Did you know that you could save a significant amount with these credits and tax deductions?
While each and every one of us knows that taxes and tax season are a part of our lives forever, we doubt there is someone out there who would not love paying reduced taxes. And while the day the tax bill comes is gloom, you can make sure you are not giving the government more money than you should.
We all work hard for our earnings and there are a lot of legal ways in which you can get tax deductions so you can give the taxman as little as possible each year. Of course, some of these ways apply to small businesses or the ones that are self-employed, but there are others that can be utilized by everyone, which are the ones that we want to present to you today.
Do not spend days dreading the moment when you will have to pay your taxes, but rather make sure you keep them as low as possible with the help of the law! The tax code and other specific things may change from one year to another, but knowing where to look to make sure you can still use these legal ways to reduce your taxes is the best way to start.
Let us know if you knew about them before or if our list inspired you to use any of them in the next tax season!
# 1 If You Donate Stocks, You Can Avoid Capital Gain
If you are in the business of acquiring stocks, know that a little charitable action on your part may be the key to reducing capital gains. You can use some of the stocks you have and donate them to charity, which in turn will be exempt from the taxes that come in the form of capital gains.
What’s more, if you are the type that itemizes, all these stocks that you donate can be deducted from your taxes. And depending on the firm you use to make these transactions, your donor-advised funds can start as low as $5,000. So why not let your stocks work in your favor again, this time by giving you reduced taxes?
#2 Open a Health Savings Account
Depending on the type of health savings account or medical plan you have, it may mean that everything you contribute to the account is just another way in which you can reduce your taxable income. If you happen to have a medical emergency, the money you use from that account will not be eligible for tax as opposed to using money from a normal account.
Any additional contributions you make to these types of accounts (high-deductible medical plans) will result in an immediate tax deduction. Not to mention, they will grow in a tax-deferred way, and you can always withdraw money from them tax-free, provided they’re going to be used for medical expenses. The money left inside these accounts will roll over to the next year indefinitely, much like the assets of a retirement account.
#3 Consider the State and Local Tax Breaks When You Think About Reduced Taxes
You should think about the reduced taxes you could get, thanks to the state and local tax breaks, as well. They can certainly add up, depending on the state you are residing in, but you should also try to find ways in which you can reduce the load these types of taxes bring to your household.
The federal tax law, since it has been reformed, has eliminated a lot of miscellaneous deductions that worked in the taxpayers’ favor, but a lot of states have either chosen to uphold them or to lower the threshold you have to read in order to claim them. It may seem that state laws are not working in your favor, but depending on your state of residence, it may be easier to claim deductions due to them.
To compare the way in which states help taxpayers when compared to federal law, people can deduct medical expenses that go over more than 7.5% of their income according to federal law. While states like New Jersey allow their residents to do so with 2% of their adjusted gross income. This might not mean much to you now, but as you age and your health changes, or if you live with a chronic illness, this difference can add up to quite a sizeable amount of deductions.
It doesn’t matter where you live in our country. You should always check the local and state tax laws to see what deductions are available to you!
#4 Combine Work With Vacation
You can actually combine a business trip with your vacation, and it can work towards getting a tax deduction. However, the best way to do so is if you are self-employed. But even so, it will work to reduce the amount you’re spending on vacation: you could deduct the portion that you used for business purposes.
It could include the airfare and part of your accommodation, all proportional to the time you spent doing work-related activities. This method for getting reduced taxes is a bit more tricky, so if you plan to use it to your advantage, it would be best to talk to a tax professional before you attempt it.
#5 Being Charitable Counts Towards Reduced Taxes
We bet you didn’t think that when you were feeling charitable, you could reduce your taxes at the same time. Any sort of charitable contribution will work towards getting a deduction. Be it that you used a check, cash, payroll deductions, or even just donated clothing, food, or other goods, they are all items that are deductible!
The drawback of this option to reduce your taxes is a bit tricky because in order for you to be able to claim the deduction, you have to itemize, and since the tax reform of 2017, the standard deduction has been doubled and a lot of people have stopped itemizing.
Yet, despite the pandemic hitting all of us hard, there has been a silver lining when it comes to taxes and charity; under the CARES Act (the Coronavirus Aid, Relief, and Economic Security Act), taxpayers who didn’t itemize could deduct donations made in cash up to $300! And since this provision has been extended to the 2021 tax year as well, there is a high chance it could be extended again. So keep a close eye on any tax news out there!
#6 Reduced Taxes When You Make a contribution to a retirement account
If we’re talking about ways to reduce your taxable income, this one may just be the easiest way in which you can do just that. And while a lot of people are already using this trick, it’s not really something that everyone is aware of or taking advantage of to its full potential.
In order to reduce the amount you owe in federal tax, you can write down all the contributions you have made towards your IRA and 401(k) accounts as deductibles, which will lower your taxable income considerably. As most of us already know and have such accounts, it is logical to make use of them beyond the perks that we are going to enjoy once we retire (including their tax-free growth).
What’s more, if you plan on taking advantage of this type of tax reduction, you should keep in mind a few key details: for the 401(k) accounts, you have to make all contributions that you include in your tax deduction by the end of the calendar year, while the ones for the IRAs only count until the tax filing deadline.
#7 You May Be Able To Deduct Private Mortgage Insurance Premiums
Not all of us fully own the home in which we currently reside. Some are renting, while others are still in the process of paying the mortgage on their home. For this reason, if you happen to have less than 20% equity in your house, there is a chance that you are paying private mortgage insurance. It’s coverage that lenders are required to have as a way to protect their assets in the eventuality that you will stop making your monthly payments.
This information is relevant because, up until 2017, the cost of paying the privately owned mortgage insurance could be reduced from your tax total by itemized deductions. It had been eliminated that year from the Act for Tax Cuts and Jobs. However, Congress has chosen to reinstate it on a year-by-year basis ever since. While we know this happens yearly, it is a good idea to keep an eye on the news during tax season to ensure it is still in place.
#8 Claim a Home Office Deduction for Reduced Taxes
If you don’t know about this way to get a tax reduction and you have been self-employed or run a side business, you may want to look into it and maybe even consider looking over how taxes work yet again. This is not to say that it could have just not come up on your radar, because that can happen too.
However, you can claim some tax deductions if you have a home office. In order to qualify for such a deduction, you will have to have a specially designated place that you use to do business, no matter the nature of it. The law allows you to file for a tax reduction that is proportional to the space you are using.
For example, if you have an extra bedroom that you converted into a home office and it accounts for one-fifth of your apartment, you can deduct one-fifth of your utility fees and rent through taxes. And in the long run, it can be a huge help!
However, if you’re having problems with paying your taxes, do not panic! Here we have gathered some of the best ways in which you can deal with this situation!