Filing your taxes is one of those things that makes you groan. It can even be more agonizing when you make your final calculations and your jaw drops at the total amount you owe to the IRS. As long as you work, you will have to pay taxes; it is inevitable and a necessity as it is what allows the federal and state government to fund programs that serve the people.
Contrary to popular belief, however, you don’t have to be a millionaire with a successful business in order to game the system and pay a lesser amount than what most other people in your financial class would owe. The fact is that anyone, regardless of income level, can get a better deal on their tax returns provided that they understand some basic strategies.
Tax Saving Tips
The average tax payer can reduce their taxable income by adhering to several fundamental steps when filing their returns. These methods are legal and don’t involve shady tactics like setting up an offshore bank account or tax shelters. These methods are worth studying; a good certified public accountant worth his or her salt will also be able to implement the best strategies for reducing your taxable income.
- Filing Status – Selecting your filing status is the first but one of the most important steps of all. Your filing status could impact your tax rates, tax deduction and standard deduction.
- Dependents – Being able to claim a dependent can help lower your taxes by increasing personal exemptions. You may also qualify for a number of dependent-related tax credits. Be sure that you understand who can qualify as a dependent as it is not necessarily just minors.
- Investing – Those who invest in bonds, stocks, real estate or mutual funds may be able to reap the benefits of a lower tax rate on long-term gains. Home sellers, for instance, can exclude about half a million dollars in profit by selling their primary home.
- Tax Breaks – Some of your biggest expenses can be used in your favor when qualifying for a tax credit or deduction. Examples include mortgage interests, alimony, child care, student loan interests, earned income credit and individual retirement accounts.
- Tax-Free Income – There are forms of income that are subject to zero income tax. Earning as much tax-free income is one of the single best ways to avoid taxes. Some common approaches include investing in municipal bonds, transferring investments over to your children and contributing to a health savings account.
- Tax Credits – Obtaining Tax credit reduces the overall tax you have to pay. Congress has taken initiative and routinely adds new tax credits that you may be eligible for. There are, for example, tax credits for making your home more energy efficient or purchasing a hybrid vehicle.
Preparation is Key
Before the next tax season approaches, take a little time to learn a thing or two about appropriate tax planning strategies. The more knowledge you accumulate, the better off you will be when it comes time to report your earnings and assets to the IRS. You work hard for your income, and you deserve to keep as much of it as possible. It is worth the extra effort to learn some valuable tax saving tips that you can use year after year.
You can also hire a public accountant to file the return on your behalf. A good accountant will be able to get you the best deductions and credits regardless of whether you are filing as an individual or filing for a business. In order for an accountant to work for you, be sure to provide all necessary documents, such as W-2 forms, payrolls, receipts and proof of donations to charitable organizations.