A person doesn’t know how much he has to be thankful for until he has to pay taxes on it. ~Author Unknown
If you are paying too much in taxes there are two ways to get you in a lower tax bracket that will enable you to have more deductions or to have less taxable income.
1. Buy a home. This is considered the number one way to reduce your taxes because of the interest write-off.
2. Get a 401k and have part of your check deposited into the 401k. This reduces the amount of money you make but you cannot withdraw it before 59.5 without paying a penalty (plus you must pay takes then as well). This is a good idea because money invested pre-tax will grow a lot more in an index fund than post-tax money. You also are likely to make less after 59.5 so hopefully you will pay less taxes in the future.
3. If you have a lot of credit cards, pay them off because you cannot deduct the interest. A lot of people will refinance the home or get a second mortgage on the home to pay off the credit cards. The interest on the new mortgage is tax deductable.
4. If you owed the IRS last year, then you probably paid a penalty. Lower the number of dependents at work or you will pay another penalty when you do this years taxes.
5. Start thinking of next year’s taxes this year and get a box and start collecting records for next year because the most important thing you can do to reduce next years taxes this year is keep records of anything that might be deductible.
6. At tax time you will need to sort those records into likely deductions. Only you know what sorts of deductions you might be able to take. But here are a few examples of deductions that might help you on your way.
- Have a child or support a disabled person. Dependents are a type of deduction.
- Live off the grid. If you make less than $9,500 per year you do not have to file taxes.
- Take a class. Going to college may be a deduction. Or you may be able to deduct the cost of classes you need for work.
- Get a money-making hobby. Your hobby or business (or hobby business) can give you deductions. (In general, you can only deduct losses on a hobby that makes money in three out of five years. Regardless of whether you made money or lost, you need to run it as a real business. Keep records, get business cards, advertise, etc.)
- Buy a house. Owning your own home (or two) means you can deduct for points on loans and for interest on loans.
- If it is time to install a new roof installing energy efficient roofing (such as a metal roofing) can make you eligible for a tax credit. Keep records.
- Repair your house. Fixing up a home to make it more energy efficient can make you eligible for a tax credit. Keep records.
- If you buy a rental property, Any repairs are tax-deductable. Remodeling is not tax-deductable until you sell the property unless it is some form of energy tax credit that is deductable a little each year.
- Buy a car. Buying an electric or alternative fuel vehicle can be a deduction. But be sure you won’t lose money in the buying of it. Sometimes the cost of an energy efficient car is too much to justify your anticipated savings and tax deductions.
- Get a loan. If you have certain types of loans (school/home) they might be deductible.
- Give to charity. Charities are a great way to get rid of stuff you don’t need or want any more. Keep records.
- Serve for a non-profit. You might get un-reimbursed mileage and other expenses. Keep records. Out-of-pocket expenses are deductible as if they were cash gifts.
- Be a teacher at a school. There is a deduction for things you buy out of your personal funds without reimbursement. Keep records. (The Educator Deduction has expired as of Jan 1, 2008.)
- Pay sales tax. If you don’t pay sales tax on items shipped to you from another state, you may have to declare this on your state income tax return or face very high penalties. Penalties cut in to your tax bill.
- Open an IRA or contribute to one.
- Pay your alimony. It’s deductible.
- Pay medical costs. Unreimbursed medical costs are deductible to the extent they exceed 7.5% of your Adjusted Gross Income (AGI).
- If you have a disaster, make sure to find out about any related deductions and use them.
- There are other deductions available and your own individual situation will vary.
8. If your tax situation is complicated hire a professional to help you out because the money they save you often more than pays for their fees.
- Keep records in any way it is convenient for you. Write it on the back of the receipt and file it away for the end of the year. Put it in a jar or several or put it in a file cabinet or get a box.
- Remember that even with paying taxes, you will still have lots of your own money left over to spend. Out of control spending and debt can make taxes seem like a burden at tax time. Each purchase you make is an investment in your future tax picture.
- Be aware what is coming up next year. Some tax deductions get eliminated each year and others get added.
- Check the IRS website.
- There is a tax course on the IRS website called “Link & Learn.” It will teach you everything a tax preparer needs to know. Then you can do your own taxes, and you can do other people’s taxes as a Paid Preparer. On the IRS site you can apply for your PTIN (Preparer’s Tax ID number) which allows you to do taxes as a Paid Preparer.