Increase Retirement Account Contributions
Any 401 or 403 contributions taken from your paycheck on a pre-tax basis reduce your taxable income . Your contributions to a traditional IRA may also be on a pre-tax basis and therefore lower your annual gross income , too.
Whether you can take a tax deduction depends on how much you make and if you have access to a retirement plan at work. In 2020, the max you could contribute to an IRA stayed at $6,000. Learn more about IRAs.
Select The Correct Filing Status
Your filing status has a significant impact on your tax situation, as it determines both your tax rate and the amount of your standard deduction.
For example, for the 2020 tax year, the standard deduction is $12,400 for a single filer but $18,850 for a taxpayer claiming the head of household filing status. The tax brackets for heads of household are also more generous than those for single filers.
Depending on your situation, you may have the option of choosing between two different filing statuses.
Here are the five available filing statuses:
- Single. This status is for taxpayers who arent married or who are divorced or legally separated under state law.
- . Married taxpayers can file a joint return with their spouse. If your spouse died during the tax year, you might be able to file a joint return for that year.
- . A married couple can choose to file two separate tax returns. However, selecting this filing status rarely results in a lower tax bill.
- Head of Household. This status generally applies to unmarried taxpayers who pay more than half the cost of keeping up a home for themselves and another qualifying person, such as a dependent child or parent.
- Qualifying Widow With Dependent Child. This status is available to taxpayers whose spouse died during the tax year or in the two preceding tax years who have a dependent child.
Paying For Someones Care Do It The Tax
After taxes, it can easily take $7,500 or more of salary to pay $5,000 worth of child care expenses. But, if you use a child-care reimbursement account at work to pay those bills, you get to use pre-tax dollars. That can save you one-third or more of the cost, since you avoid both income and Social Security taxes. The maximum you can set aside tax-free is $5,000. If your boss offers such a plan, take advantage of it. This isnt just for children; if you have spouse or a relative who is physically or mentally incapable of self-care and lives in your home, theyre eligible, too.
The new tax law expands also expands ABLE accounts, which allow families to put aside up to $14,000 a year to cover expenses for a beneficiary with special needs. The money can be used tax-free for most expenses, and account assets of up to $100,000 dont count toward the $2,000 limit for Supplemental Social Security Income benefits. Under the new law, ABLE beneficiaries will be allowed to contribute their own earnings to the account once the $14,000 contribution limit for gifts by others has been reached. The law also allows parents and others who established a 529 plan for a disabled beneficiary to roll the money into an ABLE account for that individual. However, the rollover would count toward the $14,000 annual contribution limit.
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Boost Your Healthcare Savings
Your health savings account is more than a debit card to swipe at the doctors office or pharmacy; its also a smart way to save on your taxes. There is still time to deposit up to $3,550, or $7,100 for a family plan, and get a tax deduction for the 2020 tax year. ;
Not only will contributions lower your taxes, but youll have the funds for when you need them. There are no deadlines to use the money, and you can keep it all when you change jobs. Its nice knowing theres a nest egg in case of a surprise medical bill, says Edwards.
HSAs also have another tax-friendly feature: the chance to earn tax-free interest. Some HSAs let you invest your balance so it can grow over time, Edwards adds. When you need to spend the money, you wont pay taxes or penalties, as long as you use it for qualified medical expenses.
Keep The Receipts On Everything You Can Buy
One corollary of claiming deductions is keeping track of receipts on everything you buy. RRSP information is automatically sent from your bank to the CRA, so you dont need to specifically report that. However, if you purchase a deductible service like child care youll need to report that to the CRA yourself. So, make sure you keep all the receipts. It can make an enormous difference come tax time.
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Why Save Your Tax Refund
Your tax refund may be one of the biggest checks you receive all year. If youre getting a tax refund, consider saving some or all of it. Putting your refund into savings can help you prepare for unforeseen expenses throughout the year, and work toward longer term savings goals such as buying a house or paying for college.
For many people, making ends meet throughout the year is tough, and saving regularly may seem unrealistic. The money you get in your tax refund could help you build or replenish your rainy day fund. Setting aside money for emergencies may help you cover some of the most common unexpected expenses people experience. Without savings, a financial emergencyeven minorcould have a lasting impact on your financial well-being.
Do you help people prepare their taxes?
Our free tools can help you encourage the clients you work with to save as much of their refund as possible.
