10 TAX TIPS TO HELP YOU SAVE
by: Remie Longbrake | published: March 28, 2022
Although tax time is approaching once again there are steps you do to help reduce that possible hefty tax bill Uncle Sam has sent your way.
Keep in mind these are legal and legitimate ways to help. And not every tip is applicable to every filer. Some tips may be too late to help for this year, however overall the purpose is to save money on taxes and come out better prepared.
1. Know Your Deductions
You probably know that some expenses are tax deductible. But what are some of these deductions?
Your home mortgage interest. These may be eligible for a deduction, generally this is if your adjusted gross income (AGI) is $100,000 or below, or $50,000 if married and filing separately.
Student loan interest. Depending on the modified adjusted total income (MAGI), you can deduct up to $2,500. This is “over the line”, which means you can still pick it up even if you choose a standard deduction and don’t itemize.
Medical bills. Generally if you spend more than 7.5% of the total adjusted income (AGI) on eligible medical expenses, you may be able to deduct expenses over that 7.5%.
Business-expenses. If you are self-employed or work from home, you should also consider business-related deductions, such as the cost of your home office. Employees who work from home do have limitations, such as the space you use for work must be used exclusively for business.
You may also be able to deduct certain items, travel expenses, and even food and entertainment. Of course, these should be related to business activities and not simply for pleasure.
You can rent out your home for up to 14 days per year. The income made from this can be tax deductible. This is known as the Augusta Rule. Popularly phrased due to the Masters Golf Tournament in Augusta, GA. However, does not need to be golf-related.
If you have a business and have kids, you can put (your kids) to work and take a deduction based off what you pay them. Your kids can be under eighteen, but must do actual work related to your business.
2. Adjust Your Deductions
The tax form W-4 is the one you give to your employer that specifies how much your income should be deducted for tax purposes.
It may seem prudent to keep your deduction as low as possible to keep your tax-home income higher. However, if you find that come April you end up owing taxes, you may want adjust your deduction rate. When it comes to the W-4, you are allowed to take a higher deduction rate or none at all, when it comes to the form. That doesn’t mean you won’t owe taxes come tax time. If you don’t take the deduction that the IRS says you should, it’s imperative you put the money you would normally take from the deduction and put it to work. Ideally, in a higher yield saving account or invest it.
3. Take Your Tax Credits
The IRS extends tax credits to eligible taxpayers. Tax credits are different then tax deductions. A deduction brings down your taxable income, whereas a credit reduces the tax bill after taxes due have been calculated.
Here are a few tax credits you may qualify for:
American Opportunity or Lifetime Learning Loans. Depending on your enrollment status, AGI, and how much you have paid for your education, you may be eligible for American Opportunity or Lifetime Learning Loans.
Earned Income Tax Credit (EITC). It’s the most common claimed tax credit. For the 2021 tax year (filed in 2022), this credit ranges from $1,502 to $6,728, which depends on filing status and how many children claimed.
Child Tax Credit (CTC). This allows a $3,000 per qualifying child under age 17. Children under age 6, this is increased to $3,600 for 2022.
Premium Tax Credit. This credit is for those who enrolled in a health plan through the Health Insurance Marketplace. This allows to lower the monthly insurance premium based on factors related to income and household information. This is available only to those who joined a health plan through the Marketplace.
There are other tax credit that may be applicable to your situation. Check with your tax professional for more.
4. Contribute to a Health Savings Account
If you have a Health Savings Account (HSA), this can be a good way to reduce your taxes and save for medical-related expenses.. These specific plans can only be used if you have a High Deductible Health Plan (HDHP), which are commonly found on Marketplace plans discussed previously. The contributions to the HSA are made from pre-tax income.
For 2022, you can contribute up to $3,650 to the HSA for self-only coverage or $7,300 if your HDHP covers the family.
You can leave funds in your HSA permanently and they are not subject to the minimum distribution requirements. It can be handy for those with high deductible health plans.
5. Use a Flexible Savings Account
Flexible Savings Account (FSA) is similar to the HSA in that you are allowed to deposit pre-tax dollars in the account. Provided money is use to pay for eligible medical expenses, there is no tax. Contributions are not tax deductible since you’re already receiving the tax savings however. Additionally, contributions do not roll over to the next year unlike a HSA, unless the plan specifically allow for it.
