Every year at tax time consciousness shifts toward saving money on the inevitable tax payments we make. Each person’s tax circumstances are unique, with some filers reporting by way of conventional W-2 forms and others accounting for self-employed income as required by the IRS. While each filer wants to pay his or her share; almost no one wants to make additional contributions, beyond what they rightfully owe.
The numbers aren’t set in stone until you complete the paperwork and tabulate your tax obligation. But in the meantime, saving money on your taxes requires a proactive approach, using proven methods to stay on the right track.
Take Proper Deductions
Tax filers want to take advantage of whatever provisions are present in tax law, so claiming the proper tax deductions is an important first step toward determining exactly what you owe. Deductions and credits work together to offset your overall tax responsibility, but they operate in different ways. Deductions are tax return inputs that lower your taxable income, which in turn lowers your lax liability for the filing year. The types of deductions you can take are outlined by the IRS, falling into several major categories, such as:
- Health and Medical
- Mortgage Interest
- Taxes you Paid
- Personal Losses
- Job-related Expenses
- Charitable Contributions
- And More
The way tax deductions are applied depends on your income level and personal tax situation. For filers without significant deductions in the allowable categories, the IRS provides a standard deduction, which many filers claim. When itemized deductions exceed the level of the standardized deduction, it makes sense to account for each of them individually, so you maximize your deduction amount. Rules and regulations apply, so make sure your approach is in-step with IRS guidelines. Health deductions, for example, are only permitted when the total amount spent exceeds a certain percentage of your total income.
Dial-in Your Withholding
When you started working for your current employer, you submitted tax documents reflecting how money would be withheld from your paycheck to cover your tax obligations. If you received a large tax refund in past years, it indicates your withholding is not in-line with what you actually owe each year. On one hand, it is nice to be covered, so there are no surprises at tax time. But excess withholding costs you money in the long run, so it makes more sense to fold the overage into your annual operating budget, so the money is available to you year-round.
Utilize Tax Credits
Tax deductions and tax credits each have the potential to lower a filer’s tax liability, but they operate in different ways. Deductions reduce taxable income, while credits are applied directly to an individual’s tax liability. Refundable credits issue payments to filers, when credits exceed total tax obligations. Non-refundable credits, on the other hand, do not extend beyond what a person owes. Examples of credits include options for child care costs, retirement contributions, and other expenses qualified by the IRS. The Earned Income Credit (EIC), for instance, targets lower-income filers, to help reduce their tax liability.
Use Pre-Tax Money
In some cases, certain expenses can be paid for using pre-tax dollars. Health care costs, for example, are sometimes paid through employer flex-plans, which allow employees to set aside a portion of their earnings, before taxes are taken out. The money is used to cover medical expenses, saving employees the taxes owed on that portion of their income. Family education expenses and even child care costs are also eligible for similar money saving programs, provided they are administered according to IRS regulations.
Maximize Retirement Contributions
Setting money aside for retirement carries tax benefits, which save taxpayers money as they file each year. There are various investment vehicles available allowing certain portions of your income to be tucked away for future use. In some cases, tax breaks are immediate, while others occur later, as you withdraw the funds. Either way, making the maximum allowable contribution lowers your overall tax liability.
Tax law can be intimidating to navigate, so professional consultation may yield the best results saving money on taxes. For more information about this year’s allowable deductions, credits and retirement allowances, visit the Internal Revenue Service individual filer’s resource site.
This is a guest post by Sarah Brooks from people search. She is a Houston based freelance writer and blogger. Questions and comments can be sent to brooks.sarah23 @ gmail.com.