Everyone has heard that taxes are inevitable, but by proper planning, and by following the basic tax-saving strategies, one can owe less money to the Internal Revenue Service (IRS).
The earned income is usually taxed at the local level, state level, and federal levels, and earned income is subject to extra levies to fund Social Security and Medicare. Taxes are difficult to avoid, but there are many ways to help reduce the taxes. One can choose FinAcc Global outsourced accounting services for their tax savings.
Here’s a quick look at the top tax savings tips one can take to minimize the taxable income and the taxes one owes. These are basic tax-saving strategies that every taxpayer should have knowledge about. These tax planning strategies are easy to understand and can be used, and are most likely to save the average taxpayer’s money.
- Gather all Important Documents – Before filing the taxes it is very important to gather all the necessary documents so that there will be no miss outs. Collecting the crucial collect tax forms that report income like 1099s and W-2s. Also make sure to keep all the receipts that are related to the valuable tax deductions and credits, which include receipts for higher education expenses especially those that are reported outside of the IRS 1098-T, acknowledgments for the household goods that were dropped off at the charity, information that is required to be claimed for the tax benefits for the dependent.
- Tax-Free Income – There are few certain types of income that are tax-free. Earning them will help in avoiding the taxes. Few ways to get tax-free income are saving money for the kid’s education, contributing to a health savings account, receiving health insurance and certain other employee benefits from the employer, investing in municipal bonds, and allocating few investments to the kids.
- Contribute to the Retirement – The other smart move to get the tax savings are contributing to retirement. In both the years 2020 and 2021 the taxable income can be reduced for contributions up to $19,500 to a 401(k) or 403(b) plan. People who are aged 50 or older can add $6,500 to the basic workplace retirement plan contribution. Those who don’t have a retirement plan at their workplace can get a tax break by contributing up to $6,000 ($7,000 for those aged 50 or older) to an individual retirement account in both the years 2020 and 2021.
- Get Benefited from Tax Credits – Attaining the tax credits is one of the best things to reduce the taxes. There are child and child care tax credits and also education tax credits. Tax credits for buying a hybrid car, making certain home energy improvements, like adding solar water heaters or solar electricity panels to the home.
- Defer Taxes – Deferring payment of taxes to a future year is like availing a free loan from the government. There are different ways to do this like investing in IRAs, postponing an employer bonus, and investing in other retirement accounts.
- Maximize Deductions – One of the most well-known tips to tax savings is to consider the tax deductions. The more the tax deductions the less one will be paying for those taxes. People who are the owners of a business can deduct all their business expenses and maximize their tax deductions that include travel, operating costs, inventory, and other expenses. Many small businesses easily get qualified for an up to 20% pass-through tax deduction, which has been established by the Tax Cuts and Jobs Act for 2018 through 2025.
- Itemize Deductions – Every taxpayer is entitled to take itemized deductions or the standard deduction. The itemized deductions are mostly related to personal contributions that include home mortgage interest, charitable contributions, property taxes, and state income tax. It is also better to include travel costs incurred while volunteering for a charity, household supplies, and goods that have been donated throughout the year. The Tax Cuts and Jobs Act have doubled the standard deduction starting in the year 2018. The higher-income taxpayers with a lot of deductions will itemize. There are also ways to increase the personal itemized tax deductions to exceed the standard deduction amount.
- Health Savings – Getting a high-deductible medical plan offers an immediate tax deduction, can also withdraw tax-free for qualified medical expenses, and grow tax-deferred.
- Reducing the Tax Rates – People at the 22%, 24%, or 32% tax brackets for them the capital gains tax rate is 15%. 20% for higher-income taxpayer’s people at the top end of the 35% or 37% bracket. The rate is zero for the taxpayers in the 10% and 12% tax brackets. One can get benefited from the lowest rates available if they earn income from long-term investments like stocks, bonds, mutual funds, and real estate. The profits one earns from these investments are taxed at long-term capital gains rates.
- Shift Income – By shifting the income to those who are in a lower tax bracket is a good idea. People can do this by shifting their income to their children. This process is called income splitting or income shifting. Not just children this can be done to the spouse or a relative who is physically or mentally incapable of self-care and lives with you, they’re eligible, too. The Tax Cuts and Jobs Act made changes so that income splitting was quite easier.
Get in touch with FinAcc Global outsourced accounting services to know more about tax savings. The sooner one takes advantage of these tax-saving tips, the better they will be.