Description: There are ways to legally and ethically lower your tax bill. With an understanding of the tax laws, you can keep your money and make it work for you.
You’ve made your money so obviously you’ll want to find out how to keep as much of it as possible. We know taxes are inevitable, but that doesn’t mean we have to make sure that all of our hard-earned money is withdrawn. What if it was used wisely and helped lower our tax liability? In the right circumstances, the government even offers programs that accomplish the same goal. You just need to know what to look for.
Contribute to a retirement account
The best way to reduce your tax bill is to contribute to a retirement account. This is the easiest way to get started. The most common accounts are an IRA or Employee sponsored 401 (k). Contributions to these accounts are made from your taxable income. So when your tax liability is calculated, your total amount will decrease. As an added bonus, prepare for a comfortable retirement.
If you are self-employed, there are also pension plans specially designed for you. They have a slightly different classification but still serve the same purpose: to contribute to your future retirement from taxable income. Work with a financial advisor to discuss the best option for you.
Take advantage of the employer’s advantages
If your employer offers benefits such as health, dental and vision insurance, these salary deductions will be deducted from your taxable income. Just as your 401 (k) deductions lower your taxable income, so do these lower benefits. Some employers offer flexible spending accounts and health savings accounts so that you can set aside money for medical expenses. When you take advantage of these programs, you can lower your taxable income.
For the self-employed, a tax advisor can help you determine whether or not medical plans you have purchased yourself are tax deductible. By deducting these costs, you also lower your overall tax liability.
Request business deductions on a part-time job
The sideline has become a popular way for people to make extra money on their own terms. However, many sideline jobs leave it up to the person who makes the money to report taxable income to the IRS. In order not to be the center of an IRS investigation, it is important that you report any income that has not been reported by an employer. But did you know that you can deduct expenses that are directly related to your sideline? For example, if you are a driver, you can calculate mileage reimbursement. There is the possibility of a qualified home office. This is another area where having a relationship with a qualified tax advisor comes in handy to maximize your deductions and reduce your liability.
Deduct self-employed tax
As an employee, your employer pays half the Social Security and Medicare costs, which are deducted from your paycheck. If someone is self-employed, he does not have this luxury. In fact, they are subject to a Federal Insurance Contributions Act (FICA) tax of 15.3%. You will be taxed on all income to cover Social Security and Medicare programs. Instead of wondering why self-employment is worthwhile, know that all hope is not lost. The government allows you to deduct 50% of the FICA tax. This eases the tax burden so you can keep doing what you love.
Business travel expenses
All business travel expenses are deductible from your taxes. This includes airfare, hotel accommodation, meals, etc. However, the IRS takes business travel claims very seriously. If you cannot prove the legality of every single expense, it will be rejected. For example, family vacations cannot be claimed as business trips unless you can demonstrate that there is a reason for the claim. Even then, it is unlikely that the entire trip will be accepted as an expense – only the portion that is lawfully used for business purposes.
Find out if you are eligible for the Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is designed to help low to middle income families get a tax break. The qualification standards can get a little tricky, but if you think you fit into these categories, they are well worth a look. The IRS takes into account income, marital status, and number of children when individuals qualify for the EITC. When approved, you will receive a dollar-for-dollar discount off your entire tax bill for what you qualify for.
Open a 529 plan
Do you have children? Start a 529 college plan Not only does this reduce your tax liability, but it also increases college savings as interest increases over time. It’s no secret that college education is getting more expensive every year. Contributions to a 529 may be tax deductible at the state level. With the cost of tuition and tuition rising, preparing early not only provides the security you need, it also saves you money on taxes.
Take advantage of college loans
The government has tax credits that provide valuable savings to students who are completing higher education. American Opportunity’s tax credit is available for the first four years of your college education. This credit offers up to $ 2,500 per student per year. However, since it is a credit, the amount will be deducted from any taxes you may owe to the government. If the $ 2,500 is greater than what you owe, the maximum amount you can get is $ 1,000 which will be refunded to you.
Lifetime Learning Credit is also a great option for adults trying to advance their education and training. This credit of up to $ 2,000 per year will be used to pay for your studies and advance your career.
Deducting private mortgage payments
Private Mortgage Insurance (PMI) is required by lenders when a home has less than 20% equity. This protects the lender in the event that a borrower stops making payments. The amount you pay in premiums is currently tax deductible. In 2017, the Tax Cuts and Job Elimination Act ended PMI deductions. However, they were reinstated in 2019 and are still available to this day. The IRS has approved retrospective PMI deductions for 2018, but you should speak to a tax advisor. Decide whether the amount you paid in PMI rewards is worth filing a prior tax return. Anytime you make changes to an old return there is a risk of an audit.
Harvesting tax losses
Did you only invest to experience the buyer’s remorse? The good news is you don’t have to consider everything a loss. In fact, you can benefit from the loss, so to speak. For investments that have depreciated and that you do not expect to recover, you have the option of selling them to reduce your tax liability for the current year. You can write off the loss amount from your original purchase amount (up to $ 3,000) against your income. The reverse logic also applies. If you’ve seen significant growth in an investment, if tax rates are high, you can wait for the sale to complete.
Maximum retirement provision
As of tax year 2020, most people can contribute up to $ 19,500 to their 401 (k). People 50 and older can add an additional $ 6,500 to this retirement account. Maximizing your contributions can not only significantly reduce your overall liability, but it can also have an impact on which tax bracket you belong to. As your overall tax bracket decreases, the tax percentage that is applied to your income also decreases.
Give generously
One of the easiest ways to lower your taxable income is to find nonprofits that you can donate to. What is a donation? The good news is that a donation doesn’t have to be monetary. Donations of household goods, clothing, cars and electronics are tax deductible. In order for your donation to be considered tax deductible, any donation of money or goods must be made to a non-profit organization who will provide you with a receipt of the transaction. Receipt of the donated goods should include an approximation of the value of the donated goods.
It’s all about timing
The tax year runs on the calendar year. So your tax liability is based on your total financial activity between January 1st and December 31st of the current year. When December comes and you find that you’ve postponed promotions, don’t wait any longer. The clock is reset on New Year’s Day. If you can pay off tax-deductible medical bills, do so now. Contribute extra cash to your retirement accounts and maximize contributions when possible. Add extra cash to your children’s 529 accounts. In the future you will thank me.
Final thoughts
With a little planning, you can lower your annual tax bill and keep your hard-earned money working for you. Whether you are preparing for the future, helping those in need or preparing for medical expenses, your financial situation will remain stable and secure.
Lyle David Solomon Bio
Lyle Solomon has extensive litigation experience as well as extensive practical knowledge and expertise in legal analysis and writing. He has been a member of the State Bar of California. In 1998 he graduated from the University of the Pacific’s McGeorge School of Law, Sacramento, California, and is now the Principal Attorney of the Oak View Law Group in Los Altos, California.