Many people want to change the subject when you mention the very word of taxes. Unless you are a skilled preparer, they would rather steer clear of the subject. Yet, becoming well versed about the basics is helpful if you want to save money on your taxes overall. Therefore, you “owe” it to yourself to become knowledgeable about the subject as you can so you are able to save and benefit from those savings through tax-deferred or tax-free investments and standard and itemized deductions. Understanding taxes is a necessary evil in order to save you money.
Deductions. With respect to deductions, you are allowed a standard deduction or you can itemize on your income tax return. If you find that your itemized deductions are greater than the standard deduction allowed by law, then naturally you will want to itemize. To determine what deductions can be itemized, you can refer to Form 1040, Schedule A and use the schedule to compile allowable deductions. Such deductions include property taxes, state income taxes, and the interest on your mortgage. Usually, one of the biggest factors in itemizing is whether or not you pay a mortgage on a home and can deduct your mortgage interest that you pay.
Reducing Your Tax Liability. You can minimize the liability on your taxes by putting your hard-earned money into employer-sponsored retirement and insurance plans and specific individual investment vehicles. So, for example, if you invest $15,000 per year in a 401-k retirement plan, you have in reduced your taxable income by that much and made less in the IRS’s eyes.
You can defer the amount you pay on your taxes by opting for investments such as:
- Employee-sponsored stock option plans; and
- 401(k) or 403(b) retirement plans.
Retirement 403(b) plans are administered by non-profits, and tax-exempt organizations, such as libraries, public schools, colleges, universities and churches. With respect to both a 401(k) and a 403(b), money is invested for retirement through your employer who may or may not match the contribution. All contributions are tax free until they are withdrawn at retirement. Withdraws are then taxed at your rate at the time of withdrawal.
You can also reduce your tax bill if you pick from a number of tax free investments such as:
- Employer-sponsored medical insurance;
- Employer-sponsored group health insurance of up to $50,000;
- Educational assistance;
- Cafeteria Plans, or plans by employers which offer benefits, such as group-term life insurance and health insurance.
- Flexible Spending Accounts (FSAs) permit you to save a part of your income to pay for certain expenditures in the cafeteria plan. Most often, the savings go to any medical expense not covered by insurance or towards a deductible. The money that is taken out of your pay and deposited into an FSA is not taxed. Therefore, both employers and employees like the payroll tax advantages offered by this kind of account.
Give Yourself Some Credit. Take advantage of the tax credits you are allowed. Such credits include education credits, earned income tax credit, head of household designation, and childcare credit. You should know or have a very good idea of which tax credits you qualify for before you complete your income tax return every year. It may be worth it to hire a professional to help you complete your tax return in order to maximize the number of tax credits claim. Most experts know more about the credits you may qualify for.
Pay In Advance. You can also reduce taxes by remitting your property tax payment for the following year before the end of the year. That way, you can claim the additional deduction on the current year’s tax return. You can do the same thing by pre-paying your mortgage interest in the current tax year before the New Year.
When you consider that most people obtain a pretty sizable refund at the end of a tax year and that the money, during that time, could have been earning interest for you in a high-interest savings account, it “pays” to know a little about taxes. Use the knowledge to minimize the amount you spend in taxes and make your money work for you. It is not dirty or wrong to use the complex tax system to the utmost of your advantage as the law allows. It is the system we have currently have in place, and it provides ample areas for people to save money on their taxes if they learn the system.