Open A Retirement Account For Your Side Hustle
If you’re a freelancer or self-employed, you have a whole different set of tax rules to navigate. “A lot of younger people dove into side gigs, like delivery services, this year,” says Greene-Lewis. “They need to realize that they’re self-employed. And the good thing about it is, there are so many deductions.”
Like folks who earn a regular paycheck, self-employed individuals can lower their income by contributing to a pre-tax retirement plan. As with an IRA, you can make 2020 contributions to a SEP IRA or a solo 401 until the tax deadline next year. If you’re using a solo 401, you’ll just need to make sure your plan is set up by the end of 2020.
How much you can set aside may depend on factors including the account you use, how much you earn, and how much you’ve contributed to a retirement plan at your full-time job.
Video by David Fang
Be Smart With Education Tax Breaks
Ask your boss to pay for you to improve yourself. Companies can offer employees up to $5,250 of educational assistance tax-free each year. That means the boss pays the bills but the amount doesn’t show up as part of your salary on your W-2. The courses don’t have to be job-related, and even graduate-level courses qualify.
If your employer isnt so generous and you’re paying your own tuition for a graduate course or other training, you may qualify for a Lifetime Learning Credit that’s worth 20% of up to $10,000 of qualifying expenses. That could knock off as much as $2,000 from your tax bill. The right to claim this tax saver phases out if your income exceeds $50,000 on a single return or $100,000 on a joint return.
Do I Qualify For Eitc
You qualify for EITC if:
You have earned income and adjusted gross income within certain limits AND
You meet certain basic rules AND
Meet the rules for those without a qualifying child OR
Have a child who meets all the qualifying rules for you or your spouse if you file a joint return.
EITC has special rules for:
The amount of credit you may receive
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How To Pay Income Tax Or Other Additional Tax
When you retire, you will have to pay tax with any of the following:
- Tax withheld at source If your main source of income is from a pension, you can have enough tax withheld at source to pay the tax you owe.
- Paying your income tax by instalments If you receive investment, rental, self-employment income, or certain pension payments, you may need to pay your income tax by instalments.
- Social benefits repayment You may have to repay all or a part of your old age security pension or net federal supplements when you file your tax return if your income exceeds a yearly threshold. If that is the case, a recovery tax will be deducted by Service Canada from your OAS benefits. You may request a waiver from the CRA so that Service Canada could reduce the tax withheld at source.
Increase Your Tax Deductions
Your taxable income is what remains after you’ve determined your AGI. You have a choice here: You can either claim the standard deduction for your filing status, or you can itemize your qualifying deductions, but you can’t do both.
As of tax year 2020, itemized deductions include:
- Expenses for health care that exceed 7.5% of your AGI
- The total sum of state and local income taxes, real estate taxes, and personal property taxes, such as car registration fees, up to $10,000, or $5,000 if you’re married and file a separate return. You can substitute sales taxes you paid for income taxes if this is more beneficial for you, but you can’t include both sales and income taxes. You must choose one or the other.
- Interest on mortgages taken out after December 15, 2017, of up to $750,000, or $375,000 if you’re married and filing a separate tax return, provided that the funds are used to “purchase, construct, or make substantial improvements” to your primary or secondary residence. The maximum amount for mortgages originated on or before December 15, 2017, is $1,000,000, or $500,000 for married taxpayers filing separately.
- Gifts to charity and cash donations are limited to 60% of your AGI, although this increases to 100% in tax years 2020 under the terms of the CARES Act.
- Casualty and theft losses that result from a nationally declared disaster.
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Contribute As Much As You Can To Retirement Accounts
Want to set yourself up for the future while slashing yourtax bill at the same time? Contribute to tax-advantaged retirement accountssuch as a 401 and IRA.
Unless you opt for a Roth account, you can take deductionsfor your contributions in the year you make them. This enables you to deduct a lot ofmoney. You can contribute up to $19,000 to a 401 and up to $6,000 to an IRAin 2019. You can also make additional catch-up contributions of $6,000 to a401 and $1,000 to an IRA if you’re over 50.
Anyone can contribute to a 401. If neither you noryour spouse has a retirement plan at work, anyone can contribute to an IRA as well. Ifeither of you has a plan at work, contributionsphase out at higher income levels.
If you can max out both your 401 and IRA, you’d be ableto reduce your taxable income by $25,000 or $32,000 if you’re over 50. Ifyou’re in the 24% tax bracket, this would mean saving up to $6,000 or $7,680 ifyou max out catch-up contributions too. That’s a huge amount of tax savings.
