Knowing how taxes work can help you reduce your tax bill and therefore, benefit your wallet.
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There is a way around taxes, but tax planning can help you maximize tax breaks and minimize tax liabilities in a legal and efficient manner. It is the analysis and arrangement of a person’s financial situation.
1. Tax Professional VS DIY
With so many different tax software programs, some of which are even free, hiring a tax preparer can seem like an unnecessary expense, especially as they don’t come cheap. However, doing that is the safe way to go if you have complex finances such as multiple revenues. It’s almost too easy to get confused and feel overwhelmed when preparing one’s taxes. Besides simplifying a complicated tax situation for you, a tax pro will save you time and ensure your tax bill is as low as possible. This is their expertise and there are many different types of tax professionals who specialize in different areas.
2. Tax Prep Tricks and Tips
Here are a few useful strategies.
See where you are
The first tax planning tip is to figure out what federal tax bracket you’re in. The U.S. has a progressive tax system which means the more you earn, the more tax you have to pay. There are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. But, no matter which bracket you’re in, you won’t pay this rate to your entire income due to subtracting tax deductions and the fact that your income will be broken into chunks with each being multiplied with the corresponding tax rate.
Know the difference between tax deductions and credits – and be aware of them
Tax deductions reduce how much of your income is subject to taxes. Tax credits are better because they directly lower your tax bill. There are hundreds of possible deductions and credits out there, and they all have their own rules about who’s allowed to take them so make sure you know which ones are there.
Decide whether to take the standard deduction or itemize
This is a big part of tax planning because the choice can make a huge difference in your tax bill. Standard is a flat-dollar, no-questions-asked tax deduction which makes tax prep a lot faster. However, you can also itemize your tax return, which means taking all the individual tax deductions that you qualify for, one by one.
3. Tax Deductions, Credits and Discounts
For example, green investments for your home can help lower your Ohio Edison
costs as well as reduce your taxes due to the countless tax deductions and credits for efficient housing. Although what qualifies for green investments is being changed, there are many basic categories that stay pretty much the same.
Tax deductions reduce your taxable income. Individuals could qualify for many potential deductions.
Work-related deductions
If you are working from home, you could a part of your home office expenses. Business entertainment and meals can also be deducted up to 50% as long as they are not extravagant but are deemed as necessary.
Itemized deductions
Moving expenses, home mortgage interest, interest expense, gambling loss, real estate tax, sales tax and property tax are just some of the many examples.
Education deductions
You could get a deduction due to your student loan interest or education that enhanced your company’s professional capacity.
Healthcare deductions
Investment related deductions
Selling your home, IRAs, capital losses and bad debt are a few examples.
As for credits that reduce the amount of tax you owe, they can be non-refundable which means you get a refund only up to the amount you owe or refundable which means you get a refund, even if it’s more than what you owe.
Family credit
Besides child and dependent care and the elderly credit, there’s also adoption credit.
Income and savings credit
Savings is how wealth is created as besides the power of compound interest, you’re in for saver’s credit.
Homeowner credit
Making your house more energy-efficient qualifies you for residential energy-efficient property credit. There’s also low income housing credit.
Healthcare credit
Under the Affordable Care Act, there’s premium tax credit, along with health coverage.
Education credit
Lifetime learning does not only make you smarter and boosts your odds of success.
Takeaway
Tax rules can be complicated, but taking some time to get to know them can change how much you end up paying or getting back. Therefore, any effort, be it more time or a financial investment of hiring a tax pro, is worth the cost.