Hello everyone, this is Book 2 Tax here explain how to minimize your income tax losses this year. Virtually no one wants to be subject to more taxes, but do you understand the common methods to pay the taxes that you deserve? Often, not knowing these methods can actually work against you. For instance, are you aware of how your gambling winnings may compound your tax burden? What about donations to your IRA? Heck, what does an IRA even stand for?
In this article, we’ll take a look at some common ways to minimize your tax losses. At end, we will provide some information to help you Find a Tax Professional for Income Tax Losses.
If you employer offers it, take advantage of contributions to a 401(k) retirement account to help reduce your taxes by reducing the amount of taxable income. This money is pre-tax, being deferred into an account that accumulates growth, which is also tax-deferred. The catch to all of this is that you will taxed when withdrawing from your 401(k). Also, the limitation for contributions is $16,500.
Earning Tax-Free Income
It helps to know which income that you make is subject to tax and what income is not. Tax Preparers know more in-depth knowledge that they can recommend for you, but it helps to know some general distinctions. Here’s a few examples of untaxed income:
This also includes employer offered benefits (see below). Consult an Accountant to determine ways that you may be missing out at home and at work.
Some employers offer flexible spending accounts that can save their employees significant tax burdens. If the employee participates, putting a portion of their wages in for funds, like a medical account, may not only be liable for taxes, but also act as a “rainy day fund” for unexpected expenses. Most of these spending accounts allow the employee a maximum reimbursement at any time, so this can work as a part of your tax strategy if you are able to anticipate your tax burden and divert your income.
Deductions reduce the amount of income that can be taxed, thus minimizing your income tax losses. One method is to use a standard deduction, which is like a “lump sum” for those who don’t want to or find a financial advantage of not itemizing their expenses. On the other hand, itemized expenses allow you to combine unrelated costs and reduce your overall tax burdens. Some examples of this include:
Business expensesare also eligible for tax deductions, which includes such things like operating costs, expenses for travel, and home offices.
Tax credits are similar to deductions in that they reduce your taxes per dollar, reducing the amount of taxes you have to pay overall. The government, by way of the IRS, makes tax credits available to influence taxpayer’s behavior or to grant tax relief.
A general list of tax credit are:
This is only a small selection of available tax credits, as the IRS adds new ones that you may or may not qualify for. While it may beyond the scope of this article to go into what it takes to qualify for every tax credit available, it is a good rule of thumb to assume that there’s at least one tax credit that you may qualify for.
Besides building good karma and being altruistic, one way to reduce your income tax burden is to donate to a charitable organization. However, make sure that the organization is a qualified organization, like a 501(c)3, before donating money. Also, be aware that donating property like a vehicle is subject to fair market value (FMV), meaning that you’ll only be compensated for the amount that you can reasonable sell it to a private party or trade-in value.Another item to consider is charitable donations do have a limit, but that’s only for those that make donations that exceed 50% of the adjusted gross income (AGI)
If you choose to itemize your deductions, medical expenses can lower your tax liability. Costs that have incurred from diagnosis, treatment, cure, mitigation, or the prevention of disease prescribed by a physician are applicable. Cosmetic and non-essential procedures are generally not deductible.
There is a bit of calculation involved to determine how much you are qualified for. The general rule is that medical and dental expenses can be deducted for amounts that exceed 7.5% of adjusted gross income (AGI). For example, if your AGI was $50,000, any medical bills that you accumulated over $3,750 would be eligible for tax deduction.
By shifting your income to your child/children in lower tax brackets can lower your income taxes. There are two benefits to this approach:
There are, however, laws that define the particulars of this method, so be sure to do the appropriate amount of research depending on the amount you wish to shift and the valid methods available to your particular filing situation. A qualified Tax Preparer can inform you of these regulations and shift the maximum for your particular life situation and tax strategy.
Book 2 Tax