Tuesday, July 5, 2022

How To Save For Taxes

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How To Calculate How Much Youll Owe If Youre Self

How to Save Income Tax for Beginners & Salaried Employees

Lets talk specifics here. You may think that you have to pay tax on every dollar your business earns, but thats actually not the case. Youre only required to pay income tax on your business earnings after business expenses. Moreover, you can lower your average tax rate and thus your tax bill even more by taking advantage of other personal tax deductions and tax credits, such as claiming some of your RRSP contributions as deductions.

For example:

Lets say youre a self-employed web designer in Ontario and you earned $100,000 in business revenue. Business revenue is the total amount of income your business generated by selling goods and/or services. Business revenue does not include any sales tax collected .

You spent $30,000 on business expenses and operating costs.

That leaves you with $70,000 in business earnings after expenses. Using this free tax calculator, youll find that your average tax rate would be 26.66%, and you should set aside $18,662 to pay your federal and provincial taxes and your CPP premiums.

Now, lets say you also contributed $10,000 to your RRSP which you claim as a tax deduction.

As you can see, your RRSP deduction lowered your average tax rate to 22.42%, thus decreasing your tax bill to only $15,697.

Tax Saving From Home Loan

Get Deductions u/s: 80C, 24, 80EE & 80EEA

Use your home loan efficiently to save more tax. There are five ways to get an income tax deduction on your home loan.

  • The principal amount repaid in the current financial year is included under section 80C, offering a deduction up to Rs. 1,50,000.
  • The interest portion offers a deduction up to Rs. 2,00,000 separately under section 24.
  • Benefit on interest on home loan for First Time Buyers Rs. 50,000 under section 80EE
  • Benefit of interest repayment for first time affordable home buyer Rs. 1.5 Lakh under section 80EEA. Exemption can be taken either under section 80EE or 80EEA.This deduction is over and above the deduction of Rs 2 Lakh for interest payments available under Section 24.
  • If you are living in the home on which you took a first home loan, you can get another loan for the second house. There is no limit on income tax deduction on the interest payment of the second home loan. Very few people are aware of this benefit of tax saving on a second home loan.
  • Deduction under section 80EEA is in addition to the Rs. 2 Lakh limit allowed under section 24.

    So if you can meet the conditions of both sections 24 and 80EEA then you can claim Rs. 2 Lakh + Rs. 1.5 Lakh = Total Rs. 3.5 Lakh in the deduction.

    What Youre Required To Pay As A Self

    Okay, with all of that knowledge in your head now, lets talk about what youre on the hook to pay to the government come tax time. When youre self-employed, and youre operating your business as a sole proprietorship, you must pay:

    • Personal income tax on your business earnings minus business expenses
    • Contributions to the Canada Pension Plan
    • Contributions to Employment Insurance voluntary

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    Huf Account For Secondary Income

    You can take the benefit of tax saving under the HUF account if you have any additional income through the joint family property.

    The property can be ancestral property or any other property acquired with the aid of ancestral property. You can pay tax on your salary under your name and deposit secondary income into the HUF account.

    Hindu Undivided Family status is available to Hindu, Sikh and Jain families in India.

    You have to get a separate PAN and bank account number. Income Tax Department considers HUF as a separate entity for taxation purpose.

    For example:

    You have 500,000 income from your salary and 50,000 income from rent through the ancestral property. Then you can show rent income from family property as income of the HUF.

    You can save tax on both of your entities by investing in various tax saving options like under section 80C. You will virtually pay no taxes on your secondary income if you invest in tax saving instruments.

    Work With A Tax Expert

    How to Save Taxes this tax season

    If youre feeling totally lost or your situation is complicated, it may be worthwhile to hire an expert, like a certified public accountant or enrolled agent . You may rest easier knowing your tax return is correct and you arent paying Uncle Sam any more than you need to. Hire a tax specialist to make sure you arent leaving money on the table, Edwards says. Sure, youll need to pay them for their services, but that fee can quickly be made back in the money they might be able to help you save, long-term.

    Also Check: Where Do I Pay My Federal Taxes

    What Is Freelance Work

    Freelance work is work performed by an independent contractor. It’s not employment per se. The person or company commissioning the work is not doing so in an employer’s capacity. A freelance worker can determine when the work is done, and there’s typically a contract that spells out the specifics that both parties agree to. Taxes aren’t withheld when the freelancer is paid, because freelance work isn’t employment. Freelance workers are responsible for their own taxes.

    Final Result From Avas Retirement Savings: A Potential Income Tax Reduction Of Approximately $60000

    The total tax calculation will vary based on their state income taxes and other deductions, but this strategy could save Ava and Jeff as much as $60,000 on their tax bill in 2021. If this strategy is carried forward for many years, its clear just how big of an impact it can have for both saving towards retirement and saving money on income taxes.

