By Justin Weinger
Taxes are designed to keep us honest about our finances and protect us from being overtaxed. However, paying them can still be stressful, especially when it comes time to file those forms at the end of every year. Luckily, there are plenty of ways that people can save money on taxes without compromising their financial health or lifestyle choices. In this article, we'll be covering a few of the most efficient ways to save money on taxes.
Claim your deductions
Deductions are expenses you can subtract from your income. There are two types of deductions: standard and itemized. Standard deductions are based on your filing status, which means those who fall into certain categories have a set deduction amount they can claim. Itemized deductions are for specific expenses paid by the taxpayer during the year, such as mortgage interest, charitable donations, and medical expenses. You don't need to choose between claiming one type of deduction or both. You can claim whichever will result in more of your money being returned to you after taxes.
Invest in a retirement plan
If you're preparing for your family future and in a position to save money for retirement, it's worth it to make sure that your contributions are tax-deductible. One of the best ways to have deductible contributions is to invest in a retirement plan. There are six different retirement plans you can choose from:
- 401k
- Traditional IRA
- Simple IRA and Simple 401k
- Solo 401k
- SEP IRA
- Roth IRA
A regular 401k is the standard employee retirement plan where you have a high contribution limit and your employer provides matching contributions. Employer matching contributions is basically when the employer invests the same amount into the plan as you do. IRA is short for individual retirement account and function very similar to 401ks. Rather than be managed by a third-party, like an employer, IRAs are managed by the people who open them. What sets these two options a part are the different sub-categories available and how much you can contribute to it. When it comes to IRAs, you typically have lower contribution limits compared to a 401k plan. Either way, the choice of which is better falls to you; just make sure to research each plan, so you know what you're getting into. [A taxreliefprofessional.com can certainly help you weigh the pros and cons of each category so you make the best choice for you.]
Become a cosigner
Another great way to save money on your taxes is to become a cosigner. A cosigner is someone who agrees to sign off on a loan alongside a primary borrower, so they have a better chance of being approved. One of the best ways to be a cosigner is to sign off on student loans through Earnest. Earnest is a private lending company that specializes in distributing quick student loans to applicants. Becoming an Earnest cosigner for student loans not only helps students in need, you can write off about $2,500 on your taxes.
Look at potential tax credits
Tax credits are very valuable and can be worth more than deductions. Tax credits are a dollar-for-dollar reduction of the amount of tax you owe. If your gross income is $40,000 and you have a $2,000 tax credit, you’ll get a check from the IRS for $2,000. It's also worth pointing out that some credits are refundable even if they exceed your tax liability. Once your other deductions and exemptions have been applied to lower your taxable income, they can be sent as a refund even if they don’t count toward reducing your actual tax bill. We all know how taxes can be a major source of stress, so when you have an opportunity to reduce the amount you owe, it's worth taking advantage if it fits into your budget.
Maximize business deductions
If you own a business, you'll want to start preparing for the tax season as soon as you can. This can be a tedious process, but it’s best to get it over with in April or May so that you don’t have to worry about it during busy months later on. For small businesses and freelancers, this means making sure that all your receipts are organized and ready for review before the end of the year.
Check if there's any income you can defer
A deferral allows you to delay the reporting of income, but it does not save taxes. In other words, if you defer $1,000 of income from this year into next year's tax return, you'll owe taxes on that same $1,000 next year. However, by doing so, your taxable income for this year will be lower, which can end up saving you a lot of money altogether.
