We have always heard that taxes are inevitable, but lowering your tax bill always has some scope. For most taxpayers, it is easy to save some extra dollars in taxes without breaking the rules. It is possible that you might have managed to claim every possible tax break you deserved. Still, a thoughtful planning all year-round can help you rack up bigger saving. The simplest way to manage your tax is to reduce your taxable income. The idea here is to find the ways to drop yourself in lower tax bracket which will reduce the tax rate for a large part of your income.
Let us learn some legal ways to trim down your tax.
Take professional help
There is no harm in taking professional help to reduce your tax burden. You can always rely on a New York City tax preparation service to avail a full range of tax services. Tax planning is a year-round event which must be managed accordingly. A tax preparer will advise you on the most advantageous techniques available to minimize your income taxes while complying with the legal aspects. They will also help if you have any issues with IRS in future.
Save for your retirement
Traditional IRAs and 401(k)s are meant for pre-tax contributions. If you have a 401(k) account, use it to stock up your retirement money. It will automatically lower your taxable income without any extra effort on your part.
If there is no 401(k) available, you can set an individual retirement account (IRA) for yourself with low or no fees. Any contributions to an IRA are totally deductible if your income falls below a certain threshold. However, you will be taxed on it when you will withdraw the amount after retirement, but at that time your tax rate will be lower.
Health saving accounts
Any contribution to health saving accounts (HSAs) or flexible spending accounts (FSAs) makes pre-tax money, so they are another great way to trim down your taxable income. Remember that you need a high-deductible health insurance plant to avail benefits of HSAs. They will be worth saving as the amount will accumulate and grow over time. In addition, there are no taxes incurred for withdrawal for the qualifying medical expense, and after the age of 65, you can withdraw money from HSA for any purpose by paying ordinary income tax rates. Unlike FSA money, unused HSA amount can be rolled over from year to year.
Paying certain interest
The interest on certain kinds of debt is deductible, including mortgage interest, student loan interest, business debt interest, etc. For example, mortgage interest is deductible as property taxes. In early years of a mortgage, much of your monthly payment makes interest. So, if you want to purchase a house, do it strategically as it will help you lower your taxes. Meanwhile, if you are planning to sell your home, get to know about home sale exclusion. If you fulfill the requirements, you can get an exclusion of up to $250,000 of your gain.
If you are planning to have children or more children, you can avail some tax breaks. For example, Child Tax Credit offers $1,000 for every child under the age of 17. The child and dependent care credit is worth up to $3,000 for a single child or qualifying dependent. This amount rises to $6,000 for two or more. There is also a credit available for adopted children, and you can claim a credit up to $13,570 depending on parent’s qualified adoption expenses. If you adopt a child with special needs from U.S. foster care, you can claim the entire $13,570 without any qualifying expenses.
So, don’t base your family or adoption plan on tax preparation.
A charitable contribution of up to 50% of your gross income or property (fair market value) is deductible if you itemize. However, to avail this deduction, your contribution must go to a qualified charity. It is a great reason to do something good for the society.
If you are self-employed, you get some tax breaks. For example, if you use a part of your home as a home office, you can deduct expenses associated with it, like mortgage interest, repairs, utility expense, insurance, etc. For example, if you use 18% of your house’s area as an office, you may get qualify to deduct 18% of qualifying expenses. Now, there is a simpler option available that offers $5 deduction per square foot you use as your home office. This deduction is eligible for 300 square feet, making it for a maximum $1,500 deduction.
Spending some time looking for tax breaks can make you aware of many ways to shrink your tax. For best ways, it is advisable to take help of a tax preparer.