I don’t think there is an American out there who doesn’t want to reduce their tax liability when tax season rolls around.
Every year between January and April, folks are organizing receipts, compute income, and search for deductions.
And credits that will help us to pay as little as possible to the IRS or get us a larger tax refund.
1. Don’t Miss the Deadline
One of the biggest and most obvious things when it comes to filing your taxes is to file on time. Filing on time means that you will get your refund on time or early, and it also means that if you end up owing, you will not be accruing interest on what you owe. You will also be assessed a failure to file a penalty.
To avoid being penalized, you can file for an extension. Be aware that an extension only applies to filing your taxes, not paying them. So if you owe taxes and you pay later than April 15, you will begin to accrue interest on what you owe. So plan ahead, and start your calculations early.
2. Get Professional Help
Doing your taxes on your own really isn’t so bad. It is definitely possible to take care of your taxes by yourself. It will save you money, but when doing your taxes stresses you out to the max and you just can’t seem to regain your balance, it’s time to call in reinforcements. There are plenty of options when it comes to filing your tax return.
There is software you can purchase, certified tax preparers that work in those chain stores, and certified public accountants. Accountants are a great idea if you are falling both business and personal taxes, or if you want someone to give you some education on the entire process.
3. Tax Loopholes
Tax loopholes are nothing more than ways to use the tax code to save yourself money. It is perfectly legal and worth the research and time it will take. The best thing about loopholes is that you don’t have to be a rich tycoon to take advantage of them.
Different income levels have different loopholes available to them. Many loopholes come in the form of deductions and credits. You can even use your retirement savings and mortgage to save money on your tax bill.
4. Life Stages Matter
The tax bracket, income, debt, etc. of a new graduate is likely to be very different than that of a retiree or someone who is well-established and a veteran in their profession. The taxes of a single person with no children is going to be different from someone who is married with three children.
5. Choose the Right Filing Status
Just because you are married, doesn’t mean that you have to file jointly or that filing jointly will prove to be of any benefit. Choosing to file with the “married filing separately” option is a little more labor-intensive but it can lead to tax savings if you play your cards right. In general, when spouses file separately, each person has assessed a lower adjusted gross income (AGI).
It is also helpful when one spouse has a lot of medical expenses. Not filing jointly will often mean that the deduction for medical expenses can be larger. There are some drawbacks to not filing jointly, but it is a good idea to weigh the option before choosing one option over the other.
If you are not married and have dependents, it will most likely benefit you to file as the “head of household.” Qualifying dependents can range from a child you’ve taken care of for a specific period of time or an elderly family member you support. This even applies to elderly parents who don’t physically live with you, but you provide at least half of their financial support.
6. It’s all in the Timing
Getting your timing right and paying closer attention to your finances throughout the year can help you capitalize on your tax return. For instance, paying your January mortgage payment before December 31 will allow you to get the added interest for your mortgage interest deduction. And putting in health-related exams, treatments, and procedures in the last quarter of the year can boost your potential medical expense deduction numbers.
Carefully watching the calendar and planning payments, activities, and procedures at the right time can potentially boost your refund or make tax calculations a little easier.
7. Tax Credits
Taxpayers often see better results, as far as refunds go, with tax credits instead of deductions. The reason for this is that tax credits reduce your taxes dollar-for-dollar, so a $200 credit is $200 off of your taxes.
Two of the more popular tax credits are the earned income tax credit (EITC) and the child and dependent care credit. There are education credits for both undergraduate and graduate students. There are credits for being an energy saver and having an electric car, too.
8. Deductions
There are a host of things that you can deduct. Did you know that the miles you travel to seek medical treatment may be deductible from your taxes, or the miles you travel doing charity work? Just make sure that your miles meet the criteria for the deduction. In order for deductions to be beneficial, you will need to keep your receipts and keep a record of your activity.
In the case of charitable miles, writing down the miles, date, and purpose of the trip can suffice. When making charitable donations you can write down the items donated and the market value of those items to inform the amount of your deduction.
There are many different types of credits that can help reduce the amount of taxes you pay or increase your refund amount. Because tax laws and credits change quite often, it’s a good idea to stay informed regarding tax law, filing guidelines, and other IRS requirements.