Tax bills can be a big source of stress for many people every year. This is especially true if you find not enough money was withheld from your paychecks during the year and now owe more than expected from your tax bill.
Spending time to plan for taxes ahead of time can be a big help in lowering your tax bill. Here are some tips from PayStubsNow experts on how you can get the most out of your money.
Benefits of Lowering Your Tax Bill
There are a few significant benefits to reducing your tax bill. The biggest one is that you will have more money in your pocket each month. This can be used for anything from savings to investments or even extra money to spend on things you enjoy.
Another benefit of having a lower tax bill is that it can help reduce stress levels. Nobody wants to worry about money, especially not during the holiday season. Knowing that you have taken steps to reduce your tax bill can help ease some of that stress. It can be much less stressful if you have everything organized and know what to expect.
Lastly, lowering your tax bill can also help improve your credit score. This is because one factor that calculates your credit score is how much debt you owe compared to your total income.
Tips on How to Lower Your Tax Bill
There are several different ways that you can go about lowering your tax bill. Here are some tips from the experts at PayStubsNow:
Claim All Tax Deductions You Are Eligible For
One of the best ways to reduce your taxable income is to take advantage of all the tax deductions you are eligible for. These can include things like the home office deduction, student loan interest deduction, and more. It's important to do your research and claim all the deductions you are entitled to.
Find Out if You Qualify for Any Tax Credits
Another way to reduce your tax bill is by taking advantage of tax credits. Tax credits are a dollar-for-dollar reduction in your tax bill, so they can be a great way to save money. There are a variety of tax credits available, so it's important to find out if you qualify for any of them.
There are several tax credits available, and it is critical that you claim all of the advantages to which you are eligible. Credits are normally preferable to deductions since they can lower your total tax liability rather than simply your taxable income.
Assume your taxable income is $50,000 and your tax deductions are $10,000. Your taxable income is reduced to $40,000 as a result of these deductions.
- $50,000 in taxable income minus $10,000 in tax deductions equals $40,000 in taxable income.
That $10,000 in taxable income would have been taxed at a rate of 12% in your tax bracket. You would save $1,200 on your tax bill payment as a consequence of your deductions.
- $10,000 in taxable income multiplied by the.12 tax rate equals $1,200.
Because tax bill credits reduce the amount of tax owed, $10,000 in tax credits results in $10,000 tax savings rather than $1,200 in tax savings.
Some of the most well-known tax breaks are:
- The EITC stands for Earned Income Tax Credit.
- The Child Tax Credit (CTC)
- Child and Dependent Care Tax Credit
- The Tax Credit for Opportunity
Withholding tax means your employer withholds money from your paycheck and sends it to the IRS on your behalf. This is used to cover your tax bill throughout the year.
Your company's generated W-2 form can help you know how much money is being withheld. If you think you will be eligible for a refund, you can adjust your withholding to take less money from each paycheck.
Adjusting withholdings will give you more cash in hand each month, but make sure you don’t forget about your tax bill at the end of the year if the amount withheld is not enough. You may also want to adjust your withholding if you expect to have a large tax bill this year.
Create a college savings account for your children.
529 plans, which were originally designed to assist families save for college tuition, were expanded by the Tax Cuts and Jobs Act of 2017 to include savings for K-12 public, private, and religious school tuition. You can utilize up to $10,000 in 529 plan assets each year for eligible educational costs for each youngster.
- Contributions to 529 plans are not tax-deductible at the federal level, but they may be tax-deductible at the state level (laws vary by state).
- Earnings from a 529 account are not subject to federal taxation, and distributions are not taxed if used to pay for eligible school expenditures for the student specified as the plan's beneficiary.
- A prepaid college tuition plan for a qualified in-state public university is another option under the 529 scheme. This allows you to lock in current tuition prices regardless of your child's age.
Recover investment losses
Reporting losses on capital investments might also help you save money on your taxes. "Loss harvesting" is regarded as an important year-end tactic. This is when you sell your investments in order to "realize" a loss (selling at a loss). These losses can be used to offset capital gains taxes on a dollar-for-dollar basis, lowering your overall tax bill.
You can use up to $3,000 of excess losses to offset regular income if you have more losses than gains.
The extra losses (above the $3,000 permitted each year) can be carried over year after year.
Keep in mind that the IRS does not allow you to utilize losses from a "wash sale" if you buy the identical or "substantially similar" investment within 30 days.
Tracking expenses like charitable donations, medical bills, and work-related travel can help you see where your money is going and what you can do to cut back on spending. Make sure that you keep all of your receipts so that they don’t get lost or thrown away because if not, it will be hard to deduct them from next year's taxes.
If you are also planning on making any large purchases, make sure to keep your receipts in case you need them later. You never know when the IRS might ask for proof of what expenses were made during a specific period.
Keeping all these receipts together in one place will be easier to find them when needed and help you avoid any penalties from the IRS.
Consult a Tax Professional if You Have Complicated Finances or Investments
If you have complicated finances or investments, it may be worth hiring a tax professional to do your taxes. They can save you time and energy when filing since they are the experts in this field. Their services can often come with big savings that could help reduce your taxable income even more.
A tax professional can help you generate and fill up your 1099s, W-forms, and more. They can also help you file your taxes electronically, which will considerably speed up the process.
Just make sure that they are reputable with their services before hiring someone, as not all tax professionals can guarantee a particular outcome for your taxes.
In some cases, using a professional could cost more money than it saves since there is often an additional fee involved. If you feel confident in your abilities to complete your taxes, there is no need to hire a professional.
Reduce Your Taxable Income by Donating Appreciated Stocks, Bonds, and Mutual Funds to a Qualified Charity
Donating appreciated stock, bonds, and mutual funds to a qualified charity can have significant tax benefits. You can deduct the total value of your donated asset, but you won’t have to pay capital gains taxes on it which can help reduce your overall taxable income.
Consider Retirement Savings Plans Before Taking the Standard Deduction
Several different tax-advantaged accounts can help reduce your taxable income. These include things like 401ks, Roth IRAs, and 529 plans. Make sure you are taking advantage of all the benefits these accounts offer.
Contributions to an Individual Retirement Account (IRA) can help you save money on taxes. Traditional and Roth IRAs are the two most popular types of IRAs, and the difference between them is when your contributions are taxed.
Because many employers match employee contributions to their 401(k) plans, company-sponsored 401(k) plans are the most popular option. Experts advise donating either the entire amount permitted ($20,500 for 2022 or $27,000 for taxpayers 50 and over) or, at the very least, the maximum amount that your employer will match.
Traditional IRA contributions are typically pre-tax, which means they are deposited in your IRA before being taxed, decreasing your taxable income for the current tax year. You will not be taxed on your donations until you withdraw the funds.
Roth IRAs are taxed at the outset. So, while these contributions do not reduce your current tax bill, the distributions you receive when you retire, including earnings, are tax-free.
Tax bills can be very confusing and stressful. However, following these best tips from PayStubsNow experts to Lower Your Tax Bill can help you save money on your taxes this year and leave you with more money to spend on the most important things.