Whether you’re a freelancer, small business owner, or are employed by a large enterprise taxes are just a part of life. While paying a tax bill is never fun, or easy on your bank account, there is some good news. You are able to reduce your tax bill legally by taking advantage of the following 7 techniques.
1. Tweak Your Income Tax Withholding
Your W-4 form instructs your employer on how much tax to withhold from each paycheck. The problem is that if you claim too many exemptions you may have to pay Uncle Sam. If you claim too few you’re essentially lending the government money interest-free.
Deborah Fowles suggests in an article for The Balance that if you “use over-withholding as a type of forced savings account, there are better ways to do it, such as having the money taken out of your paycheck or bank account automatically each pay period and placed in a savings account. ”
Fowles also suggests that “you should claim the number of exemptions that will result in withholding as close to what you owe as possible.” Also, you should complete and a submit a new W-4 if you received a big refund last year, owed more than $100 when you filed your tax return, had a child, got married or divorced, or can no longer claim a dependent.
I would speak to a tax advisor as soon as possible so that they can guide you in tweaking your income tax withholding. It’s best to take care of this now so that you aren’t paying interest or penalties.
2. Boost Your Retirement Savings
“One of the best ways to lower your tax bill is to reduce your taxable income,” writes Sandra Block for Kiplinger. “You can contribute to up to $17,500 to your 401(k) or similar retirement savings plan in 2014 ($23,000 if you are 50 or older by the end of the year). Money contributed to the plan is not included in your taxable income.”
Speaking of retirement and reducing your tax bill, you should also switch to a Roth 401(k) and start stashing money into an IRA. Money coming in and out of these accounts are tax-free and can be deducted on your tax returns.
3. Utilize Tax Deductions
Another popular tactic to reduce your tax bill is by utilizing tax deductions. As Kay Bell explains for Bankrate, you can itemize your deductions and the long Form 1040 and accompanying Schedule A.
“Schedule A generally allows you to subtract from your income the amounts you spent in a given tax year on medical care, other taxes, certain interest payments, charitable gifts, casualty losses and several miscellaneous expenses.” You can also deduct mortgage points, mortgage interest, property taxes, and state income taxes.
If you’re a business owner, you can also deduct everything from startup costs, travel, education, inventory, advertising, bad debts, office supplies and equipment, and interest payments.
4. Maximize Tax Credits
A tax credit, unlike a tax deduction, may be able to decrease your taxes dollar for dollar. This is because a tax credit reduces the amount of taxes that you’re required to pay via tax relief and grants.
According to an article on FindLaw, the “IRS gives the following types of credits: earned income credit, first-time homebuyer credit, child and dependent care credit, adoption credit, education credit, and retirement savings contributions credit. The IRS adds new tax credits every year.” For example, back in 2009, “qualified first-time homebuyers could receive a tax credit of up to $8,000 and taxpayers that bought a new car could deduct up to $49,500 in state and local sales taxes.”
5. Bundle Contributions
Carol W. Thompson, a federally licensed tax professional, suggests that you “bundle” certain contributions. This tactic allow taxpayers to “put what is essentially two years’ worth of deductions into a single year, vaulting their deductions over the standard threshold and thereby allowing the use of all of the smaller, otherwise-forgotten deductions.”
For example, if you made a weekly gift to you church or a donation to a non-profit, you could take the amount that you donated from throughout the year and match it with a lump-sum amount that would have equated next year’s donations. You can do this will smaller write-off as well like donating your clothes.
6. Pay Your Mortgage, Local, and State Taxes Now
Do you have a mortgage payment or a state or local tax bill that’s due in January? Then you may be better-off to pay it this year. By doing so you can get the deduction. Dustin Stamper, director of Grant Thornton’s Washington National Tax Office, notes that you aren’t capable of prepaying some of your upcoming 2017 taxes and mortgage payments, you at least need to pay all of your 2016 as soon as possible, preferably before the end of the year.
7. Combine Your Vacation With a Vacation Trip
Ideally, vacations should be planned around holidays. Since a lot of other people are doing the same you don’t have to worry about any potential emergencies. But, sometimes you just need to get away and recharge the batteries.
Instead of selecting random dates why not try to plan your vacation around a business trip?
Last year, for example, I had a speaking engagement in New York City. Since I had to travel to the Big Apple anyway, I tacked a couple of extra days with my spouse and made a vacation out of it. This saved me money because I could deduct the airfare and part of my hotel visit and meals.