12 Clever Ways of Reducing Your Taxes Legally
Who wouldn’t like to pay less tax? But, real tax avoidance seems like it’s the preserve of multi-national companies. There are legitimate ways through which mere mortals can reduce the amount of tax they pay. Such are practiced by canny savers worldwide. The easiest way through which you can reduce your taxable income is to reduce the taxable income. You need not turn down the next raise or prompt your employer for a pay cut. Just utilize tax deductions.
You can select the standard deduction amount which the IRS establishes annually for every taxpayer based on your filing status. Or, if you’ve got expenses which will produce larger tax breaks, you can itemize the deductions. Do so by keeping track of all your expenses. Meet several income thresholds and deductibility limits. File that long Form 1040 and the accompanying Schedule A.
The Schedule A will enable you to subtract the amounts that you’ve spent in a particular tax year on medical year, several interest payments, casualty losses, charitable gifts, and other miscellaneous expenses. If you itemize the deductions, you ought to file Schedule A and Form 1040. But, that extra hassle is worth it in case it’ll help reduce your tax bill. Here’s what one can claim:
1. Medical and Dental Expenses
Here’s the first group of deductions. But, you’ll require racking up some big bills for it to take effect. You can only deduct the medical and dental expenses which exceed 7.5% of your adjusted gross income. With a $40,000 AGI, your medical deduction threshold would be $3,000. It implies that if your medical costs are lower than that, they’re of no tax value. In case you’ve got $5,000 medical expenses, you can only deduct $2,000. That’s the amount which exceeds 7.5% of your income.
You can reach the limit by claiming several tax-deductible medical costs which many people don’t utilize. Such include home renovations for medical purposes, costs of specialized medical equipment, and mileage to the hospital. Also, that includes part of your long-term care premiums. Medical care costs for your spouse and dependents count here, too.
2. Health Savings and Retirement Accounts
Do you have a highly deductible medical plan? If you do, then you ought to start contributing to a health savings account. Look, any contributions which are no used for medical expenses will roll over indefinitely. They’ll grow tax-free. Contributing to a retirement account is a top tax-reduction technique. It serves two different purposes.
Most contributions will enable you to deduct the amount paid into a retirement account from your taxable income. Such funds will grow tax-free until your retirement. Start early. This strategy, alone, can help secure your retirement.
3. Job Expenses
This section allows you to take into account any money spent in your job search. It also includes various miscellaneous expenses. But, that amount must exceed 2% of your AGI. Let’s assume you’re making $40,000. That would imply that these costs must exceed $800 before they’re deducted. To exceed the deduction threshold, look at journal subscriptions and professional memberships. Also, consider uniforms you’ve bought, and the cost of keeping such clothes clean.
Also, consider the expenses of seeking another job in a similar field. Deduct the cost of tax-preparation software programs and any fees you’ve paid for electronic filing. Consider fees you’ve paid a professional tax preparer to help you complete the return. File and attach the Employee Business Expenses. That’s especially if you claim any transportation, travel, and entertainment or meal expenses.
Miscellaneous expenses which you can deduct in this section include the investment management costs. Such refer to trust and custodial fees, subscriptions to financial publications, and accounting charges. Another inclusion is safe deposit box rentals if you keep invested-related materials in it. Another potential deduction would be the fees reported on the Form 1099-DIV. This form is issued in connection with your investment.
4. Other Miscellaneous Deductions
Here’s a catch-all section for expenses which aren’t limited by your income. Among the most common deductions is gambling losses. But, bear in mind that any percentage of AGI does not restrict your gambling losses. Your good luck limits them. You’re only capable of deducting losses of up to how much you had won. In case you had won $1,000 and lost $1,700, you can just deduct $1,000.
Theft and casualty losses from income-producing property, various unrecovered investment losses in pension, the amortizable bond premium on bonds, and impairment-related work expenses of the physically challenged persons are other miscellaneous deductions. Now, tally the total itemized deductions. Say the resulting amount is greater than your regular deduction amount. You’ll then reduce your tax bill or win a larger refund.
5. The Interest Which You Paid
Note that the interest you paid on your personal loans won’t help at tax time. But, interest on home loans is deductible for most homeowners. It doesn’t matter whether it’s your primary residence or a second home. Report home mortgage interest on the Form 1098 that you obtain from your lender.
Say you purchased your home during a tax year and paid some points for that loan. Then list those points on the Form 1098. You can now then deduct that amount. Double-check your settlement statement if those points are not noted on the Form 1098. The interest that’s paid on a line of credit or home equity loan is also deductible. The interest paid on what was borrowed to purchase the investment property is deductible.
Some homeowners may qualify to deduct private mortgage insurance premiums. It’s a policy that’s lenders demand in the case the homeowner isn’t able to make a significant down payment. But, this deduction option is limited to those taxpayers who meet particular requirements. These requirements include loan amount and the date on which that loan was acquired. Read the Schedule A instructions. Follow the tax software’s direction when claiming this tax break.
