Tax season can be an expensive and stressful time of the year, but with the right steps taken it can be a great opportunity to reduce your tax bill.
Your tax refund can also be utilized to help save for future goals, whether that means investing, paying off debt or treating yourself!
Deductions
Deductions are one of the most crucial concepts when filing your taxes. They allow you to subtract certain expenses from your income before filing, which reduces how much taxation you owe and may save hundreds of dollars annually in penalties and interest charges.
Deductions for charitable donations, interest on mortgages and home equity lines of credit can be claimed. To maximize these deductions throughout the year and at tax time, create a system to monitor them effectively.
Maintain separate bank and credit card accounts for business expenses and personal costs, as well as a log or journal of any deductible expenses you incur. Doing this makes recording legitimate deductions much simpler when filing your tax return; additionally, it gives you the chance to trace down any expenses that were missed during the year and ensure they receive credit for them.
Credits
Tax credits are available to American taxpayers, and understanding which ones you qualify for can either reduce your tax bill or boost your refund.
The ideal tax software should provide an overview of all credits available and their application on your return. Furthermore, they should explain the distinction between refundable and nonrefundable credits, as well as how to apply them correctly on your tax return.
Credits are intended to motivate desirable behavior and are a means for governments to assist businesses and individuals invest their funds in areas the government deems valuable. They can be used for research and development, job creation, or investments in underserved regions.
Some tax credits are performance based, meaning companies only qualify for subsidies if they meet certain criteria. This could include investing a certain amount, hiring employees or paying a certain wage. Furthermore, good tax credit laws often contain reporting requirements and clawbacks which allow state governments to reclaim the subsidy with interest or penalties if the business fails to adhere to program conditions.
Tax brackets
In the United States, income tax rates rise as individuals’ earnings increase. While this can be confusing, knowing your bracket helps you comprehend your taxes and maximize any refund you may receive.
Each of the seven federal tax brackets has a different marginal tax rate that applies to certain portions of your income. This number, known as your marginal tax rate, should be taken into consideration when planning your taxes or trying to minimize your tax obligation.
Each tax year, the IRS publishes new tax brackets and associated credits and deductions that can significantly influence how much you owe in taxes. Furthermore, they adjust these brackets annually for inflation to account for cost-of-living adjustments.
Interest
Taxpayers who pay their taxes are usually rewarded with a refund. However, it should be noted that receiving a refund does not guarantee you free money from the government; thus, it can be challenging to maximize your refund amount.
One way to maximize your refund is to take advantage of interest. Whether you’re borrowing money or lending it out, interest serves to incentivize spending and encourages financial responsibility.
This fundamental idea underlies many financial products, from credit cards to student loans and mortgages. Furthermore, it plays an integral role in both economics and society at large.
From January 1, 2016, the IRS increased their rate for unpaid balances and pending returns from 6% to 7%, increasing from 6% previously. Adjusted quarterly and tied to the federal short-term rate, this small boost can be especially helpful to taxpayers waiting on refunds.
