What Can You Do To Minimize Your Tax Burdens?
Some pre-tax planning messages for the upcoming 2021 tax season re the 2020 US income tax filings.
Paying taxes is something you want to do religiously. Of course, you would not want to incur penalties and any other consequences that may come when you ignore your taxes. But like everybody else, you might be feeling burdened at the same time. It can be frustrating to see a large chunk of your hard-earned money going to the government instead of your bank account.
But even though paying taxes is unavoidable, there’s something you can do when it comes to the amount of your taxes. A minimum decrease in your taxes can already be a significant addition to your savings, helping you attain your financial goals. Thus, we’ve highlighted below a few things you can do to minimize your tax burdens.
Take Itemized Deductions
Every year, you can either itemize deductions or claim the standard deduction applicable to your status. Itemized deductions are basically expenses on eligible products, services, or contributions that the Internal Revenue Service (IRS) allows you to subtract from your taxable income.
On the other hand, the standard deduction is a fixed- dollar amount that you may discount from your income before income tax is applied. Generally, you may choose whichever results in the lesser amount of tax you’ll have to pay. You cannot claim both deductions at the same time.
But most higher-income taxpayers choose to itemize because the total of their itemized deductions is greater than the standard deduction. Thus, the less they will have to pay in their taxes. But do your research first since the deductions allowed may vary from year to year.
An extensive list of expenses can be itemized, and we’ve highlighted a few of them.
You can deduct medical expenses that are not covered by insurance. However, it is more difficult to qualify for. The condition is that you can only subtract the expenses that are greater than 7.5 percent of your total gross income. If you reach above that limit, you can deduct a wide-ranging list of medical expenses.
If you take out a mortgage to buy a home, you can deduct the interest from your taxable income. The same applies to a home-equity loan given that you used the borrowed funds to purchase, build, or improve the home where the loan is secured. You can also deduct the interest you pay on a loan that you borrowed for investment but only to a certain amount you earn from that investment. If you didn’t earn anything, you could not deduct such expenses.
You can claim a deduction for cash or property you donated to charitable organizations. However, make sure that the organization is a qualified charity. Contributions to any political campaign or individual are not included. Moreover, you also need to provide a receipt to support your deduction claim.
State, Local, and Property Taxes
As a property owner, you can claim property tax reductions. These are state, local, and property taxes that can be deducted from your taxable income. As long as you paid the taxes on a property for personal use, you can itemize and claim such deductions. But you can’t deduct the taxes you paid on rental or commercial property and those you do not own.
Maximize Tax Credits
Itemized deductions reduce only the amount of taxable income, and it depends on your marginal tax rate. But tax credits can decrease the amount of tax you owed after you’ve taken all the income adjustments and tax deductions you’re entitled to.
There are tax credits for the expenses you spend for college, childcare, adoption, and even for retirement plans. These tax credits are added directly to the IRS as your payments to your tax bill. Thus, it can reduce or eliminate your tax debt. If there is any balance left over after paying your tax obligation, the IRS may issue a tax refund but only in the refundable credits, such as earned income credit.
Reducing the amount of your gross income accounted for taxes is the key to minimize your tax burdens. Along with tax deductions and credits, you can employ some contributing strategies to reduce your tax bill. The following are some of the items where it would be worthy of making more contributions.
You can take advantage of the 401(k) plan since you’re allowed to contribute without taxing that amount. However, a traditional 401(k) plan is tax-deferred, which means you’re still going to pay the tax, probably during retirement.
If you want to make tax-free withdrawals but don’t want to minimize your current tax bill, you can opt for a Roth 401(k) plan or other non-traditional retirement accounts. But either way, note that your tax rate is usually lower in your retirement than when you’re still working.
Flexible spending Account
Many employers provide a flexible spending account (FSA) as an employee benefit. It is a special pre-tax spending account that allows you to pay for necessary expenditures. Since you won’t have to pay income taxes on the money you contribute to your FSA, your gross income will be reduced, and so your taxable income.
If you can afford to contribute a substantial amount to college savings plans while your kids are still young, it would be an excellent idea to reduce your tax burdens. The invested fund for such a plan grows tax-free, and you can contribute as much as $250,000. You can even open your own savings plan if you’re going to go to college in the future.
Do Thorough Tax Planning
Although claiming tax deductions and credits and making contributions can help you minimize your tax burdens, doing thorough tax planning would bring better results. It’s worth noting that selecting investments and retirement plans needs to go with your tax filing status and deductions.
If you want to achieve the possible outcome of your taxes, consulting with a tax advisor might be a great idea. They can help you better minimize your tax payable while, at the same, complying with the law, especially in complex financial decisions.
Paying taxes is an obligation that you cannot avoid. That is if you don’t want to encounter any trouble with the law. And although it’s often easier to ignore your taxes, especially if you have various things to deal with, the consequences might cost you a lot. If you think your taxes are too much for you, there are tax breaks and opportunities you can employ. All you need is the right planning and strategy.
Lauren Cordell is a freelance writer who tackles topics in finances. It is her passion to educate readers on how to achieve their financial goals by managing their finances and overcoming financial barriers. During her free time, she loves to read books about personality and behavior.