As of April 17, 2014, most Americans will be sighing with relief that another tax-filing deadline has come and gone. But according to financial experts, this is actually the perfect time to begin planning to pay fewer taxes next year than you paid this year! Reason being, you’re already hyper-aware of areas that cost you more in taxes than you might like and you’re likely highly motivated to do a little advanced legwork to pay less in the future. These handy tips can help you begin now to plan for a reduced tax season by the time next April 15th rolls around.
1. Hire (or fire) your tax preparer
The issue of whether or not to use a tax preparer is every bit as hotly debated as whether the chicken or the egg came first. As such, now is an excellent time to evaluate whether what you paid for tax preparation services (which you can also write off) was worth what you paid in taxes. In the same way, if you self-prepare your taxes using paper forms or a tax software program, ask yourself if you feel confident you got yourself every tax break you qualify for.
2. Consider turning a hobby into a part-time business
Starting a small business is a popular pastime for Americans. In fact, according to Forbes, more than half a million new businesses open their doors each month. Wow! But even more than potential profit, the tax savings from small business deductions may be a primary driving factor in the number of folks who launch a new enterprise annually (also consider here that more than half of new small businesses started annually are home-based).
Tax deductions you can take as a small business owner
This is just a small representative sample of the types of deductions you may be able to take as a small business owner.
- Deduction for home space used as an office (including utilities costs and property taxes)
- Deduction for business use of vehicle (mileage and/or car expenses)
- Deduction for family members employed in the small business (including children)
- Deduction for business-related entertainment expenses
- Depreciation/amortization of business-related equipment
- Deduction for continuing education, professional memberships, conferences and more
- Deductions for individual health insurance premiums and expenses
- Deduction for technology (computer, smart device, etc.)
Note: Even if you work for an employer, in some cases you may still be able to deduct some or all of these expenses.
3. Write off summer camp for the kids
Did you know that if you send your kids to summer camp (day camp only) and they’re under the age of 13, you have two potential ways to write off that expense? One is under the child and dependent care tax credit, and the other is under an employer-sponsored flexible spending account for child care.
4. Max out your annual retirement contributions
Whether through investing into a traditional, SEP or Roth IRA, the more you invest, the lighter your tax burden will be. To save now and in the future, consider opening both a traditional and a Roth IRA. The former will shelter your income from taxes now, and the latter will free you from distribution tax after the age of 59 ½.
4. Balance capital losses against capital gains
While it’s fairly common knowledge that you must pay taxes on capital gains accrued annually, are you maximizing your deductions for capital losses as well? You can take up to $3,000 as a deduction against your annual ordinary income.
5. Be aware that not all income is subject to taxation
Here, you may need to take the help of a knowledgeable tax preparer. However, it can be worth it when you discover that some of your income is exempt from taxation.
Common income sources that may be tax exempt
Here are some examples of the types of income that may carry a lower or no tax burden.
- Municipal bonds
- Foreign income (up to $96,100 if you work abroad for 12 months at a multinational company), plus paying foreign taxes may give you a domestic tax deduction
- Social security benefits (some are tax exempt, others are partially tax exempt)
- Disability benefits (only if policy premiums paid by the policy holder versus the employer)
- Long term capital gains income, which is taxed at a lower tax rate than ordinary income
6. Consider changing your filing status
Here again, you may want to consult a knowledgeable CPA, but if you’re married, it could end up working out to your benefit to change your filing status from “married filing separately” to “married filing jointly,” or vice versa. For instance, if you’re married and have a combined modest income and are eligible for the Earned Income Credit (EIC), you can only claim it if your filing status is “married filing jointly.”
7. Go back to school
As an incentive towards pursuing higher education, the IRS offers two different types of education credits: the American Opportunity Credit ($2,500 per year, per eligible student) and the Lifetime Learning Credit ($2,000 per year, per eligible student).
Education costs you can deduct
These are common education costs you can deduct on your annual tax return.
- Books and supplies
- Fees, including laboratory fees
- Some travel and transportation costs
- Research and administrative costs
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