Itemize Deductions Whenever Possible
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The IRS has provided two basic types of deductions, the standard deduction and itemized deductions. Itemized deductions are your expenses throughout the financial year, whereas the standard deduction is a flat-rate allowance subtracted from the gross income.
You can only use one type of deduction to calculate your final taxable income. Fortunately, it’s easy to decide which one is right for you. Calculate the itemized deduction, compare it with the standard deduction, and choose the one which will reduce your tax bill by a higher amount. Usually, itemized deductions yield a higher difference than a standard deduction.
Invest in Pension Accounts
Generally, the more income you have, the more taxes you pay. However, you may be able to reduce your taxable income as much as possible by investing a portion of your paycheck in safety nets such as a 401 (k) or an IRA account. Note that if you are an employee, your employer contributes toward your pension, and thus your potential benefits are doubled.
Make Estimated Tax Payments
If you are a freelancer or a self-employed person, you do not qualify for tax withholding. In this case, you must pay at least 90% of the taxes you owe to the IRS as a lump sum or by regular estimated tax payments throughout the year. Paying this amount is essential if you do not want to incur any penalty on estimated taxes and receive a disproportionately large tax bill. The income sources can range from regular income to interests, rents, alimony, dividends from investments, as well as benefits from unemployment and Social Security.
Invest in Your Children’s Education
If you have children, you know you must keep a hefty sum of money ready for your children’s college education. You can start saving that money right now with a 529 savings plan.
Note that these savings are not deductible from federal taxes. Still, the earnings or withdrawals from the contributions are deductible, as long as you use them for further education or recontribution. To get these benefits, you need to open a 529 savings account operated by an educational institute or a state.
Make Your Refunds Work for You
When you pay more tax than you owe, the IRS issues a refund. Usually, the IRS uses this refund to pay off non-federal tax debts through the Treasury Offset Program (TOP). However, the IRS can also withhold your refunds if you have federal tax debt.
You can use this to your advantage by making enough savings on your upcoming tax bill. If these savings are enough to pay off your tax debt, it will be paid automatically through your refunds.
Saving money on your taxes is not a secret. These simple tips can help you to cut down your tax bills rather than paying them off blindly.