Keep Good Accounting Records
Maintaining good financial records is critical in order to have a foundation that will assist both you and your Trusted Advisor make important financial and tax-saving decisions. Good accounting records are especially critical for business owners, without good business records you cannot properly manage your business, identify cash flow issues ahead of time and, implement proactive tax planning strategies throughout the year.
With good records, you can uncover a wealth of additional deduction you might not know even existed. For example, most taxpayers dont know that you can deduct both Medical and Charitable miles, but without accurate records, you cannot take advantage of these deductions.
If you are a business owner, you should consider outsourcing your accounting to a professional that can assist in making sure your records are updated regularly. Do I really need to work with an Accountant to handle my bookkeeping? Absolutely yes! In this article, we discuss the cost of outsourcing accounting and the massive benefits it provides to business owners which far outweigh the fees to have your accounting maintain by a professional.
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Buying Your First Home
Theres a home buyers credit thats available that you can make a claim for if its your first home, said Banerjee.;
Launched in 2019, the credit allows buyers to receive up to 10 per cent of the house price back, which would lower the amount of a mortgage, according to a previous Global News report.;
Its a little bit of a help, its a big purchase, but every little bit counts, he said.;
For more information on how to save money on your taxes, watch Preet Banerjee in the video above.
Make The Most Of Venture Capital Trusts
Similarly, Venture Capital Trusts also offer 30% tax relief, but only on investments up to £200,000. VCTs are a specialist type of investment trust, meaning the investments are managed by a fund manager, rather than chosen yourself.
To qualify for the relief, you’ll need to buy the shares at launch, and hold them for at least five years.;
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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.
Learn All About How To Save Income Tax In India
Approximately 1.46 Crore people have filed tax returns in the financial year 2018-19. A total of 11.17 Lakh Crore has been generated as revenue from such tax collection from the masses, as reported by the Central Board of Direct Taxes .
As the CBDT facilitates the more intricate tax collection and related services, individuals should develop an idea regarding how to save tax in India subject to the income tax slab applicable.;
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Improve Your Homes Energy Efficiency
The residential energy efficient property credit allows homeowners to claim 30% of the cost of alternative energy equipment . That eligible equipment includes solar hot water heaters, solar electric equipment, wind turbines, and fuel cell property.
If you do any home efficiency installs, hang onto your receipts. Learn more about energy tax credits on the IRS site.
Take Every Tax Credit Available To You
That includes options like the child tax credit. Remember, the goal is to take all the credits youre entitled to so that you reduce your tax bill. This credit, for example, lets you deduct $2,000 per child under the age of 17, with a few income limitations and rules, of course.
Tax deduction: reduces the amount of income your taxes are based on.
- Example: $50,000 taxable income – $2,000 tax deduction = $48,000 new taxable income
Tax credit: reduces the total amount of income tax you owe.
- Example: $10,000 owed in federal income tax – $2,000 tax credit = $8,000 new total owed
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Itemize And Save Those Receipts
- Automobile mileage to your doctor, dentist, and parking costs
- What was paid on April 15th for your final state or city return for the prior year
- Auto mileage doing charity work
- Donations of clothing and household items to Goodwill or similar organizations
- Tax preparation costs
- Investment expenses
Save your receipts. other
Financial Gifts Tax Exclusion
This year allows for individual;personal gifts of up to $15,000 as a tax exclusion. If you are married, you can double this tax benefit by each gifting up to $15,000 to one or multiple recipients. The maximum gift tax exclusion is $30,000. This tax benefit includes donating directly to institutions on behalf of loved ones and friends. These yearly tax exemptions do not count toward your lifetime exemption limit.
Exclusion Vs. Deduction What is a tax exclusion?
Tax exclusions and deductions are similar but they arent the same. A tax exclusion is a tax break that allows you to not pay tax on income that would otherwise be taxable, such as foreign earned income or combat zone income. A deduction, on the other hand, reduces your taxable income. Examples of tax deductions include business expenses and interest payments.
Top 10 tax tips for 2020:
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Expenses For Treating Specific Diseases:
This deduction is part of Section 80DDB. Tax benefits are applicable for expenses incurred towards treating specific diseases such as Dementia, Cancer, Aids, etc. For such diseases, tax deductions up to Rs. 40000 are applicable. In case the expenses are for a dependent senior citizen, then the amount increases to Rs. 1 lakh.
How To Pay Less Tax
There are lots of ways to reduce your tax bill legally, whether you’re an employee or self-employed, a landlord, investor or pensioner.
