Resourceful taxpayers will always look for strategies to reduce yearly tax obligations. You should see the positive side. Many options remain open for Americans hoping to cut back on taxes or probably add to the number of refunds without breaking the rule of the Internal Revenue Service (IRS). Remember the revenue agency modifies its policies time and again, so deductions and credits also vary.
Know the Fundamentals
Ignorance of how things should work can cause you problems in the long run. To avoid this predicament, learn the essentials of federal tax legislation which includes saving tips. By claiming more deductions, you can get more refunds once the tax year ends. Spouses who get married or have a new baby also qualify for extra tax breaks. The government allows certain concessions like expenses taken away from gross income to lower taxable earnings. Other often- ignored tax cuts consist of deductions from the following:
- Relocation expenses
- Transportation costs while doing volunteer work
- Payments in looking for employment
- Charitable contributions
Eligibility for Earned Income Tax Credits
This type of credit benefits taxpayers with low and moderate incomes. The IRS laid down the guidelines for taxpayers who can claim Earned Income Credits:
- Receive regular earned income
- United States citizen or resident alien for the whole tax year
- Hold a valid Social Security Number for the taxpayer, spouses (for joint filing), and qualifying dependents on your returns
- Investment income must no go beyond $3, 450
- File a tax return with the following status: Married (filing together); Single; Head of Household; or Widower even if the IRS does not require you to submit returns.
Contribute to Individual Retirement Accounts
Pay contributions to your Individual Retirement Account (IRA) or 401K. The tax due depends on adjusted gross income (AGI). You need to make adjustments, or you owe the government more. Reduce the overall amount by depositing pre-tax contributions into tax-deductible IRA. You decrease AGI as well as the amount you owe (taxes) by increasing contributions to your 401K. Two years ago, maximum 401K and Individual Retirement Account contribution limits consisted of $5, 500 and $18, 000 in that order for taxpayers (49 years old and below).
Anybody with age 50 years and above can add $1, 000 to the IRA cap and $6, 000 to the 401K ceiling. You do not pay capital tax gains while your money grows annually. The IRS does not require payment of income tax on any money withdrawn from these accounts. However, you fall under a lower income tax category upon retirement. Thus, you pay a reduced rate on these withdrawn funds.
Save for Retirement
Think short-term. Increasing your retirement contributions voluntarily while getting a lower take-home pay can disrupt your finances. Nonetheless, you get a couple of benefits from this approach. First, you augment retirement benefits. Second, you bring down tax burdens. The money you channel into specific retirement accounts means tax deductions with certain limitations.
Fund your Flexible Spending Account
Take advantage of the Flexible Spending Account (FSA) that employers offer to reduce your tax payment. The Internal Revenue Service permits channeling of tax-free USD from your paycheck directly into your FSA annually. Last year, the IRS-prescribed limit reached $2, 600. This year, the threshold increased to $2, 650. However, you need to spend that money during the current calendar year for medical and dental bills, daily first-aid stuff, pregnancy testing kits, acupuncture (needle treatment), or breast pumps. Your dependents also qualify. In fact, individual employers allow employees to carry a maximum of $5, 000 to the following year.
Funding for Dependent Care FSA
The DFCSA refers to a pre-tax benefit account for paying off entitled dependent care services including pre-school, summer camp, (before or after) school programs, and child or grownup daycare. This employer-sponsored scheme also reduces your tax bill. The IRS excludes a maximum of $5, 000 from your pay that the employer will redirect to the Dependent Care account. It benefits parents with children below 13 years of age. Make sure to check out the plan’s documents carefully.
Use Health Savings Accounts
Health Savings Accounts stand for tax-exempt programs utilized in paying costs of hospitalization. You can ease your tax load if you own a high-deductible health care policy by contributing to the HSA. All contributions qualify for tax reductions with tax-free withdrawals provided you earmark them for authorized medical expenditures. Last year, the ceiling for contributions stood at $3, 400 for the self-only, high-deductible health cover. The cap for 2018 increased to $3, 450. For family coverage, the 2017 rate stayed at $6, 750 and rose to $6, 900 this year. Many employers offer the HSA, but you also have the choice of opening a private account in an accredited bank.
Become a Full-Pledged Entrepreneur
You can also save on taxes by starting your enterprise. Business owners can control their tax payments. If you are an entrepreneur, you may keep more funds in the company instead of declaring the money as revenues. Business proprietors also consider specific activities as expenditures. Tax specialists offer services to assist startups or small enterprises in dealing with the rules of the IRS on certified expenses. Neophytes will need professionals to guide them through the long and tedious processes. Part-time or outsourced work provides substantial tax deductions for the following:
- Office supplies
- Vehicle mileage
- Phone services
- Internet access
- Business travel and meals
- Part of home utility bills
The Broad Objective
Look at the bottom line with the magic words being SAVINGS and TAXES. Try to prepare your tax returns instead of hiring an accountant or bookkeeper unless you have a flourishing business with lots of requirements and financial concerns. You can save a great deal by performing this function than pay another person. Besides, you need not get stressed about things like beating tax filing deadlines. Review the guidelines for the Internal Revenue Service published online. You will surely learn plenty of tips from the agency’s website.