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Best Ways to Lower Your Taxes and Maximize your Tax Return

Best Ways to Lower Your Taxes and Maximize your Tax Return

Paying taxes can be a complicated and frustrating experience, especially when you’re dealing with a lot of paperwork. However, there are ways to minimize your tax burden and get the most out of your tax return. For example, you can lower your taxes and keep more hard-earned money by taking advantage of deductions and credits.

The Benefits of Tax Credits

The government offers tax credits to incentivize taxpayers to engage in certain activities or grant tax relief. Credits can lower your taxes dollar for dollar and usually are better than tax deductions because they can lower the total tax you owe, not just the taxable income.

Some current IRS tax credits include the child tax credit, earned income tax credit, education credit, first-time homebuyer credit, adoption credit, child care, and dependent care credit, American Opportunity Tax Credit, and retirement savings contributions credit. However, it’s important to check each year as the availability of these credits can change regularly.

As someone with taxable income, it’s important to be aware of tax deductions and credits that can lower your overall tax bill. Tax deductions may reduce your taxable income, while tax credits would lower the tax you owe dollar-by-dollar.

In terms of savings, a $10,000 deduction on $50,000 in taxable income would result in a $1,200 reduction in taxes owed. However, a $10,000 tax credit would result in a $10,000 reduction in taxes owed. Each has different requirements and can provide varying levels of savings.

Saving for Retirement

There are many different ways to lower your tax bill, and one of them is by contributing to an Individual Retirement Account (IRA). The two most popular types of IRA are the Traditional and Roth IRA; the main difference between them is when your contribution is taxed.

For many people, the most popular option is a company-sponsored 401(k) plan. This is because many employers will often match employee contributions to their 401(k) plans. Experts recommend contributing the full amount allowed each year (for 2022, $20,500 or $27,000 for taxpayers 50 years and over) or at least the maximum amount your employer will match.

With a Traditional IRA, your contribution is usually pre-tax, which means it’s placed in your IRA before being taxed. This lowers your taxable income for the current tax year. However, you won’t pay taxes on your contribution until you withdraw from your IRA.

With a Roth IRA, your contribution is taxed upfront. So even though it doesn’t reduce your tax bill in the present, the IRA distributions you take when you retire in the future (including earnings) are tax-free.

Contribute to your Flexible Spending Account (FSA) and HSA

There are several easy ways to reduce your taxes. One way is to contribute and allocate to a Flexible Spending Account (FSA) for your health expenses. The contributions you make to an FSA are not subject to employment tax or federal income tax, which can significantly lower your tax bill.

Your employer may participate in an FSA program, allowing you to elect to have a certain amount of money deducted from your salary paycheck throughout the year and put into the account. This money can then be used for tax-free health expenses incurred during the year up to the maximum amount you have elected to contribute.

You can also lower your taxable income by contributing to a Health Savings Account (HSA). The IRS allows you to make contributions to HSA until the tax deadline, which means you can continue to reduce your tax bill after December 31.

Start a College Fund for Your Children

A 529 plan is a government savings plan with unique tax benefits designed to encourage saving for your child’s future high education costs. Named after Section 529 of the IRA, it was created in 1996 as a state-sponsored investment program. As of 2022, all 50 U.S. states offer at least one type of 529 plan.

The Jobs Act and Tax Cuts of 2017 expanded 529 plans to include expenses associated with K-12 public, private, and religious school tuition and college costs. In addition, you may use up to $10,000 per year of 529 plan funds per student for qualified educational expenses.

The earnings from a 529 plan account are not subject to federal tax as long as they are used for qualified educational expenses for the designated beneficiary of the plan.

Another option under the 529 program is a paid, advanced, qualified in-state public college tuition plan. This allows you to lock in current college tuition rates regardless of when your child enrolls in college.

Make charitable contributions

Tax deductions for charitable contributions can lower your overall tax bill. The IRS allows taxpayers to itemize their deductions for gifts made to qualified organizations. This means you can deduct donations of money, stock, or noncash items on your tax return. In some cases, you may also be able to deduct out-of-pocket expenses, like transportation costs.

