Want to Reduce Your Next Year's Tax Bill? Start Planning Now
As I am writing this blog, I assume that most of you must have already filed your taxes for 2016 by now, and the remaining, who are still scribbling over the tax form, must be waiting for 18th April 2017, the deadline for filing taxes. People who are yet to file it must be searching for some last minute tips to minimize their liability, and those who have already filed it must be wondering how they could have minimized it further. Well, this blog will answer the queries of both parties.
First of all, let us talk about how you can save more on your tax bills if you plan all your spending in advance. Remember, planning is the key to success when working on reducing your tax bill. Only those who failed to plan properly right from the beginning, are liable to pay bigger taxes this year. So in order to avoid a huge tax burden next year, start drawing a picture of your income and expenditures in your mind and start to plan!
Here are the things you need to start working on from now to reduce the level of tax you pay each year:
Check Your Tax Refund: If you get a big tax refund this year, bear in mind that too much tax is taken out of your paycheck every day. The first thing you need to do is to file a W-4 form, or an Employee's Withholding Allowance Certificate with the IRS. The W-4 form will tell your employer about your current tax situation based on your marital status, number of exemptions and dependents and other factors. It will insure that you get more of your hard-earned money. Also, note that you can file this form any time your situation changes, such as when you get married, or divorced, or have a child or when one of your dependent dies.
Spend in Retirement Plans: This is one of the most recommended ways to reduce your taxes. Choose from Individual Retirement Accounts (IRAs) as the money that you spend in traditional IRAs is a pre-tax contribution that helps you lower your taxable income. You can also opt for other employer sponsored retirement plans such as Roth IRAs, and 401(k). Here, Roth 401(K) is better than regular Roth as the money coming out of the 401(K) in retirement will be tax-free. This way, not only you can avoid taxes every year but also save money for your golden years.
Go for Flexible Spending Plans: Flexible spending plans such as dependent care, medical reimbursements, and health insurance are pre-tax plans can be paid with tax-exempt dollars. A part of money from your salary account will be diverted to this account from which you can pay for any of your medical bills. This way, you can avoid both income and social security tax on money. It can let you save 20 to 35% or more compared with spending after-tax money.
Seek Out for Tax Credits: Tax credits can save more money than deductions. Deductions only reduce the amount of taxable income, whereas, credits directly reduce the amount you owe. It works on a dollar-for-dollar basis. For example, if you owe $1000 in taxes but are eligible for a $500 credit, then your net liability drops to $500. There is an array of tax credits available for all types of taxpayers such as a credit for the cost of purchasing a solar panel and wind turbines for use in your home, or other credits that cover the expense of child and dependent care and for taxpayers purchasing their first home. To really maximize your tax savings next year, you should check and see what tax credits your state allows.
Make Deductions Wherever Possible: Many medical and dental expenses are tax deductible. Even the cost of getting to and from medical treatment plus the cost of tolls and parking are deductible. Not only that, dependent expenses can also be deducted. Apart from that, paid student loan interest and tuition and fees can be claimed as deductions.
Start Donating to Stop Over-paying: This is one of the best ways of reducing your tax bill. Just start donating money or even household goods and clothes to a qualified charity. Go to the IRS website to check the qualifications of the charity. Also, you should keep a record of everything you donate. If you pay by credit card, keeping credit card statement may be enough. Remember if your donation is more than $250, then you must get the receipt from the charity. Take care of the household goods and clothes that you donate. They should be in a good condition.
These were some of the best tried-and-tested ways to reduce your tax bill. All you need to do is to plan everything in advance, take care of all the tax credits offered by your state, keep a record of every donation, and spend your money in schemes that pay you back. You will be successful in saving much more on your tax bill next year than you were able to do this year.
Now for those who are still struggling with their tax filing and in urgent need of last-minute tips to maximize their savings wherever possible:
Last-Minute Tips to Reduce Your Tax Bill
This is for the procrastinators who wait until the last minute to file their taxes. Here are some last-minute tips for those who are still pondering how and where they can make some changes to get the maximum benefit out of their tax filing:
Check the retirement fund's maximum contribution limit and file for the maximum amount. Annual contribution limits to IRAs are $5,500 with an extra $1,000 in "catch-up" contributions if you are over the age of 50. You can make contributions until the tax-filing deadline for a year, so contributions for the 2016 tax year may be made until April 18, 2017.
You can do the same with one of your high-deductible health plans if you have any. Contribute to the limit that suits you and has it count toward your 2016 contribution limit. However, verify the rules on your individual health savings scheme before making any changes.
As a last resort, you can file for an extension using the IRS Form 4868 to delay filing up to October 16, 2017, but do it before April 18, to avoid any late filing penalties.
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