Paying taxes is hardly anyone’s idea of fun; whether you’re a full-time employee or a business owner, seeing those numbers cut into your bottom line can make you wince. Big businesses seek out tax havens and consult with a captive insurance lawyer to save millions in taxes, but even individual taxpayers may stand to gain significant tax relief. Here are some standout tips for lowering taxes.
Pre-tax contributions and expenses
The oft-quoted line from Benjamin Franklin reminds us about death and taxes; you’d think that everyone would prepare for both a comfortable retirement and annual tax compliance with equal diligence, but that’s not always the case. And yet, one of the easiest ways for any individual to pay less tax is by making contributions to a retirement plan. Any money contributed to a traditional IRA is considered a pre-tax contribution, and thus lowers the overall taxable income. Similarly, contributions made towards a flexible spending account or health savings plan – which often cover a lot of medical and health-related expenses that individuals and their dependents would be incurring anyway – would be considered pre-tax. It should be noted that traditional IRAs are tax-deferred; eventually, the tax would be settled (typically on retirement).
Qualifying for credits
There are several situations in which a taxpayer would potentially qualify for credits, and since tax credits are more lucrative than deductions (every $1 in credit is a dollar fully saved in taxes paid, compared to around 25 cents saved for every $1 of deduction), this is one instance where you want to take full advantage of available credits. Still, for instance, the IRS estimates that 1 in 5 qualified taxpayers don’t claim their Earned Income Tax Credits (EITCs), which is a significant refund for low- and moderate-income workers. Families paying for child care or adoption expenses, or individuals pursuing higher education or further job training, are some other scenarios where tax credits are applicable; failing to claim these could be leaving thousands of dollars on the table.
Taking on a side hustle is becoming increasingly popular in today’s gig economy, and just like any other traditional self-employed, full-time freelancer, various tax deductions are available to those who make a living through this model. For example, while being your own boss can cost you in taxes, but a deduction applies as the IRS considers this to be a business expense. Depending on the nature of the business, self-employed taxpayers can also justify a home office deduction for expenses involved in the use and maintenance of their workspace. Further along those lines, other business expenses such as utilities or travel costs can also be factored into the tax calculation as deductibles.
Contributions to charity
While you may feel at times like there’s barely enough money to cover your needs, there can also be other occasions where we end up donating goods or giving money to qualified charitable institutions. If these contributions to charity add up to a certain threshold (the standard deduction was $12,200 for 2019), then claiming a deduction is simply a matter of keeping track of all receipts for such donations. Regular contributors may also find it beneficial to pool donations in a calendar year to meet the threshold for deductions.
Adopting a thorough, systematic approach to tax preparation is essential – and if ever any part of the process is unclear, consulting with a CPA or similar expert could be well worth it.