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Get A Knee Replacement By Year
In 2016, most taxpayers can only deduct unreimbursed medical expenses that exceed 10% of their adjusted gross income. That high hurdle prevents most taxpayers from writing off medical costs. If youre close, though, consider scheduling medical or dental work before the end of the year to clear the 10% bar and take advantage of this tax break on your 2016 tax return. Deductible expenses include everything from laser eye surgery to a portion of your long-term-care insurance premiums.
Another deduction that could go away if the House tax reform plan was adopted is medical expenses, so next year, that move might not work at all. Something to considerbut don’t rush your surgeon unnecessarily.
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How Fidelity Charitable Can Help
Since 1991, we have been helping donors like you support their favorite charities in smarter ways. We can help you explore the different charitable vehicles available and explain how you can complement and maximize your current giving strategy with a donor-advised fund. Join more than a quarter million donors who choose Fidelity Charitable to make their giving simple and more effective.
Is Deferred Compensation Plan A Good Idea
Deferred Compensation Plan is great as long as you can continue working for the company till the desired distribution date.
Stock options which vest over a period of time are often described as Golden hand cuffs. Deferred Compensation Plan can be considered equivalent to golden shackles.
Also at the distribution date, your tax rate should be lower than your earning years. I am sure most readers would have made sure they accumulate.
Another factor to be considered when making your annual enrollment decision is the solvency of the company.
You have to be cognizant that the company is not at risk of bankruptcy. This is often harder than it seems. We all know companies which were seemed fine and suddenly filed for bankruptcy.
If the company files for bankruptcy, then the Deferred Compensation Plan contribution amount and any notional gains will be subject to claims of creditors. In that case, you would have been picking up pennies in front of the steamroller. Never let the tax tail wag the dog.
Readers, would you ever opt for Deferred Compensation Plan? If you did enroll, what was your experience?
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Be Strategic When Selling Your Home
When it’s time to sell your home, know that you may be able to exclude up to $250,000 of your gain on it via the home sale exclusion rule. That can be a big deal! If you bought your home for $300,000 and sell it for $450,000, your gain of $150,000 can be entirely free of taxes — subject to a few rules:
- The home you sell must be your primary residence.
- You need to have lived in the home for two of the last five years .
- This exclusion can only be claimed once every two years.
Save For College For The Kids In Your Life
If you have a kid, saving for college in a 529 is ano-brainer. But, even if you don’t have your own child, you can open a 529 planfor other kids in your life, including grandchildren, nieces and nephews, andeven friends. You could even open a 529 to save for your own college tuition ifyou’re planning to return to college.
Contributions to 529 accounts aren’t tax-deductible on thefederal level, although invested funds grow tax free. But, depending where youlive, you may be able to deduct 529 contributions from your state taxes. Infact, more than 30 states as well as Washington DC allow either deductions orcredits for 529 contributions.
Reducing your state tax bill may be more important thanever thanks to new federal limits on the deductibility of state and local taxesthat went into effect in 2018. While you used to be able to deduct allthe taxes you paid to your state from your federal taxable income, you’re nowcapped at deducting a maximum of $10,000. This new cap is called the SALT cap.
Anything you can do to bring your state taxes below thisthreshold is helpful, since you don’t want to pay federal taxes on money youhad to pay out to your state.
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Distribution Across Income Levels
As with other tax deductions, SALT deduction benefits accrue more for higher-income taxpayers than lower-income taxpayers. Two factors explain this pattern: higher incomes directly lead to more state and local income taxes and are correlated with higher sales and property tax payments stemming from greater consumption and taxpayers with higher incomes are subject to higher marginal tax rates, so each dollar deducted from tax liability results in greater tax savings.
Table 2 shows the JCT projections of SALT benefits by income class in tax years 2017 and 2019. Taxpayers with more than $100,000 of AGI received the vast majority of SALT benefits in both 2017 and 2019 . Taxpayers with income between $50,000 and $200,000 received a larger share of total benefits in 2019 than 2017 , whereas the opposite trend occurs for taxpayers with more than $200,000 . Taxpayers with less than $50,000 received relatively little benefit from the SALT deduction in both years.
Table 2. Income Distribution of SALT Deduction Benefit, 2017 and 2019
Joint Committee on Taxation, Estimates of Federal Tax Expenditures For Fiscal Years 2016-2020, December 2019, JCX-3-17 and Joint Committee on Taxation, Estimates of Federal Tax Expenditures For Fiscal Years 2019-2023, December 2019, JCX-55-19.
Table 3. Illustrative Example: State and Local Tax Rates and SALT Cap Effects
How To Calculate Income Tax In Ontario
Lets look at a couple of examples: If Paul has a taxable income of $36,000, his income falls within the first tax bracket, so his Ontario tax payable would $36,000 X 5.05%=$1,818.
If Janet has a taxable income of $56,000, her income falls into two tax brackets.
