An organized tax filer is always interested in saving more on tax bills than the previous year since it is probably the best way to reduce tax liability. So, it's always a clever initiative to learn some strategies to save money on tax bills. Make sure to formulate documentation of your capital gains in advance to handle your tax situation better. Once you manage every possible tax deduction opportunity, you can use the tax credit to pay off your other financial obligations as well.
If you are not in a complicated tax situation, reporting in the right and organized way is better to get better tax breaks. So, here are some unnoticed tax breaks that will allow you to save money on tax bills each year.
Get an earned income tax credit.
If you lost your job last year or took a huge pay cut, it might have lessened your AGI or adjusted gross income to such a level that it'll make you eligible for the Earned Income Tax Credit. EITC is a repayable tax credit, which implies that when you're obliged to pay less in income tax than your entitled credit, you'll not only be required to pay more tax but also obtain compensation for the difference.
Get advantage of childcare costs.
Parents can get tax benefits, including childcare costs and child tax credits. Remember, alimony payments are also deductible.
Under the American Rescue Plan Act (ARPA), the child tax credit has increased. The amount has increased to $2,000 per qualifying child under age 17. Up to $1,500 of the credit was refundable for each qualifying child. However, it's important to note that for the 2021 tax year. The credit amount was increased to $3,600 for children under six and $3,000 for children ages six to 17, and it was made fully refundable.
Make charitable contributions.
Charitable contributions are a popular way to save money on taxes and are also a tax-deductible option. One can receive up to $13,000 without paying taxes. So, you can donate a used car, money, assets, or anything to your favorite charity. Don't forget to keep the receipts because the IRS may ask you for the documents for all charitable contributions at the time of audit. Charitable contribution deductions are the amounts taxpayers can deduct from their taxable income when they donate money or property to qualified charitable organizations.
Taxpayers who itemize their deductions can save on tax based on the type of donation and the taxpayer's adjusted gross income (AGI). If you contribute cash, you can deduct up to 60% of your AGI.
Contributions of property may be subject to different deduction limits, depending on the type of property and the recipient organization.
Charitable contribution deductions directly reduce the taxpayer's taxable income, which may result in a lower income tax liability.
Get advantage of the annual gift tax exclusion.
The annual gift tax exclusion is the amount an individual can give to another person in a year without incurring a gift tax or reporting the gift to the IRS.
Gifts exceeding the annual exclusion amount may be subject to gift tax or require the donor to file a gift tax return.
The annual gift tax exclusion is not a deduction and does not directly affect the donor's income tax liability.
Get a deduction on mortgage payments.
The costs related to mortgage payments can help you get some tax deductions. The interest you pay on your mortgage is tax deductible. Your lender should send you a Form 1098 with the amount you paid toward the interest and deductible. If you made an extra mortgage payment at the end of last year, check if the interest payment was counted.
Go green to get more tax breaks.
According to the Federal Government, those who make their homes more green, such as installing insulation, new windows and doors, and advanced cooling and heating systems, are eligible for tax breaks. Homeowners can save on taxes by installing solar panels in their homes.
Get tax breaks on your retirement savings.
The IRS also considers other assets, such as retirement savings accounts. The IRA savings contribution credit is mainly for low-income and moderate taxpayers. For instance, you can get a tax break of up to 50% of the first $2,000 invested in your retirement account or an IRA (traditional or Roth).
Claim on real estate taxes for the deduction.
If a part of your mortgage payment includes an escrow amount used to pay your annual real estate taxes, the Form 1098 you get from the lender will let you know the deduction amount. There is also a tax deduction opportunity if the state or the county you live in charges a personal property tax.
Maximize Employer 401(k) Matching.
Try to maximize tax savings by leveraging tax-advantaged retirement accounts. The power of tax-deferred or tax-free growth within these accounts allows you to accumulate wealth more efficiently. A specific tip within this strategy is to maximize employer matching contributions in 401(k) plans.
Try to contribute enough money to capture the full employer match. This will help you save money on taxes immediately and enhance your long-term retirement savings. This approach not only reduces your taxable income today but also fosters a disciplined savings habit.
It aligns both short-term and long-term financial goals while optimizing tax efficiency. "Regularly review and adjust retirement contributions based on taxable income changes. It ensures continued tax savings and wealth-building opportunities," advised Ricardo Ferrer, Chief Financial Officer, Culture.org.
Leverage Tax-Deferred Life Insurance Plans.
Mike Cummins, Client Advisor at LIRP Life, advised maximizing tax bill savings with Indexed Universal Life (IUL) and LIRP (Life Insurance Retirement Plan). This is to leverage these policies' tax-deferred growth and potential tax-free withdrawals. By funding an IUL or LIRP, you can accumulate tax-deferred cash value over time.
Additionally, withdrawals can be structured as policy loans, which are typically tax-free. It allows for tax-efficient access to funds during retirement. This strategy enables them to optimize their retirement income while minimizing tax burden. It also provides long-term financial flexibility and security.
Start thinking according to your income.
The IRS will mainly tax you on your taxable income. So start thinking based on your income. If you're an independent contractor, the company you worked with is supposed to send you a form showing your gross income. If you're self-employed, you will have to track all the receipts and documentation for all kinds of business-related expenses and your income.
Get a deduction on job hunting.
If you are searching for a job this year, you're probably eligible for tax breaks. Remember, the job you're searching for should be the same type of work as your current job. You can get an itemized deduction. Some qualifying expenses are transportation expenses, parking, tolls, cab fares, printed resumes, postage fees, food and lodging (in case of overnight search), and employment agency fees. Make sure this is not the first job you're searching for because expenses are not deductible on the first job search.
Consult with a CPA.
Only an experienced and efficient CPA can tell you where to save money on tax bills. They are well aware of tax laws and every tax-saving opportunity. If your tax situation is complicated and you need to be more experienced to handle it, you should consult a CPA who knows federal income taxes. A CPA can charge fees according to their expertise and location.
Some other good tax-deductible options for you.
- Student loan interest paid by parents.
- You can get up to 7.5% -10% of your AGI for deducting qualified medical expenses like acupuncture, bandages, and breast pumps.
- Education Expenses
- State sales tax
- Deduction on baggage
- Dental care expenses
- Adoption credit
- Moving expenses
- Bad investments
Conclusion.
Remember, the IRS can track you based on your Social Security Number. So file the returns along with the SSN and keep the dependents' ID numbers (starting from your elderly parents to infants). Also, you need to keep the tax identification number of the nanny. You may need it if you file for the childcare credit. If you miss the SSN for any persons listed, the blunder will cost you dearly.
