Saving money on taxes is easy if you know where to look. The IRS provides numerous deductions and credits for businesses and entrepreneurs, and some of your own expenses may even be eligible for deduction.
One of the best ways to reduce your taxes is by setting up a 401(k) or other retirement account. You can direct up to $19,500 of each paycheck into these accounts without being taxed.
1. Don’t Forget About Your Home Office Deduction
According to the IRS, 26 million Americans own home offices. However, only 3.4 million taxpayers claim this deduction each year.
No matter where you work from – from your main home office or a separate structure on your property – the home office deduction can be an important factor when it comes to saving money on taxes.
To qualify for this tax break, your home office must be used regularly and exclusively for business purposes. While the IRS doesn’t specify how many hours must be worked there each week, one court has held that 12 hours should suffice.
2. Look for Tax Credits and Deductions
Tax season is the ideal time to learn how to save money on your taxes by taking advantage of deductions and credits. While these are two popular methods for cutting back on the amount owed, they can be complicated to comprehend.
Deductions reduce the amount of income tax you owe, while credits directly reduce it. Since credits often have more value than what’s claimed on your return, it’s essential to know what eligible for before filing.
There are various tax credits available, such as the Earned Income Tax Credit, Lifetime Learning Credit and Green Energy Credit. You should consult your tax advisor or a tax prep service to see what’s available to you.
3. Keep Track of Your Expenses
Tracking your expenses is essential for saving money on taxes. Whether you use a spreadsheet or app, make sure to record every purchase you make and the exact amount spent.
Maintaining control over your budget and identifying areas to cut back can help you stay on track. Additionally, it makes it simpler to detect hidden spending patterns that you may not have been aware of before.
4. Don’t Forget About Charitable Contributions
Charitable contributions are beneficial in many ways, but they also have the potential to reduce your income tax liability. It’s essential to remember that charitable deductions have certain limits.
Therefore, you may want to consider frontloading your donations or prefunding them all at once in order to maximize the tax advantages.
If you plan to donate cash or appreciated securities, consider giving the full value of the asset rather than just its current market value – this can result in a larger deduction for you.
Donations of long-term appreciated assets like stocks, real estate and bonds usually don’t incur capital gains taxes, so you can deduct their full fair market value on your income tax return. This is an effective tax strategy that could significantly reduce your tax bill.
5. Consider Deferring Income
Deferring income, whether you are an individual or business, can be an effective way to reduce your tax bill. For instance, contributing pre-tax money into an annuity premium or qualified retirement plan allows you to defer taxes until after withdrawal of those funds.
Similarly, you can invest after-tax money into cash-value life insurance and not have to pay taxes on its growth until you take withdrawals from the policy. This helps you save more for retirement.
However, it’s essential to note that deferring income may not always be the best strategy. If you anticipate that your taxable income will be higher in the future than this year, accelerating deductions instead of deferring them could make more financial sense.