First $45,142 x 5.05%=$2,279.7
Total combined tax: $3,273.2 + $8,783.9 =$12,057.1
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Get More With These Free Tax Calculators And Money
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Learn what education credits and deductions you qualify for and claim them on your tax returnGet started
The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
Above The Line Deductions For 2021
Above the line deductions reduce a taxpayer’s adjusted gross income and are allowed regardless of whether you itemize or take the standard deduction. Above the line deductions are important because reducing your AGI may help you qualify for additional deductions or credits on your return. High-income earners may consider the following above the line deductions:
Health savings account contributions. HSAs are triple tax-advantaged accounts: Contributions are tax-deductible, the money grows tax-free, and withdrawals are tax-free for qualified medical expenses for those under age 65, and for any purpose if you are age 65 or over. The contribution limits for 2021 are $3,600 for individuals and $7,200 for families. If you are age 55 or over, you can contribute an extra $1,000.
Deductible Traditional IRA contributions. Contributions to Traditional IRAs are deductible with different income thresholds based on if you have access to a group retirement plan or not. If you and your spouse do not have access to a group plan then there is no income limit for taking the deduction. The MAGI limit to deduct contributions for a married couple with just one spouse having access to a group retirement plan is $198,000 – $208,000. If both spouses have access to a group plan then the MAGI limit for the deduction is $105,000 – $125,000. For a single filer who has access to a group retirement plan, the MAGI limit is $66,000 – $76,000.
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How To Adjust Your Tax Withholding
If youre single with just one job, no dependents and you take the standard deduction, then the new form is easy to manage. You just have to fill out the top part with your name, address, Social Security number and filing status. Then skip steps 2-4 and provide your signature and date on the bottom of the form .
If youre married and both you and your spouse are employed and make about the same amount of money, you might be able to get away with doing the same as above, plus checking the box in Step 2. Each spouse would have to do this on their respective Form W-4. If one spouse earns considerably more money than the other, then too much tax may be withheld.
If you earn income from several sources or have dependents, it gets more complicated.
Step 2 requires you to choose one of three ways to account for the various income sources:
- Use the IRSonline tool for best results.
- Fill out the Multiple Jobs Worksheet on page 3 of the form.
- Take the shortcut described earlier for two-income households with similar pay.
Step 3 takes into consideration tax credits you get when you claim dependents. Here you can also factor in education tax credits and the foreign tax credit, if youre willing to get into the weeds of the instructions.
Move To A Lower Tax State
This may seem like a drastic move, but there’s a hugedifference in state taxes from one locale to another. In fact, there are somestates where you could live where you’d pay no taxes at all on your income,while others impose a high tax burden.
The Tax Foundation provides a ranking of state and local taxburdens and, for 2017,the U.S. average state-local tax burden as a share of state income was 9.9%.However, in the state with the highest burden — New York — the state/local taxburden was 12.7%. By comparison, Alaska had the lowest burden at 6.5% while sixother states had tax burdens below 8%.
If you have flexibility in where you work — or you’reretired — switching to a state where you pay far less of your income in taxescould help you keep much more in your pocket. This is especially true since, asmentioned above, not all of your state and local taxes may be deductible onyour federal return anymore thanks to the SALT cap.
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To Itemize Or Not To Itemize
One key tax-planning strategy is to keep track of your itemized expenses throughout the year using a spreadsheet or personal finance program. You can then quickly compare your itemized expenses with your standard deduction. You should always take the higher of your standard deduction or your itemized deductions to avoid paying taxes on more income than you have to.
The standard deductions for the 2020 tax year are:
- $12,400 for single filers
- $12,400 for married taxpayers filing separate returns
- $18,650 for heads of household
- $24,800 for married taxpayers filing joint returns
- $24,800 for qualifying widows
A single taxpayer who has $13,000 in itemized deductions would do better to itemize than to claim the standard deduction. That’s an additional $600 off their taxable income, the difference between $13,000 and $12,400. But a taxpayer who has only $9,000 in itemized deductions would end up paying taxes on $3,400 more in income if they were to itemize rather than claim their standard deduction.
Get Help From A Tax Pro
If your tax life isn’t so straightforward, or if you just want more reassurance that you’re making the best tax decisions throughout the year and shrinking your bill as much as you can, seek the services of a good tax pro. It’s their job to keep up with all the tax law changes and to know effective tax strategies. Ask around for strong recommendations or perhaps look for an “Enrolled Agent,” a tax pro licensed by the IRS, near you. The National Association of Enrolled Agents website can help.
The more you know about taxes, the smaller your tax bill can be. Taxes may not be super exciting, but saving hundreds or thousands of dollars certainly can be.
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