Tax reduction is a common concern for the average consumer and business owner alike. While everyone shares the same responsibility in paying taxes, not everyone has to pay more than their share. Luckily, there are things you can do to reduce the amount of taxes you are required to pay.
Tax professionals refer to these as tax reduction strategies. By putting them into place, you can drastically reduce your tax liability.
For those who have been hit by a bill by the IRS, you can even reduce that amount, or get the overdue tax bill mitigated entirely. Your results may vary, of course, but everyone should be able to benefit from the tips listed below.
Here is how to proceed when your goal is fast tax reduction:
The IRS determines the amount you have to pay in taxes based on your adjustable gross income. Adjusted Gross Income (AGI) is where you will start calculating how much you owe right now, before you begin putting tax reduction strategies in place.
Your AGI also determines your tax rate and the tax credits you may be eligible for. If your taxable income is too high, you likely won’t qualify for any credits at all.
Once you understand your AGI, you can begin putting in the necessary steps to lower your tax bill.
Your AGI is represented by all your income sources minus any qualifying adjustments, such as any deductions you can claim. The higher your AGI, the more you will pay in taxes. Your job now is to lower the amount you owe to the IRS. You can do that in a variety of ways.
After determining your AGI, as an individual taxpayer, you can itemize your deductions to succeed in lowering your taxes for that year.
Possible deductions include health care expenses that exceed 10% of your adjustable gross, state and local taxes up to a certain amount and some personal property taxes, like car registration fees, for example.
Some mortgage expenses can be deducted, as well as gifts to charity, and casualty and theft losses that occur from nationally declared disasters.
Of course, you can opt to take the standard deduction for the tax year instead of itemizing deductions. In any case, you should take the deductions that are higher so that you can reduce your taxes the most.
The standard deductions for the 2019 tax year are $12,200 for single filers and married taxpayers filing separate tax returns, $18,350 for heads of household, and $24,400 for married taxpayers filing joint tax returns.
Tax credits can reduce your taxable income, but they have an added benefit. Tax credits can also subtract any debt you may owe the IRS. If you have received a letter about an IRS problem, a tax credit or two could get you out of the conundrum.
Taxpayers can take advantage of tax credits for all sorts of reasons, such as college expenses, adopting children, and saving for retirement. Having a child can also help you lower your tax liability. For example, you get $2,000 for the Child Tax Credit for every child under the age of 17, as long as you satisfy the income restriction.
If you are a lower-earning taxpayer, you might be able to take advantage of the Earned Income Credit (EITC), which can put more of your hard-earned money back in your pocket.
Making contributions to qualified organizations can give you a tax deduction to take advantage of each year. You have the option of donating cash and household items to non-profit entities to effectively reduce your tax liability.
Be aware that donations exceeding $250 require a receipt to count as a valid deduction. Additionally, any donations above 20% of your AGI are limited. Check with a tax preparation expert for details.
While working on ways to reduce taxable income, you will want to be careful not to add to your tax burden. For instance, you will want to avoid taking an early withdrawal of your IRA or 401(k) retirement plans. If you do, the amount you withdraw then becomes part of your taxable income. You will also be required to pay a 10% tax penalty.
Saving for retirement is one of the easiest ways for the average consumer to lower their tax obligation. If your employer offers a company-sponsored plan like a 401(k) or 403(b), consider making higher contributions throughout the year. If you are over age 50, you can make catch-up contributions.
Because these contributions are made on a pretax basis and are deferred directly from your paycheck, the money you save for retirement can simultaneously lower your tax bill.
If your employer does not offer one of these plans, an individual retirement account (IRA) can be a wise alternative. Self-employed taxpayers can often find 401(k) plans like the simplified employee pension (SEP) IRA.
Some companies offer flexible spending plans or health savings plans, which are pretax savings accounts for expenses like medical costs and dependent care. An FSA or HAS allows you to reduce your taxes by setting aside portions of your earnings in an account that is managed by your employer.
Most accounts require employees to incur expenses on the account by the end of the year, or else you could end up forfeiting the unspent amounts. Usually, it is the discretion of the employer to carry over the balance or give you a grace period if you have not incurred the proper expenses by the time limit.
For self-employed taxpayers, whether you are full or part-time, there is a lengthy list of deductions you can list that will lower your tax liability. For example, if you work out of your home, you can use your home-office deduction if at least one-fifth of your home is used as a dedicated office space. You should also be able to deduct at least a portion of your mobile phone and internet bills. Other deductions for the self-employed include marketing and advertising costs, travel, as well as shipping.
If you are working for someone else, consider starting on the self-employed route to lower your taxes once and for all. While this can be a risky move, you may find that the freedom to work for yourself lends itself well to higher income, better fulfillment, and lower taxes.
Reducing your taxes is possible if you know the correct steps to take. Hopefully, the above gave you more insight into what it takes to keep your tax liability to an absolute minimum.
Keep in mind that the above is just the tip of the iceberg. If you find yourself paying way too much in taxes every year, and you find yourself always looking for more ways to reduce your taxes, SCL Tax Services can help.
Using our tried and true tax advice, tax experts at SCL tax firm can help you keep more of the money you earn.
Or maybe you received a letter from the IRS and now you are facing an inflated bill or the dreaded audit. Whatever your situation, you can make positive changes by taking small but incremental changes to your tax preparation efforts. By looking for deductions and credits and by working with a tax professional, you can lower your taxes and solve your IRS issues faster than you might expect.
To reduce your tax liability starting today, contact us! We serve you in and near the Bronx, Eastchester, Westchester, Mount Vernon, and Yonkers, New York. As Enrolled Agents, we can help you prepare your taxes and find the necessary deductions and credits to effectively lower your taxes. Working with a tax expert can also ensure that your paperwork is completed properly, which can further limit future tax problems, so do not hesitate to call us.