By familiarizing yourself with the tax law in your country, and carrying out some simple calculations that only take you a couple of hours every year, you’ll be able to save yourself hundreds, if not thousands, of dollars. Tax returns and tax credit can make a huge difference in what you owe. For instance, if you owe $2,000 in taxes and you get $300, what you owe decreases to $1700.
The good news is, these tricks are perfectly legal and do not require you to break any IRS rules in the process. However, there’s one thing you need to bear in mind, and that’s keeping yourself up-to-date with the latest changes to tax law, seeing as tax credits and deductions tend to see changes over the years. If you’re wondering how you can owe less to the federal government, here’s what you need to know.
Retirement Account Contribution
One of the best tax reduction tricks is to contribute to a retirement account, and this will help you in more ways than one. Any contribution you make to a traditional 401 (k) or IRS account will be deducted from what you owe by subtracting it from your taxable income. Of course, all these savings are entirely tax-free until you actually retire. However, you should know that workplace 401 (k) accounts have a specific time frame; contributions have to be made by the end of the year, or if they’re tax-deductible contributions, your deadline extends until the fifteenth of July.
Health Savings and Trusts
Another great way to save up on taxes for individuals who have a high-deductible medical plan is to open a health savings account, or alternatively, a trust fund. Any contributions you make that are unused for medical expenses will become tax-free. The dynamic is similar to that of a retirement account but does not apply to everyone. On the other hand, another efficient way that works similarly is establishing a trust fund, which can also be passed over to your family when you pass away. This will not only help you with more tax credit but will also continue helping your family save when it’s passed on to them.
Hire a Professional
Depending on how much you usually pay in taxes, you can drastically cut down what you owe by hiring a professional. A professional will pinpoint all the methods that can help you reduce what you owe to the federal government and by keeping an eye on your tax credit. That said, a professional may also give you advice on any changes you can make in your lifestyle that can help you save up more. If you don’t want to hire a professional, you can always make use of a software program that does all the calculations on your behalf.
Revise Your Calculations
Although there are many tricks in the book to help you save up, abusing or misunderstanding any of them can cost you far more than what you would have saved up. Errors in calculations are taken seriously by the IRS and can subject you to fines, or if the errors are repeated every year, they can have far more serious consequences. To avoid that, it’s best to revise any calculations made and to double-check the instructions on the official IRS website, to make sure that they apply to you.
Combine Vacations with Business Trips
Do you have a business trip coming up soon? Take your family with you and enjoy a nice holiday when you’re done with your meetings. Combining a business trip with a vacation is an excellent way to subtract un-reimbursed expenses from the total cost of the trip. This will include everything from the cost of your plane ticket to your hotel bill, while the duration of your trip also plays a part in how much you can save up by combining the two trips together.
Work from a Home Office
While it may be easier said than done, if you can relocate your office to your home, or start a side business that you can operate from your house, you are eligible for a home office deduction. This will permit you to subtract the percentage of your home, which you use for your business, from any needed expenses you are required to pay to run your business. For instance, if your home office is one-fourth of your home, you get to deduct this percentage from your rent, mortgage, or utility fees on an annual basis.
Start Freelancing
If you have plans to be self-employed in the future, or if you’re already self-employed, this can help you save up on hundreds, if not thousands, of dollars on a yearly basis. Self-employed individuals are eligible for different forms of tax deductions, and these include the expenses you may be required to pay for vehicle mileage, any fees you pay for your website, any needed memberships, advertising, travel, and everything you need to pay in order to successfully run your business. While you don’t get deductions upfront, you will be covered in the form of scores or tax returns.
Learning Credit
If you’re an adult who is not dependent on your family for living expenses, you are eligible for learning credit that you can use to cover a portion of your tuition and your living expenses. This learning credit can range drastically depending on your income and what you do. Any low-earning families are eligible for this credit, and it is usually worth a maximum of $2,000 a year, which is the sum that you can expect to be deducted from the amount of taxes that you owe to the federal government.
Before you begin calculating your next tax returns, it’s best to take a look at the Instructions for Form 1040 that you can find on the IRS website, to see if any of the deductions mentioned apply to you. That said, it’s best to have a professional do your taxes, but you’re thinking of a cheaper way to get that done, the closest to a professional is a tax preparation app or software that you can download to your phone or computer. These programs do most of the work for you to help you pinpoint all the saving tricks that you might not know about. That said, it’s advised to revise the calculations before submitting it to the IRS, seeing as tax filing errors can be very costly, which beats the whole purpose of saving up!