Tax Saving Tips
Let’s look at some ways that you may be able to reduce your taxes. In general, the lower your taxable income, the less tax you will be required to pay.
Tax withholding exemptions are set at a fixed amount that will increase or decrease your take-home pay based on the number of withholdings you claim. You can adjust these exemptions by filing a Form W-4 with your employer, which will have a direct impact on your paycheck. If you get a big tax refund each year, consider increasing your exemptions to reduce your tax refund and add more money to your paycheck. Be careful not to increase your exemptions too much or you could owe money to the IRS at the end of the year.
Tax deductions are expenses that will help lower your taxable income. You should know what deductions you can claim so you can keep track of them throughout the year. These expenses may include some medical and dental expenses, business expenses, mortgage interest paid, education expenses, dependent children, etc. For more information on deductions, visit the IRS at www.irs.gov or talk to a tax professional.
Tax credits are also expenses that directly reduce the amount of your tax liability. Credits act like coupons for the tax you owe. For example, if you owe $5,000 in taxes for the year and have a tax credit for $2,000, your tax liability is reduced to $3,000. There are several tax credits such as child and dependent care, homebuyer credit, energy credit, etc. Credits can change from year to year, so keep up to date on the latest information by visiting the IRS at www.irs.gov or talking to a tax professional.
Tax-deferred retirement accounts enable you to save pre-tax dollars into an individual retirement account (IRA, 401K, 403B, etc.). Contributing pre-tax dollars will lower your taxable income. Keep in mind this is a tax-deferred option, which typically means that you won't have to pay taxes on the money until you withdraw funds from your retirement. However, when you retire, you may move into a lower tax bracket than the one you were in when you were working full-time.
Pre-tax savings or spending accounts are another way to lower your taxable income. These are usually employer-sponsored plans that deducted funds from your check before taxes and deposit the money into an escrow account. The funds can then be applied toward eligible expenses such as medical and/or child care expenses. Before opting in for one of these accounts, be sure you know exactly how they work. Some plans roll unspent funds into the next calendar year, whereas other plans have a "use it or lose it" policy.