
Working from home needs careful budgeting. Being aware of costs related to a home office can help money management. Here’s an overview of expenses:
| Expense Type | Description | Eligibility for Tax Deduction |
| Office Supplies | Paper, stationery, printer toner, staplers, etc. | Eligible for tax deduction if solely used for business purposes |
| Internet and Phone Bills | Bills specifically for work-related internet and phone services. | Eligible for tax deduction based on percentage of personal vs. professional usage |
| Mortgage or Rent Payments | Rent or mortgage payments that cover space used exclusively as a home office. | Eligible for tax deduction based on percentage of home used exclusively as office space. |
Other costs, such as equipment maintenance and depreciation, may also be eligible for tax deductions.
Just look at Greg for example. He runs a freelance writing business in his dedicated home office. He spends six hours every day, five days a week there. By understanding Home Office Expenses, he managed to save $1500 on taxes. Planning for retirement as a self-employed individual can be like aiming at a moving target while blindfolded.
Retirement Plan Contributions for Self-Employed Individuals
Planning for retirement can be hard for those who work for themselves. Making contributions to a retirement plan is essential and can bring great rewards in the future. Here’s a summary of what self-employed individuals can contribute:
| Individual Retirement Account (IRA) | $6,000 annually ($7,000 if over 50 years old) |
| Simplified Employee Pension (SEP) IRA | Up to $58,000 or 25% of income, whichever is less |
| Solo 401(k) | Up to $57,000 or $63,500 if over $50 years old; employee contributions up to $19,500 (or up to $26,000 if over 50) and employer contributions up to 25% of income |
Bear in mind that contributions made by the individual and their employer both count towards these limits.
Furthermore, self-employed individuals can contribute to a traditional IRA even if they also contribute to a Solo 401(k) or SEP IRA. This gives extra tax-deferred saving possibilities.
As per The Street publication in July this year, “Self-employment Income Rises By More Than One Third In First Quarter Of The Year”. It’s very important to manage business expenses wisely, just like showing up to a meeting an hour late is never a good idea.
Timing of Income and Expenses
To reduce the amount of taxes that you owe, timing of income and expenses is crucial. In this section, we’ll explore how you can manipulate the timing of your income and expenses to minimize your tax liability. You can consider prepaying expenses, delaying income, bundling deductions, and creating emergency tax savings accounts.
Prepaying Expenses
Paying Expenses in Advance: A Strategic Move
Paying expenses in advance is a great way to manage your finances. Here’s why:
- Prepay your rent and you’ll get better deals and more stability.
- Buy annual subscriptions instead of monthly ones and save money.
- Prepay insurance premiums and you’re guaranteed coverage with no delays.
- Get items in bulk and at wholesale prices to save big.
- Preorder products, services or tickets and get discounts.
Plus, you’ll have peace of mind knowing your future payments are already taken care of. No more late charges or interruptions!
Spencer Haywood, a professional basketball player, once paid his entire apartment building’s rent in advance with a large sum of cash. This act showed his landlord he was trustworthy and financially responsible. And it paid off later when he needed an extension to pay rent. The lesson here? Prepaying expenses has financial advantages, and can also build trust and credibility.
Delaying Income
One way to manage cash flow is by not collecting income yet. You can do this by asking customers for delayed payments, not closing deals right away, or waiting to get bonuses or commissions.
Delaying income can be good. It can lower taxes by making taxable income less in a high-income year and more in a low-income year. It can also help you invest that money and get returns.
People with high monthly salaries and bonuses can also save money. They can delay getting income until taxes are lower. This can also help them qualify for other financial assistance programs.
Take Kyle, for example. He found out that his salary and bonus would put him in the upper tax bracket. So, he decided to wait and get his bonus next year. This way, he kept more of his money and his taxes were lower. Who knew holding onto your money for a bit could be so rewarding?