6. Gifts to Charity
The tax code enables you to deduct any donations to qualified charities. That includes the contribution to non-profit organizations and religious groups. Others include not-for-profit schools, veterans’ associations, and recreational facilities. They ought to avail its tax deduction eligibility.
But, contribution rules have become toughened recently. You ought to maintain a record of the contribution. Have a credit card or bank statement, or any canceled check. Official receipts from the charity will suffice, and are required when a gift is above $250. You don’t need to file the substantiation documents with your return. But, you’ll need them in case the IRS questions you about the deductions.
For donated household goods, the IRS will require that those items be in good shape. The agency might later determine those products were of poor condition. You’ll thus be denied your tax claim. You can deduct a vehicle gift to a qualified organization. There are specific rules about the much you can claim. It depends on that car’s value and how the charity makes use of that gift.
You can seek a Donor’s Guide to Car Donations. It’ll give you details on how to figure the deductibility of such contributions. Also, you can deduct those travel costs incurred to do charitable work. As well, consider out-of-pocket expenses, which have a relation with charitable endeavors. Such include expenses incurred for postage for groups’ mailing.
While there’s no income threshold on donations, some limits are set by the IRS. In most cases, annual contributions shouldn’t exceed 50% of your AGI. Annual property gifts, like bonds, stocks, and artwork, must not exceed 30% of your AGI. Say you contribute more than the set limits. Then, you can carry over the specific amount you’re unable to deduct for the future tax years.
7. Casualty and Theft Losses
Are you a victim of theft or casualty? You can obtain some tax help in covering your losses. Catastrophic damages don’t limit casualty loss deductions. That includes those who’ve suffered in a flood, fire, hurricane, earthquake, or tornado. Losses from vandalism and theft are eligible. As well, any damages from car wrecks are eligible, as long as they were not a result of the driver’s negligence. But, you can’t deduct the full loss amount. You’d need to complete the Form 4684 to help determine the much you can claim.
8. Combine Vacations with Business Trips
Yes, we’re advising that you combine your vacation with a business trip. It’ll reduce your vacation costs. Deduct the percent of unreimbursed expenses spent on business from your total expenditure. That could include airfare and hotel bills. But, the amount ought to be proportionate to the time devoted to business activities.
9. Home Office Deductions
Do you work for yourself? Do you have a side business? Take advantage of the home office deduction. It’ll enable you to deduct the percent of your home used for your business (from Schedule C, 1040). Let’s assume you use the guest bedroom only as your home. What if it makes up 1/5 of your living space? You can deduct 1/5 of your rent and utility fees for your home office.
10. Self-Employment Deductions
Are you self-employed? Do you pay 100% of your Social Security taxes owed (15.3%)? If so, you can deduct 50% of the taxes you pay. In fact, you need not itemize to claim such a tax deduction.
11. The Taxes You Paid
Do you live in a state that collects local or state income taxes? Then, the amount you’ll pay can be deducted against the federal taxable income. That includes payments made to your local or state tax collectors. As well, it includes the taxes which are withheld from your paycheck (find that on your W-2). Does your country collect revenue but levies sales tax? Then, you can deduct such payments on Schedule A.
Note that local sales taxes count here, too. In case you pay both state sales and income taxes, you ought to select the amount to deduct. Do you reside in an area with low flat income tax rates? The sales tax deduction will be more beneficial to you.
Also, other taxes apply here. A property owner can deduct the real estate taxes paid during a tax year. Let’s assume your mortgage company pays these taxes. Let’ say the escrow funds are collected as part of the mortgage payment. In such a case, you’d only deduct the actual amount of paid taxes in the fiscal year. That’s the deduction rather than the amount of escrow payment sent to your lender.
Some cities, counties, and states also assess personal property taxes, especially on vehicles. You can claim car taxes and other personal property tax bills. You’re allowed to deduct any deductible tax that’s not listed in the form. There are deductions for foreign taxes. Those paid in connection with the investment funds are a common entry here.
12. Tax Credits
Tax credits are just gold! They’re deducted from the owed tax. For your college years, you can take advantage of The American Opportunity Tax Credit. You’ll receive a tax credit for 100% of the first $2,000 you spend on qualifying college expenses.
You’ll get tax credits to 25% of the next $2,000 for a $2,500 greatest per student. That translates to $2,500 deducted from the tax owed. You’ll win these credits as long as you meet income requirements about the school courses which improve job skills.
We can’t value brilliant financial advice like the one we’ve given you above. Now, you’re a scholar of the tax law. Take all tax deductions to which you’re entitled. Stick this advice with you. It’ll save you thousands of dollars. Visit the IRS website. There, you’ll find excellent resources will help you further understand tax deductions and credits.
Spend a few hours keeping abreast of the tax law. Keep a tax-reduction mindset in your life. It’ll help serve your finances well. Be a smart consumer. Know the tax benefits which you can claim. More deductions will increase your disposable income. However, we don’t advocate illegal tax evasion. The above secrets are some legal ways provided in law but many people don’t know. In fact, governments encourage citizens to apply them.