Pay Less in Taxes
Paying taxes is a stressful time for most people, but it doesn't have to be like pulling teeth. With some planning and preparation throughout the year, you can significantly reduce the amount of taxes that you owe. You can even start lowering your withholding once you lower the taxes that you owe, allowing you to get more money from each paycheck.
Deductions and Credits
- Understand the difference between deductions and credits, and how they affect your taxes. The best way to reduce the amount you have to pay in taxes each year is to take full advantage of every deduction and credit you are eligible for.
- A deduction is something that reduces the amount of your income that is taxed. These can include charitable donations, job-related expenses, interest paid on student loans and mortgages, energy-efficient home improvements and more.
- A credit reduces the actual amount of money you have to pay for your taxes, which makes them much more powerful than deductions. A $2000 credit will lop $2000 dollars off the taxes you owe, which can make a huge difference. Finding every credit you're eligible for is essential for reducing your yearly taxes.
Itemized or Standard Deduction?
- Know the difference between an Itemized and a Standard Deduction. Choosing the correct deduction can have a significant impact on your taxable income for the year. Choose whichever deduction is greater when filing.
- Itemized Deduction - There are a wide variety of expenses that can count on your itemized deduction list. These include, but are not limited to, charitable donations, student loan and mortgage interest, health and dental care, job-related expenses, and more. Many of the available deductions will be outlined in the following sections.
- Standard Deduction - This deduction is a set amount based on your filing status. Choose this deduction if your itemized deduction is less.
- Review IRS Form 1040 Schedule A to see all of the deductions that you may be eligible for. This will give you an idea for what receipts to save throughout the year.
- Save every essential receipt. Organize-Receipts so that you can easily track your receipts down when it's time to file taxes.
- Save every receipt from your donations, even the toaster that you gave to Goodwill. You can claim a significant portion of your donations, leading to a big deduction.
- Save any receipts and bills for healthcare expenses, as an expense over 7.5% of your adjusted income is deductible.
- If you run your own business, save every job-related receipt. If you're hunting for a job, save the receipts for your job-hunting expenses (cab fares, employment agency fees, etc.).
Homeowner Deductions and Credits
- Buy-a-House. This is a major life-event deductions, and gives you access to several major deductions and credits detailed below. Obviously this isn't a decision to be taken lightly, but becoming a homeowner can provide significant tax benefits for years to come.
- Consider avoiding paying off your mortgage. Mortgage interest is deductible, and can add a significant deduction to your gross income. Consider continuing to make monthly payments on your mortgage instead of paying it off early.
- You'll need to weigh the benefits of this tax deduction versus the benefits of paying your mortgage off early.
- Your mortgage interest will be deducted through the Itemized Deduction.
- Save-Money-with-Residential-Renewable-Energy-Tax-Credits. There are several credits that you can take advantage of by installing earth-friendly energy sources, including geothermal heat pumps, Solar-Power-Your-Home, and fuel cells.
- You can also get credits for improving your insulation, getting new windows and doors, or getting a more efficient furnace.
- Consider refinancing your mortgage to pay for home improvements. If you get a second mortgage and use it to make improvements to your home, you may be able to deduct some or all of the points, or up-front costs, of the second-mortgage. You'll need to weigh the benefits of this versus going further into debt with the second mortgage.
- You can use a second mortgage to pay off credit card debt, which cannot be deducted. You can then deduct the interest on your second mortgage while getting rid of your looming credit card debt at the same time.
Child-Related Deductions and Credits
- Have children. While taxes shouldn't be a motivating factor behind the decision to have a child, you can get some powerful benefits when it comes time to file should you choose to become a parent.
- Make sure to get your child a Social Security number so that you can claim them as a dependent.
- Claim the child as a dependent. Claiming a child as a dependent will act as an immediate deduction of #3,950 from your taxable income, no matter when in the year the child was born.
- Since you're claiming a dependent and your tax bill will be reduced, you can cut back on your withholding at work so that your paycheck is a little larger. You will need to fill out a new W-4 for your employer.
- Claim the "Child Tax Credit". You can claim one of these credits for each of your qualifying children. Each credit can be worth up to $1,000 off of the taxes you owe, depending on your income.
- Claim the "Child and Dependent Care Credit" if you pay for childcare while working. Depending on the number of children you have and the amount of money you spend on childcare, this could be worth up to $2,100.
- Claim the "Adoption Credit" if you adopted a child this year. Depending on the adoption costs you paid, you may be eligible for a tax credit of up to $13,190 per adopted child.
- Determine which credit you are eligible for. There are two tax credits available for students, but you can only claim one or the other.
- American Opportunity Credit - This credit is only for students in their first four years of post-secondary school education. The credit is worth up to $2,500 for qualified tuition, and you must be enrolled at least half time for one academic period.
- Lifetime Learning Credit - This is available to any adult taking undergraduate, graduate, and professional degree courses. The credit is %20 of up to $10,000 of your tuition, with the upper limit being $2,000.
Retirement Deductions and Credits
- Start a retirement account. A 401k or IRA will allow you to funnel money from your paychecks into a retirement account. This makes your paychecks a little less, but the money that you invest in your retirement plan is tax-deductible.
- Deduct your retirement deposits in the itemized deductions list.
- Claim the "Saver's Tax Credit". This is a credit that can be worth up to $1,000 depending on how much you've deposited into your retirement plan.
Other Ways to Save
- Apply for the "Earned Income Tax Credit". This is a scaling credit based on the amount of income that you earn. Typically if you make $50,000 or less in a year, the credit can help get you a significant return.
- This credit is often overlooked, but can be very helpful for low-income filers.
- Check your previous returns. You can amend a return for up to three years if you missed something and need to correct it. There are all kinds of reasons that you may want to go back and Amend-a-Federal-Tax-Return, including:
- Neglected to file for an Earned Income Tax Credit when eligible.
- Forgot to get a credit for purchasing a hybrid car in 2010.
- Forgot to claim education credits, or any other credit or deduction that you were eligible but didn't claim.
- Have a professional review your taxes. Professional tax preparers are paid to know all of the tax regulations inside and out, and can be very helpful in tracking down every last deduction and credit. You may be able to get a guarantee that if you paid more taxes than you should have the tax firm will repay the difference.
- Be aware what is coming up next year. Some tax deductions get eliminated each year and others get added.
- Keep records in any way it is convenient for you. Write it on the back of the receipt and file it away for the end of the year. Put it in a jar or several or put it in a file cabinet or get a box.
- Pay Your Taxes
- Be a Tax Preparer
- Claim AMT Credit
- Get Out of Debt
- Reduce Income Tax Liability in India
- Know if Your Boss Is Filing Taxes on Your Income
Sources and Citations