Secrets to Tax Reduction
Knowing the tax law can give you more disposable income.
Okay, so just knowing the tax law won’t necessarily get you money. However, if you take the time to figure out your eligibility for different tax breaks and apply them to your life specifically, you can increase your disposable income and have more money in your pocket. The IRS’ website offers plenty of information about tax breaks and how to determine whether or not you are eligible. Study the credits available, each of those benefits results in money in your pocket.
1. Contribute to a retirement account: This is a top tax-reduction tool, because it serves two purposes. Most retirement accounts will deduct from your taxable income, the amount you put towards your retirement account (exception being the Roth individual account). This in turn will decrease your amount of taxable income as well as increasing your retirement funds, which will grow tax free.
2. Have a health-savings account: An HSA is a high-deductible medical insurance plan that allows a tax-free roll over of unused funds that will continue to grow indefinitely.
3. Combine trips: Combining a vacation with a business trip can aid in tax-friendliness in the sense that you will be able to deduct business expenses from you overall trip costs depending on how much time you actually spent doing business activities and how much reimbursement you are allowed (i.e flight, hotel room or meals).
4. Home office deduction: Those that own their own business or side business and operate out of their home can deduct the part of your home used for your business. Such as, if you operate out of a spare bedroom that makes up about 1/4 of your home, then you can deduct 25 percent of your rent, utilities, etc. as business expenses. For anything concerning the IRS’ stipulations on the home office deduction, click here for more information.
5. Be self-employed: Those that are self-employed can take advantage of numerous of tax-deductions such as business-related mileage costs, shipping, marketing and advertising, business-related travel, percentages of home internet costs, dues, memberships, office supplies etc. Basically anything used for the betterment of your from-home business can be a possible tax deduction.
6. Social Security payments: Again, those that own their own business can take advantage of a tax reduction if they pay the whole 15.3 percent social security tax. The benefit is then a deduction of 50 percent of the taxes paid, even without itemizing this claim.
7. Vehicle expenses: Personal vehicle expenses such as traveling between offices or to other business proceedings without mileage cost reimbursement, with the exception of commuting, can be tax-deductible.
8. Tax credits: The American Opportunity Tax Credit is deducted available for four years of college with 100 percent of the first $2,000 being eligible for the credit and 25 percent of the next $2,000 being eligible (maximum of $2,500 per student). That $2,500 will be deducted from taxes owed as long as the student meets the income and school course requirements.
9. Lifetime Learning Credit: Meant to be an incentive to further adult education and improve job skills of the workforce, the Lifetime Learning Credit can award up to $2,000 per year (maximum of 20% of $10,000) to be spent on post-high school education, educational expenses and training.
10. Earned income tax credit: This tax reduction comes in the form of lowering the overall tax bill for low-income and moderate-income working families.
11. Sales tax break: For people living in states without income taxes, this tax break is a real benefit because it allows the itemizers to deduct state sales taxes paid. (In states that do have income taxes, tax payers can either deduct state income taxes paid or state sales taxes paid.)
12. Investing: After selling an investment, add in all reinvested payments to calculate the cost basis. This will increase your cost basis and in turn reduce the capital gain on selling said investment.
13. Give to charity: Giving to charity in the form of payroll deduction (United Way), checks, cash, or donation of good/clothing can all be a tax deduction. Giving at church or donating to the Salvation Army are more commonplace ways of donating that are easily over looked. Charitable donation tax deductions can really add up if properly itemized.
14. Adult children not claimed by parents: Children who have gone to college and are not claimed as dependents by their parents can take advantage of this student loan interest tax break. For a child whose parents are paying back their student loans, the IRS assumes the money goes to the student, and then the student pays the debt. This allows the student to deduct up to $2,500 from the student loan interest that his or her parent paid.
15. Job hunters: If you are searching for a new job in the same field, you can deduct all expenses related to your job hunt including miscellaneous ones, even if you don’t find a job.
16.Military reserves: If you are military reserves and need to travel over 100 miles to get to your base or destination, you can deduct mileage costs as well as lodging and 50 percent of your meal costs if you are required to stay overnight.
It is best to be educated on all possible forms of tax deductions available to you, because tax preparers cannot be counted on to know every tax deduction you are eligible for. Each deduction that you claim increases your disposable income.
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