Over 150 million tax returns were filed in the United States in 2020 alone. A lot of those people may have lost more money than they needed to in the process.
So, how do you avoid major issues when you’re filing your taxes?
Read on for our top tips that can help individuals manage their taxes and potentially save money.
1. Keep Track of Your Expenses
Keep accurate records of your expenses throughout the year, including receipts, invoices, and bank statements. This will help you identify potential tax deductions and credits when it’s time to file your taxes.
Keep receipts for all purchases related to your business or employment, including office supplies, travel expenses, and meals and entertainment.
Consider using accounting software to track your expenses. Many software programs allow you to link your bank and credit card accounts and automatically categorize expenses.
If you use your personal vehicle for your job or any other business purpose, keep a mileage log to track your mileage and related expenses, such as gas and maintenance.
Keep your records organized and easily accessible. Consider using folders, envelopes, or digital files to keep your receipts and other records in order. Keep your business and personal expenses separate to make it easier to track and deduct your business expenses when filing your taxes.
2. Maximize Your Retirement Contributions For Taxes
Contributing to a retirement account can help reduce your taxable income and save money on taxes. Be sure to contribute the maximum amount allowed by law, if possible.
Be sure to understand the contribution limits for your retirement account. For example, in 2023, the maximum contribution limit for a 401(k) is $20,500 for those under age 50, and $27,000 for those over age 50.
Set up automatic contributions to your retirement account so you can maximize your contributions without having to think about it.
f you’re over age 50, you may be able to make catch-up contributions to your retirement account. Catch-up contributions allow you to contribute additional money beyond the regular contribution limit.
f you’re eligible, consider contributing to a Roth IRA. With a Roth IRA, you pay taxes on your contributions upfront, but your withdrawals are tax-free in retirement.
If your employer offers a 401(k) matching program, make sure you’re contributing enough to take full advantage of the match. This is essentially free money that can help you maximize your contributions.
3. Take Advantage of Tax Deductions and Credits
Familiarize yourself with the available tax deductions and credits. Some common deductions include charitable contributions, mortgage interest, and medical expenses. Some common credits include those for education expenses, childcare expenses, and energy-efficient home improvements.
If the itemized deductions you end up with exceed the standard deduction, consider itemizing your deductions. This can help you save money on your taxes by reducing your taxable income.
Don’t overlook smaller deductions, such as those for work-related expenses or tax preparation fees. Even small deductions can add up and potentially save you money on your taxes.
4. Consider Tax-Efficient Investments
Certain investments, such as municipal bonds, can provide tax-free income and help reduce your taxable income.
Consider starting to invest in tax-advantaged accounts. Contributions to these types of accounts are made with pre-tax dollars, which can lower the amount of your income that is taxed.
Municipal bonds are issued by governments and are generally exempt from federal taxes. They may also be exempt from state and local taxes if you live in the same state as the issuing government.
Index funds are a type of mutual fund that tracks a specific market index, such as the S&P 500. They typically have lower fees and turnover than actively managed funds, which can help reduce the tax impact of buying and selling investments.
Frequent buying and selling of investments can trigger capital gains taxes, which can reduce your investment returns. Consider a buy-and-hold strategy for your investments to reduce the impact of capital gains taxes.
Tax-loss harvesting is when you sell investments that have declined in value to offset gains from other investments. This can help reduce your tax bill by reducing your taxable income.
Remember that investing involves risk, and past performance is not a guarantee of future results. It’s important to do a lot of research and talk everything through with a financial professional before making any investment decisions.
By investing in tax-efficient investments, you can potentially save money on taxes and improve your financial well-being.
5. Hire a Tax Professional
If your tax situation is complex or you’re unsure about how to handle certain tax issues, consider hiring a tax professional.
Filing your taxes can be time-consuming, especially if you have a complex tax situation. By hiring a tax professional, you can free up your time to focus on other important tasks.
Filing your taxes can be stressful, especially if you’re worried about making a mistake or missing a deadline. A tax professional can help reduce your stress by ensuring that your taxes are filed accurately and on time.
A tax professional can help you identify tax deductions and credits that you may have overlooked. This can potentially save you money on your taxes and improve your financial well-being.
Filing your taxes can be complicated, and errors can lead to penalties and interest charges. A tax professional can help minimize errors by ensuring that your taxes are filed accurately and in compliance with the tax laws.
A tax professional can provide valuable advice on tax planning, retirement planning, and other financial matters. By working with a tax professional, you can make informed decisions about your financial future.
If you’re not sure who to hire, check out taxreliefprofessional.com.
6. File Your Taxes on Time
Be sure to file your taxes on time, even if you can’t pay the entire amount you owe. If you don’t file your income taxes on time, you may be subject to severe penalties and interest charges. The basic penalty for not filing your taxes on time is generally 5% of the unpaid taxes per month, up to a maximum of 25%.
If you’re owed a tax refund, filing your taxes on time can help you receive your refund faster. The IRS typically processes refunds within 21 days of receiving a tax return.
If you owe income taxes and don’t file your taxes on time, the IRS may place a tax lien on your property. A tax lien can make it difficult to sell your property or obtain a loan, and can negatively impact your credit score.
Filing your taxes in a timely manner can help you plan for the future by providing a clear picture of your financial situation. By knowing your tax liability, you can make informed decisions about budgeting, saving, and investing.
It’s also a legal requirement. By complying with the tax laws, you can avoid legal issues and maintain good standing with the IRS.
7. Consider State Taxes
Remember, your tax return is not just about your federal taxes. Your state-level taxes play a role as well.
When preparing your taxes, it’s important to consider state taxes as well as federal taxes. Most states have their own income tax system, which may have different rules and rates than the federal system. Some states also have additional taxes, such as sales tax, property tax, or excise tax.
To ensure that you accurately calculate your state taxes, you should gather all the necessary information about your income, deductions, and credits. You may also need to research the specific tax laws and regulations in your state to understand how they apply to your situation.
Many states offer deductions and credits that can help reduce your state tax liability. Check to see if your state offers any of these deductions or credits, and make sure you take advantage of them.
If you work in a state other than the one where you live, you may need to pay taxes to both states. Keep track of your income earned in each state and consult with a tax professional to determine your tax obligations.
8. Think About Where You’ve Worked
Where you’ve worked geographically will also affect your taxes.
State taxes typically include income taxes, sales taxes, property taxes, and many other fees. The rates and rules for each of these taxes can vary widely from state to state, so it’s important to understand the specific rules and regulations in the state in which you reside.
If you live and work in a different state than your employer, you may be subject to both state taxes. However, most states have tax reciprocity agreements with neighboring states, which can help to avoid double taxation.
Use These Tax Tips To Your Advantage Today
Remember that tax laws and regulations can change over time, so it’s important to stay informed about changes that may affect your tax situation. By following these tax-related tips and staying up-to-date on tax laws, you can better manage your taxes and potentially save money.
Do you need more financial advice? Many of the other posts on this website can help you.