When tax season comes around, people always start looking back at their incomes and spending habits for the past year. That way, they can identify where to maximize their tax deductions and credits thus reducing the overall tax burden.
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Top Strategies to Protect Your Income From Taxes
Here are some of the top ways of saving money on your taxes this year.
Earned Income Tax Credit
This credit applies to people in the low and moderate-income tax brackets. Therefore, if you want to reduce your tax burden considerably, you need to check whether you qualify for this spot which offers a tax credit as high as $6,000.
If your income is less than $50,000, you need to find out whether this tax credit is applicable to you. Do your research to determine whether or not you can save money on your taxes this way.
Start A New Business
You can save some money on your taxes if you choose to start a new business. That’s because as a business owner, you have more control on how you pay your taxes. For instance, you can keep more money in your business rather than writing it off as income.
Additionally, you can also describe some costs as expenses. You can always use the services of a tax professional to determine the IRS regulations regarding your business to help reduce the overall tax burden.
Check Your Investments
You can reduce your tax burden by making an investment, but it depends on your individual finances and prevailing circumstances. Therefore, you need to consult a qualified financial planner to get the best advice on the right investment to help you reduce your tax burden.
Make sure you choose an investment that benefits you in the short and long-run. It wouldn’t make sense to make an investment to save money on your taxes and end up losing the capital in the long run.
Reduce Your Tax Burden With Your Children
The tax code provides a few benefits to parents such as tax credits for any child care costs. The credit in this statute goes as high as $1000 for each child under 17 years of age but it’s phased out for people with higher incomes.
If you have more dependents in your household, your tax credit will also be higher. If you’re making alimony payments, they are also tax deductible so that’s a plus for you.
College Savings
Very few parents create the 529 account for college savings for their kids. If you’re not doing this, you’re missing out on the tax benefits of letting those savings increase tax free. If the money in that account is used only for tuition purposes, you don’t have to pay taxes on the earnings.
Adjusting Finances As A Couple
You can optimize your tax circumstances if you adjust your finances with your partner, especially for married couples.
For instance, if you have saved some money as a couple in a short-term account during which you have earned interest, it’s a good idea to invest the money under the name of the lowest earner among yourselves. That way, you can pay the least amount of tax on the total interest earned.
Longer Mortgage Periods
Your mortgage interest payments are tax deductible. Therefore, as a homeowner, you’re benefiting on this front with regards to your taxes. If you choose to keep your mortgage for longer periods, you can enjoy higher tax benefits.
Of course, you need to consider the additional interest payments for keeping the mortgage for a longer period and choose the best option for you. Also, don’t discount the benefit of paying off your debt completely, if you have the savings to do it. If you have a reverse mortgage loan the interest charges cannot be deducted until loan maturity or should you voluntary repay the interest.
Retirement Savings
You can reduce the amount of income you’re taking home every time by increasing your retirement contributions and enjoy some tax benefits. Yes, it might be a painful choice for a while, but you can enjoy a few things in the long-run.
Note that, you will be increasing your retirement benefits while reducing your overall tax burden. Remember that money saved in various retirement accounts such as IRAs and 401(k)s is tax deductible but with a few limits.
Give Out More Money
Any money you give to charity will be tax deductible. Therefore, you should get into the charitable mood and give out more money to reduce your tax burden considerably. Note that, you can also give out a maximum of $13,000 without paying taxes.
Therefore, parents can use the gift-splitting technique to give each of their children $26,000 and avoid paying taxes on those amounts altogether.
Track Your Medical Expenses
There are a few medical expenses that are tax deductible. For instance, if you get medical supplies such as bandages or undergo acupuncture, you’re reducing your tax burden. On the other hand, breastfeeding mothers can purchase breast pumps and save money on their taxes during the tax season.
Make sure you keep all your receipts and visit the official IRS website to get more information on the eligible items under medical expenses.
Increase Your Home’s Energy Efficiency
The federal government continuously emphasizes the importance of homeowners being energy efficient. If you increase your home’s energy efficiency by adding insulation, installing energy efficient doors or windows and using the best HVAC systems, you can enjoy a few tax credits.
Additionally, you should consider installing alternative sources of energy such as solar panels to qualify for the tax credits offered by the federal government.
Pay Attention To Details When Selling Your Assets
If you’re planning on selling an asset that will be taxed under capital gains tax, there are a few things to consider. First, if you’ve owned the asset for more than a year, you can enjoy a 50% discount on the CGT.
Secondly, if your income fluctuates from one year to the other, you should consider selling the asset during the lower income earnings periods because you will reduce your tax liability.
You can always seek the assistance of Dean Hines Tax Lawyer to help you identify the best way to reduce your tax burden when disposing assets.