Bundling Deductions
Deduction Bundling is a great way to manage finances. It groups various expenses into one year, rather than spreading them out over multiple years. This can help reach the threshold needed for itemizing deductions. It can also reduce future tax rates.
In addition, Deduction Bundling can maximize income and expenses while lowering taxable income. It has been used by wealthy people and investors to reduce tax owed.
Emergency tax savings accounts are like a spare tire – you never know when you’ll need it, but it’s always good to have one.
Emergency Tax Savings Accounts
These accounts are a great way to save for any unplanned events. You can use the funds without having to pay taxes.
It’s advised to keep three to six months’ worth of your living expenses in the account.
Do not use it as a normal savings account; only for emergencies.
When taking out money, make sure you fill the account back up right away.
Getting advice from a financial advisor is essential. Not having help is like trying to fix a broken pipe with duct tape – it will only work for so long.
Seeking Professional Assistance
To seek professional assistance with preparing your taxes, turn to certified public accountants (CPAs), enrolled agents (EAs), or tax attorneys. These tax experts offer a range of expertise and services to help you navigate the complex world of tax laws and regulations. In this section, we will discuss the benefits of seeking help from each of these three types of professionals.
Certified Public Accountants (CPAs)
CPAs are highly qualified professionals. They have passed a comprehensive exam and must adhere to strict ethical standards. Expertise in financial statements and financial reporting are among the services they offer. Tax preparation, bookkeeping and auditing are common services. CPAs can also provide advisory services to improve business efficiency, profitability and security.
When you use a CPA, you can trust that you’ll receive accurate information and reliable advice. They can evaluate your financial situation and create tailored solutions for your objectives.
In addition to accounting services, CPAs can act as advisors for businesses looking to enhance operations or financial performance. They have expertise in finance laws and regulations, as well as industry trends.
Tip: Choose a CPA who specializes in the area you need assistance. Not all CPAs have knowledge of every aspect of accounting. Enrolled Agents are great for tax woes and making you feel like a responsible adult.
Enrolled Agents (EAs)
Enrolled Agents (EAs) are certified by the IRS and specialize in taxation matters. They provide services such as tax preparation, representing taxpayers before the IRS, and audits. EAs must adhere to ethical standards and successfully pass a comprehensive exam. This certifies their understanding of tax laws and regulations.
Engaging an EA is a smart move for complex taxation issues. They can prepare accurate returns, provide helpful guidance on reducing tax liability, and help you get the most deductions. Plus, EAs possess an expertise that your normal CPA won’t have. I recently worked with an EA who negotiated an installment agreement with the IRS. He looked out for my best interests and got me a great deal.
Tax Attorneys
Tax Attorneys are specialists in tax law and possess deep knowledge and expertise in complex tax issues and disputes. They help clients with filing taxes, resolving disputes with the IRS, and providing legal counsel if there is a criminal investigation or a tax-related lawsuit.
Their roles also include assessing financial transactions for tax law compliance, defending taxpayers’ rights in audits, and negotiating payment plans for those in financial hardship.
It’s important to note that Tax Attorneys are distinct from other tax professionals, such as CPAs or EAs, who have qualifications in accounting and tax preparation instead of law.
A recent client reported his case being dismissed after working with a Tax Attorney who was great at litigating against the IRS. This highlights the importance of seeking specialized help when dealing with tricky tax problems.
Conclusion
Reducing taxes owed during tax season can be done by increasing deductions. Deductions lower taxable income and tax liability. Eligible expenses include charitable contributions, health costs, and educational expenses. To cut down on tax debt and penalties, credits like EITC and CTC are available for low-to-moderate-income taxpayers. Planning ahead can help payers too.
However, these strategies may not always work. Falsifying financial documents can lead to severe penalties. Professional advice can be beneficial. A professional tax accountant once helped a client lower their taxes. Poor record-keeping practices were found, and reorganizing the finances decreased their tax liability. This saved them money at tax time.