    There are rules to maintaining these types of retirement plans correctly, and again, they require the review of an actuary each year to make sure your business is contributing the correct amount for all eligible employees. But when you want to save as much as possible on your income taxes legally, ethically, and in a way that benefits you in the long run through increased retirement funds, its worth it to explore your options!

    Hannah Chapman is a Certified Financial Planner and wealth advisor based in Cincinnati, OH providing financial planning and investment management for entrepreneurs and business owners from coast to coast. Sign up for her weekly newsletter for even more content on wealth building and entrepreneurship!

    Recommended Reading: How To File Pa State Taxes

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    How To Save For Retirement And Reduce Taxes As An Entrepreneur

    How I Save for Taxes | How to Save for Self-Employment Tax

    How can we plan for the future?

    Is there any way to reduce our tax bill? Ava asks, sitting with her husband Jeff and talking with their financial advisor over Zoom. My business is having its best year yet and is on track to make $600,000, and Jeffs income as a surgeon should be $500,000 again this year before we get any K-1s from his partnership. I feel like were going to get killed with taxes! What options do we have?

    Thankfully for Ava and Jeff, there are several options to help reduce their income taxes while saving for retirement, and well see how they might be able to reduce their tax bill by $60,000 in 2021 while saving $161,000 of Avas business income towards retirement. But first, to understand what options are available we need to understand her business.

    Ava is 41 years old and owns a mediation firm and is also in high demand as a public speaker in her industry. The business is in its third year, Ava has one W-2 employee who she pays $70,000 per year, and she has not set up a retirement plan for the business yet. For the purposes of this illustration, well assume that her employee is not eligible for the retirement plan this year. She files taxes as an S-corporation and has been paying herself $155,000 on her W-2 and taking the rest of the business income as pass through income based on her CPAs recommendation. Based on everything she sees in her industry she expects to keep growing her business for a long time to come.

    Read Also: Where Do I Mail My Taxes In California

    Borrow Money To Invest

    Borrow money to make investments in the stock market. With prudent investing and sound financial advice, your stock portfolio should grow overtime. Think of borrowing for investments as an energy bar for your stock portfolio it gives it a much needed to boost. By borrowing to invest, you are increasing your buying power, and stock portfolio size.

    From a tax perspective, interest paid on money borrowed to purchase stocks, bonds and mutual funds is tax deductible. This will increase your tax savings.

    Do you own a small business? Pay for medical expenses with before-tax dollars using a Health Spending Account

    Interest Paid On Purchase Of Electric Vehicle

    Exemption U/s: 80EEB

    Max Exempted Amount: Rs. 1.5 Lakh

    The interest paid on the loan taken for the purchase of an electric 2,3 or 4 wheeler can be claimed as a deduction up to Rs. 1.5 Lakh.

    To be eligible for deduction the loan for the purchase of an electric vehicle must be sanctioned between 1 April 2019 till 31 March 2023.

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    Collection Of Tax Saving Tips And Tricks For Businesses

    Though much has been written about the soon-to-be-implemented tax plan, corporations and institutions of all sizes as well as self-employed individuals are often still unsure about all of their options. There are many factors that affect large and small businesses the market fluctuates, demand shifts, and technology raises the bar on products and services, but the arrival of tax season will never change. Many businesses likely lose money every year, sometimes in significant amounts, simply because of incorrect or inefficient tax planning and execution. Business owners know that every penny counts. And when it comes to tax planning and filing, its helpful to be aware of any and all tax saving tips and tricks. Read on to learn about what businesses may be overlooking when it comes to the tax process, and how a few simple hacks can make a real difference to the bottom line.

    Consider Investing In Government Schemes

    A Guide on How to Save Income Tax

    Tax waivers are among the benefits associated with several government-mandated schemes. Tax waivers on total annual income are available on up to *1.5 Lakh spent on such investments under Section 80C of the Income Tax Act.

    Investing in the following tools can result in tax exemptions:

    • Senior Citizens Saving Scheme
    • Sukanya Samriddhi Yojana
    • Scheme of National Pensions
    • Public Provident Fund

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    How To Save For Taxes As An Independent Contractor

    Working for yourself offers plenty of benefits, including independence, a mix of projects and total control of the office thermometer. And in the age of side hustling, more people are taking on flexible contract work every year.

    But working for yourself has its headaches, too, and many of them come during tax season. âWhat kind of worker am I?â âDo I need to pay taxes quarterly or annually?â âHow much should I pay in taxes?â These and other questions can be challenging for new freelancers. The following tips will answer these and other questions so you can dive into new projects with fewer worries.

    Understanding The Many Types Of Deductions

    While all business owners are mindful of tax deductions, small-business owners, in particular, are hyper aware of how business expenses relate to tax deductions. Half the battle is knowing the tax deductions and credits that are available to businesses, and the business owners who are well-versed in the many types of deductions are typically the ones who enjoy more tax savings.

