Whether you are a first-time filer or a seasoned veteran, there are tips that can help lower the amount you owe in taxes or increase your refund. See how many you can implement now to keep more of your money in your pocket.
Get organized: Don’t wait to deal with your taxes every April. Start a box to house all your tax-related documents and fill it all year long with receipts for deductible expenses, 1099 forms, end-of-year statements, etc. When it’s time to start preparing your return everything will be in one place.
Claim all the deductions you can: Tax deductions can shrink your tax bill by reducing your taxable income. You can choose to itemize all your deductions, or just take the standard deductions that are available to all taxpayers. These types of deductions have almost doubled in recent years, making it a smart decision for most people. This list of tax deductions can help you as you prepare your taxes.
Claim all tax credits: It’s important to take advantage of all your deductions, but don’t forget tax credits. They can save you more money than a basic deduction. There are many available tax credits (education, adoption, dependent care, energy-efficient home improvements and many more.
Give back: Charitable contributions are an easy way to reduce your tax bill. Remember, there are many ways to give back beyond just writing a check. Toys, books, clothes and other household items may be donated to shelters or other organizations. Expenses from volunteer work can also be a tax benefit. Cost of travel or a donation to the charity you volunteer for can also be deducted but the non-profit organization must be a 501©(3). For taxpayers that need extra tax savings, think about bundling some contributions or putting two years’ worth of deductions into a single year. This could put you over the standard deduction allowing you to use all your smaller deductions.
Feed your IRA: Contributions to a retirement plan is the best way to reduce your tax bill. Remember this – the money you contribute to a traditional IRA is a pre-tax contribution, so it lowers your taxable income. This means you will owe less in income taxes, whether you itemize or take the standard deduction. For 2020, you can contribute up to $6,000 to an IRA plus $1,000 extra if you are 50 or older. You can contribute up to $19,500 to your 401(k) plus $6,500 extra if you are 50 or older. Contributions to Roth accounts won’t give you any tax deductions.
Use a Flexible Spending Account (FSA): An FSA lets you put away funds for qualifying healthcare expenses on a pre-tax basis, which shrinks your taxes. For example, if you contribute to your FSA and spend it on prescription drugs or doctor visits, that money won’t show as taxable income. Keep in mind that this is use-it-or-lose it money or 12 months.
Contribute to a 529 plan: If you have kids heading to college in the future then this plan is for you. These plans can vary by state but there is virtually no limit to your contributions and can grow on a tax-free basis before being spent on education expenses. Research 529 plans before you contribute.
Buy a home with a mortgage: Even if you are lucky enough to have the funds to purchase a home out right, you may still want to buy it with a mortgage. Mortgage interest is deductible and can help your tax bill. Also, the funds you save by purchasing with a mortgage can be invested for your retirement.
Use the correct filing status: If you file your taxes with the incorrect status it can be costly. Review the deductions above to see what status will help you the most.
If in doubt, consult a tax professional: While you are preparing your taxes and you’re unsure about something, consult a pro. It’s well worth the small expense to avoid an audit or tax penalty.
