How to Pay Less Taxes

0
Spread the love


The current federal income tax brackets range from 10% to 37%, but you can get away with paying less in taxes if you’re smart about claiming deductions and credits.

RELATED CONTENT

“There’s more opportunities in general for self-employed workers and business owners,” says Luke Sotir, a financial professional with Equitable Advisors in the greater Boston area.

However, there are still a number of ways for wage earners to lower their tax liability.

Tax credits and deductions change regularly though, and the Tax Cuts and Jobs Act of 2017 eliminated some popular deductions and limited others.

“Certainly, it’s a moving target,” says David Snider, founder and CEO of New York City-based Harness Wealth.

As of right now, here are 15 ways to reduce how much you owe for the 2020 tax year:

Contribute to a Retirement Account

Retirement account contributions are a top tax-reduction tool, as they serve two purposes.

Contributions to traditional 401(k) and IRA accounts can be deducted from your taxable income and, as a result, reduce the amount of federal tax you owe. These funds also grow tax-free until retirement. If you start early, saving money in these accounts can help secure your retirement.

“Even if you haven’t executed that plan by the end of the year, you still have time,” says John Maceovsky, managing director for accounting firm CBIZ MHM in Tampa Bay, Florida.

While contributions to workplace 401(k) accounts must be made by the end of the calendar year, tax-deductible contributions can be made to traditional IRAs up until the April 15 tax-filing deadline.

Open a Health Savings Account

If you have an eligible high-deductible medical plan, contribute to a health savings account. Contributions to these accounts offer an immediate tax deduction, grow tax-deferred and can be withdrawn tax-free for qualified medical expenses. Any balance left at the end of the year can roll over indefinitely, similar to the assets in a retirement account.

Use Your Side Hustle to Claim Business Deductions

Self-employed individuals (full time or part time) are eligible for scores of tax deductions. That means your freelance projects or side gig as a ride-share driver could land you considerable tax savings.

A few of the business deductions available include business-related vehicle mileage, shipping, advertising, website fees, percentage of home internet charges used for business, professional publications, dues, memberships, business-related travel, office supplies and any expenses incurred to run your business. If you pay for your own health, dental or long-term care insurance, those premiums may be deductible too.

Just be sure to maintain proper records, says Robbin E. Caruso, a CPA and partner at accounting firm Prager Metis in Cranbury, New Jersey. She has seen many people lose their deductions for that reason.

“They are disallowed because taxpayers didn’t keep the right documentation,” she says. Be sure to keep receipts, mileage logs or other records that you can produce in the event of an audit.

Claim a Home Office Deduction

To qualify for the deduction, the space must be used regularly and exclusively for business purposes. For instance, if an extra bedroom is used exclusively as a home office and it constitutes one-fifth of your apartment’s living space, you can deduct one-fifth of rent and utility fees.

Write Off Business Travel Expenses, Even While on Vacation

Combine a vacation with a business trip, and you could reduce vacation costs by deducting the percent of the expenses spent for business purposes. This could include airfare and part of your hotel bill, proportionate to the time spent on business activities. Talk to a tax professional about how to make this calculation correctly.

Deduct Half of Your Self-Employment Taxes

The government assesses a 15.3% Federal Insurance Contributions Act tax on all earnings to pay for the Social Security and Medicare programs.

While employers split the cost with their workers, self-employed individuals are responsible for paying the entire amount themselves. To compensate for the extra expense, the government will let you deduct 50% of the amount paid from your income taxes. You don’t even need to itemize to claim this tax deduction.

Get a Credit for Higher Education

Since it’s a credit, that amount is deducted from whatever tax you might owe the government. If it exceeds the amount of taxes you owe, up to $1,000 may be refundable to you.

Meanwhile, the lifetime learning credit is great for adults boosting their education and training. This credit is worth up to $2,000 per year and helps pay for college and educational expenses that improve your job skills.

See if You Qualify for an Earned Income Tax Credit

Even if you aren’t required to pay federal income taxes, you could get a refund from the government. The earned income tax credit is a refundable tax credit of up to $6,660 for tax year 2020.

The EITC is calculated with a formula that takes into consideration income and family size. The income limits for the credit range from $15,820 for single taxpayers with no children to $56,844 for married couples filing jointly who have three or more children.

Itemize State Sales Tax

Taxpayers who itemize their deductions can include either their state income tax or state sales tax on their Schedule A form. The state sales tax break is a great option if you live in a state without income taxes.

While taxpayers can use a table provided by the IRS to easily claim their sales tax deduction, Maceovsky says people should remember to add on the sales tax from any major purchase such as a car or boat.

The federal tax deduction for state and local taxes is capped at $10,000 from all sources.

Deduct Private Mortgage Insurance Premiums

If you have less than 20% equity in your home, chances are you pay private mortgage insurance. This coverage is required by lenders as a way to protect them in the event you stop making payments.

Until 2017, taxpayers could deduct the cost of private mortgage insurance on their itemized deductions.

While the Tax Cuts and Jobs Act eliminated the deduction, it was reinstated at the end of 2019 and is available for the 2020 tax year. It was made retroactive for 2018 as well. That means you could amend your 2018 tax return to claim it, but Caruso advises checking whether it would result in any significant refund first.

“Whenever you open an older return, you put yourself at some risk of being looked at closer (by the IRS),” she says.

Make Charitable Donations

Charitable contributions made with payroll deductions, checks, cash and donations of goods and clothing are all deductible. These deductions add up and are often overlooked.

“People might forget about their non-cash contributions,” Maceovsky says.

You generally need to itemize to claim a deduction, and since the 2017 tax reform nearly doubled the standard deduction, many people choose not to itemize. However, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, allows taxpayers who don’t itemize to deduct cash donations of up to $300 made before Dec. 31, 2020.

Adjust Your Basis for Capital Gains Tax

Investors: When calculating the cost basis after selling a financial asset, make sure to add in all of the reinvested dividends. That increases the cost basis and reduces your capital gain when you sell the investment.

If you sell your house, you may end up paying capital gains tax as well, particularly if your property’s value has risen significantly.

However, you can reduce how much you owe if you’ve made home renovations or improvements.

“Any investment you make can be deducted from the capital gains,” Snider says.

Avoid Capital Gains Tax by Donating Stock

Another way to avoid capital gains is by using stocks to make charitable gifts.

“You can move stocks that had big gains directly into a donor-advised fund,” Snider says.

Money moved into a donor-advised fund is not only exempt from capital gains tax but can also be deducted by those who itemize. Donor-advised funds can be started with as little as $5,000, according to Snider.

Claim Deductions for Military Members

Are you in the military reserves, such as the National Guard?

If you travel more than 100 miles from home and need to be away overnight, you can deduct unreimbursed travel expenses such as transportation, meals and lodging.

If you’re an active duty service member, you can deduct any costs associated with moving for a permanent change of station.

Don’t Forget State and Local Tax Breaks

State and local taxes can add up, so don’t forget to look for ways to reduce your tax burden there as well.

While the federal tax reform law eliminated miscellaneous deductions, many states still allow them, Caruso says. Or they may have a lower threshold for claiming them.

For instance, in New Jersey, taxpayers can deduct the cost of medical expenses exceeding 2% of their adjusted gross income. On federal tax forms, only medical expenses more than 7.5% of a person’s income are deductible.

Tax savings aren’t limited to income taxes either. In New York City, there is a parking tax for some rented spaces, but Snider says residents can effectively waive almost half the fee by requesting an exemption.

Regardless of where you live, check with your local and state taxing authorities to see what deductions might be available to you.



Source link

Leave A Reply

Your email address will not be published.