It’s important to note that time spent volunteering is not tax deductible. However, expenses incurred while doing volunteer work may be deductible. For example, the cost of ingredients for a donated dish or certain travel expenses when attending a charitable event.

To take advantage of these deductions, you must itemize your tax deductions when you file your taxes. For 2022, charitable tax deduction allowed up to $600 per tax return for filing married and jointly while it is $300 for other filing statuses.

It’s important to note that you can only deduct these charitable contributions if you itemize your taxes. The standard deduction for the 2020 tax year is $12,400 for singles and $24,800 for married couples filing jointly. So unless your total itemized deductions exceed these amounts, you won’t benefit from writing off your charitable donations.

Your donations are only qualified for tax deductible if the organization is a qualified nonprofit organization.

Harvest investment losses

As an investor, it’s important to know the different strategies you can use to lower your tax bill. One such strategy is known as “loss harvesting.” This involves selling investments and assets that have lost value from its principle to offset capital gains taxes.

For example, let’s say you have a portfolio of stocks worth $10,000. However, you also have some stocks that have lost value and are now only worth $9,000. By selling the losing investments, you can realize a capital loss of $1,000. This can be used to offset any capital gains taxes you may owe, dollar for dollar.

Another benefit of loss harvesting is that it can help you lower your overall tax liability. When you have more losses than gains from your investment portfolio, you may use up to $3,000 of excess losses to offset your ordinary income. However, the remainder of the losses if you have an excess of $3,000, can be carried forward year after year.

So, the next time you prepare your taxes, consider loss harvesting to reduce your tax bill!

Please note that the IRS does not allow use losses from a “wash sale”. A “wash sale” is when you purchase “substantially similar” or the same investment within thirty days before or after the investment loss.

Maximize Tax Deductions on Expenses

There are several ways to reduce your taxable income through deductions. The amount you save in taxes will depend on your marginal rate. You can typically take either a standard deduction or itemized deductions. Itemized deductions may include medical and dental care costs, mortgage points, interest on your mortgage, property taxes, state income taxes, charitable contributions, and business expenses.

It is generally advisable to itemize your deductions to maximize your savings. This is especially true for business owners and self-employed taxpayers who often have access to various deductible business expenses. Taking advantage of all the deductions available can minimize your overall tax liability and retain a little more of your hard-earned money.

Some of the common business expense tax deduction includes,

Business office rent, home office expenses, vehicle maintenance and acquisition cost, equipment depreciation cost, etc.
These are expenses that lowers your or the business’s net profit, and writing off as many expenses for a tax deduction as possible will help to reduce your tax bill. Claiming these business tax deductions can also reduce both your income tax and self-employment tax, and you may tax deduct a portion of your self-employment tax payments on your tax return.

Find out whether going with a standard tax deduction is better at maximizing your bottom line.

Bonus Tip on Lowering your Taxes:

One way to lower your taxes is to itemize deductions for medical expenses. The IRS defines medical expenses as costs incurred for diagnosis, treatment, cure, mitigation, or disease prevention. For example, you can Deduct your self-employed health insurance.

As a self-employed individual, you can claim a tax deduction for health insurance premiums paid for yourself, your dependents, and spouse. This deduction can lower your taxable income dollar-for-dollar. Self-employed individuals who are partners or 2% S Corporation shareholders may also benefit from this deduction, although special rules apply.

You can lower your taxes by itemizing deductions and including medical expenses. The IRS defines medical expenses as costs incurred for diagnosis, treatment, cure, mitigation, or prevention of disease. These expenses can include those incurred for yourself, your spouse, or your dependents. You may tax deduct medical expenses and dental expenses that exceed 7.5% of your adjusted gross income. Qualified expenses include those for yourself, a spouse, or dependents. Regardless of when you incur the medical costs, the expenses may be eligible for deduction in the year they were paid.