Almost everyone has to pay taxes, but not everyone is happy with what they pay. While no one likes having to hand over money, there are many legitimate ways to reduce your bill at tax time.
1. Make Use of Tax Credits
A tax credit does exactly what it sounds like it does – provides you with credit to lessen your tax bill. It’s important to know what you’re entitled to in terms of tax credits and how to make the most of them.
One of the most common examples is dependent children. For each son or daughter you have that you have to financially support, you can get a tax break.
When considering tax credits, think in terms of itemized deductions. If your collective itemized deductions would exceed the standard deduction, be sure to claim them instead of taking the standard deduction.
2. Start a Retirement Plan
Any tax advisor or financial planner you talk to is likely to make some reference to retirement planning when discussing this subject. This is because saving for retirement is an efficient way to reduce your taxes.
Contributions you make to retirement plans are mostly tax-deductible. Most retirement programs entitle you to a tax refund in the year you make them. Plus, that money gets put away so it can grow for your retirement.
While this might not be a viable option if you’re struggling with money, it is an easy way to lower your tax burden if you can afford it.
3. Use Your Health Insurance to Reduce Taxes
There has been much confusion around laws on health insurance lately. You can now choose not to take out private health insurance without fear of financial retribution from the federal government.
However, you may still face a tax penalty at state level if you fail to maintain an appropriate level of health insurance. Therefore, you should check your state’s rules in this area before you make any decision about health insurance going forward.
And depending on your income, you may be able to write off a portion of your insurance as well as receive credits to help pay for your monthly premium.
4. Claim a Deduction If You Work From Home
With the COVID-19 pandemic still going on, many people are working from home. Whether this is new to you or you’ve been doing it for years, you’ll be glad to know that it can reduce your taxes.
If you use your home as an office, you can claim back a portion of your rent or mortgage as an expense. The percentage you’ll be allowed to claim will depend on how much of your property you use as a place of business.
This is especially helpful if you’ve taken freelance work on the side.
5. Deduct Your Medical Expenses
Your medical expenses could result in a tax break. Contributions you make to eligible healthcare savings accounts can go untaxed, potentially saving you thousands of dollars.
And you are also able to deduct a list of approved expenses. Here’s a resource from the IRS about what qualifies and how to claim your deductions.
6. Take Fewer Allowances
The W-4 form is one of the key documents you have to fill out if you work for a traditional employer. It details the amount of tax you want your employer to withhold from your paycheck and this number is up to you.
One of the main reasons why taxpayers end up with a surprisingly large tax bill at filing time is because they don’t give proper consideration to their withholdings. If you got a shock this year when the time came to pay the IRS, your withholdings are the best way to make sure it doesn’t happen again next year.
The larger your withholding is, the more tax you pay in advance each month. You can change the withholding details on your W-4 form at any time.
7. Sell Your Bad Stocks
Did you make some poorly advised investments that never grew as you hoped? If so, there’s good news.
The IRS allows taxpayers to deduct the lost money from stock investments from their tax repayments. This is possible up to a limit of $3,000.
It’s important to note that you shouldn’t sell stocks just to use this tax break. A good investment is worth more to you than a small tax refund, even if you won’t see the benefits right away.
Using Our Tax Laws to Your Advantage
Once you take federal, state, and local taxes into account, it can be difficult to keep track of what you’re meant to pay – and that’s before you implement any strategy to reduce taxes. However, if you take the time to consider your approach to your taxes, there are a number of ways to lessen your tax burden when filing time rolls around again. The key is to use any available deductions and credits, and stay prepared.
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