The contribution limit for 2021 was $2,750 and increased to $2,850 in 2022. Spouses are allowed to contribution equally to the maximum amount set through their own FSA plan, provided their employer has one.
An FSA is different, in that you can’t open an account individually as you could with an HSA. It must be set up through an employer who owns the account. Fortunately, you don’t have to have a HDHP in order to have and contribute to an FSA.
6. Contribute to a 401(k)
Chances are you have a 401(k) through your employer. This is a way to save for your retirement through tax savings plans. These plans would include the traditional 401(k), Roth 401(k), 403(b), and many 457 retirement plans.
The contribution you make to 401(k) is pre-tax, so it does not count on your taxable income for the year you make the donation, although you will be taxed if you withdraw later. A Roth (40(k), however, this money is after tax contributions, therefore these grow tax free.
The tax benefits for 2022, you can contribute up to $20,500 to those under 50, and up to $27,000 to those 50 and older. This does not include the amount your employer puts into your plan.
7. Contribute a Traditional IRA
Just like the options we discussed before, the contributions you make to your Traditional IRA are not included in your taxable income.
This type of retirement account is different from the Roth IRA, where contributions are tax deductible today but then grow tax-free afterwards.
Contributions for 2022, are up to $6,000 to the IRA, or $7,000 if you are over 50 years old.
You also have until April 15, 2022, to complete your IRA contribution for the 2021 calendar year.
8. Deduct for College Expenses.
If you have kids, you’re well aware that they can be costly to your wallet. College is no different.
According to U.S.News & World Report, the average cost for tuition and fees range from $10,338 to $38,185 per year. To help with these costs and hopefully help you save money on taxes, consider opening a 529 savings plan.
This account is an investment vehicle specifically designed for educational savings. You can use it to pay for your kids college courses, K-12 expenses, and can be even yourself. These 529 plans work much like a Roth 401(k) or Roth IRA, in that you contribute after tax money and qualified withdrawals are tax free.
Specific tax benefits vary from state to state, and nearly ever state offer full or partial tax deductions on 529 contributions.
9. Make a Donation
If you’re one looking to offload some of your stuff and save in taxes, there is a way! Donations are tax deductible, and it can be a great way to reduce your tax liability.
The IRS, in an effort to encourage donations, will allow you to deduct for up to $300 per person (or up to $600 if you get married) if you take a regular deduction. The caveat is that these require financial contributions. For those who itemize, you can deduct the full amount for your cash contribution of up to 100% of AGI.
If you decide to donate things like those to Goodwill, that can be more tricky. Essentially, donations of goods, like clothing, furniture, or appliances, the deduction should be Fair Market Value, (FMV). And these items you’ll need to itemize on your taxes. You should always make a list of everything donated and take photos if taking a deduction when donating. Of course, if itemizing deductions don’t exceed the standard deduction for your filing status, then it likely makes more sense to not itemize anyway.
10. Tax Savings with a Side Hustle
Self-employed people (full-time or part-time) are eligible for tax deductions. Side hustles are all the rage lately, as can be a great way to earn extra income. However, with that comes tax that will likely be due.
The IRS definition for a side hustle, is any activity that earn income. That’s pretty clear. And this isn’t just a side hustle, it’s a business you’re involved in. These side hustles, can be anything you earn money from. Moving yards, crafting, making deliveries, driving such as Uber or on your own, selling goods or services in person or online, and numerous other money-making avenues.
Some of the business deductions available include business-related car mileage, shipping costs, advertising, website and hosting expense, the percentage of Internet costs incurred by business, , fees, membership fee, business-related travel, office supplies and basically any operating costs incurred. If you pay for your own health insurance, dental, vision, or long-term care insurance, those premiums may be deducted too.
In closing
As you can see, there are many ways to claim a tax deduction or possible tax credit. It’s always wise to work with a qualified tax professional who understands the law, but is helpful to you and possibly your business to save on taxes.
It is our recommendation to always consult with a licensed and reputable financial expert. This educational article is not specific advice. We strive to present quality, effective content. For specific references to our content please use our contact page.