Part of your salary goes to the government as income tax. It’s one of the ways for governments to generate funds for public service.
Individuals and businesses alike should yearly file their income tax returns. Not only to avoid getting charged for tax evasion, but also to determine if one is eligible for tax deductions or refunds.
You might feel that you’re legally mugged every time you receive your salary. Well, you’re not alone. Here are some useful ways to legally lower the taxes you pay and take home more of your hard-earned income.
1. Organize and plan early
Filing for tax exemption could be encumbering. Organize your files so you know where to look for when you need them. Keep track of receipts and other records that would support your claim for tax exemptions.
Avoid the rush and plan early. Planning could save you from overlooking tax-saving opportunities.
You could also consult an accountant for advice on tax planning.
2. Tax credits
Tax deductions are reductions in an individual’s taxable income. Tax credits, on the other hand, directly reduce the tax due.
To brighten you up, know that tax credits could still be claimed after getting tax deductions from your adjusted gross income.
Child tax credit, education tax credit, dependent care credit – several tax credits are available for claiming. Maximizing the potential of these credits could cut a good chunk off your payable taxes.
3. Investment opportunities
Investments in U.S. government bonds and municipal bonds have favorable tax aspects. Aside from bearing low risk ratings, they are subject to tax exemptions.
Basically, you lend money to the government by buying bonds. You are then paid with the amount of interest stated in the agreement for the length of time until it reaches maturity. After reaching maturity, the principle or original amount you lent would be repaid.
Depending on the state you’re in, exemption from both federal and local taxes could be applicable.
4. Retirement plans
Contributing to retirement plans like the 401(k) plan and individual retirement accounts (IRAs), would be beneficial in the long-term. Cash distributed to retirement plans would not be included in your taxable income.
Several types of retirement plans are available. Find which one suit you best.
5. Business-related deductions
Ever spent money on business-related expenses? If your employer wasn’t able to reimburse your expenditures, it’s possible to deduct it from your tax payment.
For example, you bought reams of paper for your employer and they forgot the reimbursement, you could claim for an income tax deduction.
Just remember to present valid receipts of the said expenses.
6. Home office deductions
Some people could be working in their homes and have a designated area solely for business purposes. Good news is, a percentage of the upkeep costs of that area could be source of tax deduction.
Telephone, electric, water and other bills for running the facilities in your work area could be used for tax deductions.
7. Mortgage tax
Mortgage tax deductions reduce your taxable income by subtracting the amount you paid in interest on your mortgage. Your primary residence and a second home are the only qualified subjects for this tax deduction.
8. Be charitable
Cash dole outs and other non-monetary contributions to qualified charities are tax-deductible. For non-cash donations, its equivalent monetary value could be deducted from your tax.
Say you prepared food for a non-profit event, the amount you spent on grocery items could be subtracted from your tax. Just make sure to keep receipts and other records related to the charitable act.
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9. Job-hunting expenses
Looking for a job demands a lot of time, energy and money as well. Considering that it’s not your first job hunt, accumulated expenses could be deducted from your next income.
Keep track of your food expenses, transportation costs, and other expenses. Uncle Sam might reward you for your determination to find work.
10. Track receipts
Appealing for tax deductions could be a gruesome task. To make your life easier, remember to keep records like receipts intact so you can back your claims for tax deductions.