We explain how simple checks;could boost your take-home earnings;with minimal effort, and;how to take advantage of;tax reliefs and government schemes.
Here are 35;simple tips and tricks that can help you cut;your tax bill;to put more pounds in your pocket.
- Get a head start on your 2020-21;tax return with the Which? Tax Calculator. Tot up your bill, get jargon-free, money-saving tips and submit your return direct to HMRC.
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Protect Yourself From Tax Fraud
Scammers like to take advantage of tax time to go after unsuspecting Americans. Follow these tips to protect yourself from tax fraud.
Be aware of scam phone calls.
The IRS will never:
- Demand immediate payment without first sending you a bill in the mail and giving you an opportunity to question or appeal the amount they say you owe.
- Require you use a specific payment method for taxes, like a prepaid debit card.
- Ask for credit card information over the phone.
- Threaten to have you arrested for not paying.
If any of these things happen to you, report it to the Treasury Inspector General for Tax Administration at 1.800.366.4484 or at treasury.gov/tigta.
File electronically and request that your refund be deposited directly into your account.
Use ID theft prevention measures. Dont carry your social security card with you and dont give it out just because a business or professional asks for it. Also, dont carry your Medicare card unless youre going to a doctor for the first time.
Check your credit report. You can review your credit report for free every 12 months at AnnualCreditReport.com, or by calling 877-322-8228.
If you suspect youve been a victim of identity theft and it involves your income tax return, the IRS has more information and help on suspected fraud.
Deductions For Childrens Tuition Fees
Expenses related to childrens education consume a major portion of our income. Hence, it makes a lot of sense to maximize the tax benefits associated with these costs. Parents can claim a tax deduction of up to Rs 1.5 lakh under Section 80C for the tuition fee paid for their childrens education. Do note that this benefit applies to any full-time education plan imparted at any registered institution like schools, colleges, and even pre-schools and nurseries. However, this applies for the tuition fee paid for up to 2 children per taxpayer . Also, this benefit only applies to the tuition fee and not other payments like development fee, late payment fee, etc. Also, if your employer provides childrens education allowance and hostel expenses allowance, you can avail tax exemption on such allowances up to Rs 1,200 p.a. and Rs 3,600 p.a., respectively, for up to 2 children.
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Coverdell Education Savings Accounts
Similar to a 529, a Coverdell education savings account is a trust or custodial account that can be used to pay for elementary, secondary, or post-secondary education expenses. Distributions are tax-free when made for qualifying expenses, though any money remaining in the account when the beneficiary turns 30 must be distributed and is then taxed. By contrast, there is no age limit for the beneficiary of a 529 plan.
Itemize And Track Deductions
For many small business owners, part of the struggle in doing taxes is itemizing deductions. Itemized deductions are business expenses that the IRS allows you to subtract from your gross income, reducing your taxable income. It takes a lot of work to account for all those deductions, and you have to keep track of your receipts throughout the year. However, the money you save can make the extra work worthwhile.
If you want to itemize deductions, know your deductible expenses should exceed the 2020 standard deduction. Thats $12,200 for single-person filing, $18,350 for head-of-household filing, or $24,400 for married filing jointly. There are also a few reliable indicators you can use to determine if itemizing deductions is right for you:
- You had significant out-of-pocket medical or dental expenses.
- You paid interest or taxes on your home.
- You had significant employee business expenses that were not reimbursed.
- You had sizable out-of-pocket casualty or theft losses.
- You made substantial charitable contributions.
If you decide to itemize, your next step will be to determine which expenses are allowed as deductions. When it comes to your typical business expenses, some allowable deductions might be obvious. Business vehicle costs, employee wages, office supplies, and business travel are all common deductions for small businesses.
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Reduce Your Taxable Income
One surefire way to not pay income tax: Dont earn any income!
Of course, for most of us, that plan wont work. Unless youre independently wealthy , you need money to live on.
But there are ways to reduce your taxable income while still earning a living.;
The easiest way to reduce your taxable income without throwing in the towel at work, of course is to contribute to a tax-deferred retirement savings vehicle, like your companys 401 plan.
Wages you defer to a 401 dont count toward your taxable income for the year you make the contribution, though they will be taxed when you make withdrawals later.
That means youll get a tax break now and youll be feeding your growing nest egg and setting yourself up for a comfortable retirement. Smart finances all around!
Which leads us to our second suggestion