    Possible Deductions for Businesses: While some deductions are overlooked, many businesses dont typically consider certain things deductions. This piece describes how businesses may be wrong.

    The Mortgage Interest Deduction: This article explains the mortgage interest deduction for Americans and provides how it can impact them in three different scenarios.

    Outlandish Tax Deductions: This piece touches on tax deductions that most people may have yet to learn about, but may be applicable.

    Also Check: Do You Pay State Taxes On Unemployment

    Choose Voluntary Provident Fund For A Good Tax Saving Investment

    Employee Provident Fund is offered to all salaried employees, every month by the employer. In an EPF account, an employee has to contribute a certain amount of money and the employer will do the same amount of contribution. These contributions are generally fixed. This was introduced by the government to assure employees’ future financial needs after retirement when he/she can withdraw the lump sum amount of money to fulfill their old age needs. This kind of contribution is tax-free according to government tax rules.

    What Is 1099 Income

    Tax Deductions – How To Save Money On Your Taxes!

    Freelancer. Independent contractor. Self-employed. 1099 worker. Side hustler. There are many terms used to define workers who are not traditional employees. Regardless of the label, they are treated the same when it comes to taxes.

    First things first: When you work for yourself, your employer does not withhold taxes from your paycheck and send them to the IRS. Instead, youâre expected to pay income taxes directly to the government.

    Like most things related to taxes, it all starts with paperwork. Instead of a traditional W-2, as a contractor you fill out a W-9. That allows the company that hired you to prove to the IRS that it doesnât owe payroll tax for your employment. Then, come tax season, you will receive an IRS form 1099 from each client, outlining exactly how much 1099 income you earned from that company over the course of the year.1

    Read Also: Where To Find Real Estate Taxes Paid

    Landlord’s Replacement Of Domestic Items

    Landlords can claim tax relief on money spent to replace ‘domestic items’ in their furnished rental properties.

    The types of items you can claim relief on include beds, carpets, crockery or cutlery, sofas, curtains, fridges and other white goods.

    But this only applies to items being replaced – not those bought for a property for the first time. You can also only claim the amount for a like-for-like replacement.

    Start A Business To Pass On To Your Kids

    Now that Im a father of two kids, theres nothing I want more than to pass my business down to my kids when theyre grown. I plan on teaching them everything there is to know about running a website if theyre willing to learn.

    Its super competitive in the job market these days and it would be my honor to hire my children. If they want to branch off and do something on their own, Ill show my support. And if they want to work with me, my wife and I will jump for joy.

    They are already involved in simple ways like modeling, providing post ideas, and adding sound bites to the Financial Samurai podcast. I plan on getting them more and more involved each year in new capacities.

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    Easy Tax Saving Strategies You May Be Missing Out On

      Income taxes are often one of our largest expenses and a source of deadline-induced stress and confusion. While we cannot avoid paying taxes without getting some unwanted attention from the IRS, we can at least try to minimize the total amount of income taxes that we owe. The good news is that by paying less in taxes, youll have more money available to save for your financial goals and use for more fulfilling life pursuits. The new tax code may have eliminated many seldom used deductions and significantly changed some others, but there are still several easy ways for you to reduce your taxable income even things you may be doing already. Here are 7 easy tax saving strategies that can lower your 2018 or 2019 tax bill:

      Make deductible contributions to a Traditional IRA.

      This is an option if you are working but not covered by a qualified plan at work or if you are participating in a plan and have income below certain limits. You can contribute up to $5,500 to an IRA for 2018. If you dont have a retirement plan through work or do but meet the income limits, you can deduct your contributions to a traditional IRA and invest them to grow tax-deferred until withdrawn.

      Max out your health savings account contribution.

      Set aside education funds in a 529 plan.

      If you are still itemizing deductions, dont miss any potential deductions or tax credits!

      Contribute to an employer-sponsored retirement plan.

      Create a personal spending plan to create bigger tax savings.

      Avoid Tax Penalties: Take A Required Minimum Distribution

      FinEdge

      When you reach age 72, youre required by law to take a certain amountan RMDfrom retirement accounts each year. If you dont, youll pay a penalty . Or, if you dont need the income, you can make a qualified charitable distribution from certain IRAs to a qualified 501 charity . Work with your financial professional to make sure you follow the rules for a QCD.

      Heres the tricky thing: Even before the COVID pandemic, the RMD amount required to be distributed changed each year based on your age and account balance. A 2020 waiver, for example, made an RMD optional, but that expires for 2021, so be prepared to take yours this year.

      Need help calculating your RMD? Find a calculator at investor.gov.

      Also Check: How To Pay Federal And State Taxes Quarterly

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