There are many ways to legally shelter your income from tax so you save money. But you may overlook strategies because you’re not aware that they exist or you don’t understand the often-complex rules.
In this post, I’ll explain 8 ways to legally reduce your taxable income so you pay less tax. You can take advantage of some or all of them, no matter how much or little money you make, to keep more of your hard-earned money.
Free Resource: Ready to save more, eliminate debt, and reach big financial goals? Join Laura in the Dominate Your Dollars community now!
8 Ways to Legally Pay Less Tax and Save Money
You can't avoid taxes, but there are ways to legally pay less when you qualify for certain deductions. Try as many of the following tactics that fit your situation:
1. Adjust your tax withholding.
If you get excited about receiving a big tax refund each year, that may be a sign that you need to adjust your tax withholding. Getting a refund means you overpaid tax during the previous year by giving too much money to the IRS. They settle your account many months later by sending you your own money.
I don’t know about you, but I’d rather keep my own money throughout the year, instead of handing it over to the government as an interest-free loan. When you have bigger paychecks, you can put it to work by beefing up your emergency savings or investing it in a retirement account slowly throughout the year.
In last week’s post, How to Fill Out a W-4—Plus, 7 Reasons to Adjust Your Tax Withholding, I explain when and how to update this important tax form. To reduce your refund and increase your take-home pay, complete a Form W-4 and submit it to your employer any time during the year.
2. Claim any unreimbursed job expenses.
Do you ever spend money on goods or services related to your job that your boss doesn’t reimburse you for? Maybe it’s shelling out for expenses like:
- industry conferences
- continuing education
- subscriptions to trade publications
- dues to professional organizations
- uniforms or protective clothing
- tools, supplies, and safety equipment
- business licenses and fees
- passport fees for a business trip
- gifts for customers
- using your vehicle (other than for regular commuting)
- travel, lodging, and meals related to your work
Many people overlook the fact that the IRS allows you to claim a tax deduction for “employee business expenses.” These are expenses that are considered ordinary or necessary to perform your job, but that your employer doesn’t cover.
Qualified expenses don’t have to be required by your employer to be considered necessary. You make the call about whether an expense is necessary to do your job.
Bunching up deductions in a single tax year, instead of spreading them out of 2 years, may help you qualify to claim them and save more money.
Some tax deductions are subject to certain limitations, and that’s the case with these types of unreimbursed, job-related expenses. You must meet 2 requirements to claim them:
- You must file taxes on Form 1040 and itemize deductions on Schedule A. You enter job-rated expenses in the section of Schedule A titled "Job Expenses and Certain Miscellaneous Deductions."
- You can only claim the amount that exceeds 2% of your adjusted gross income.
For example, if your income is $50,000, 2% is $1,000. So only the amount above $1,000 would be tax deductible. If your job-related expenses total $2,500, you could deduct $1,500 ($2,500 - $1,000)—not the full amount of $2,500. If your total expenses were less than $1,000, you don’t get to claim them.
If you fall short of having enough expenses to meet the 2% threshold, delay paying as many as possible until the following tax year. Bunching up deductions in a single tax year, instead of spreading them out over 2 years, may help you qualify to claim them and save more money.
Or if you know you’ll have plenty of job-related expenses to qualify for the deduction in the current year, prepay expenses when possible. Qualifying for a tax deduction every other year is better than not qualifying for a deduction at all.
The expense examples I mentioned are not a complete list, so check out IRS Publication 529 to learn more. There are more limitations on certain types of expenses, such as meals and entertainment, which you can learn more about in IRS Publication 463.
If you have frequent or high expenses related to your job that come out of your own pocket, speak with a tax accountant about the best way to document them so you can use them as legitimate tax deductions.
See also: 5 Ways to Pay a Tax Bill You Can't Afford
3. Start a business.
No matter if you want to create a tech startup that revolutionizes the world or just do a little freelancing work on the side, having a business is a great way to shelter more of your money from taxes.
For instance, if you start building websites or offering services as a virtual assistant, reasonable business expenses might include the cost of a computer, accounting software, and office furniture. If you’re a rideshare driver you could deduct a portion of your car payment, insurance, and cell phone bills.
If you’re trying to profit from your business—and not just engaged in a hobby—you can turn some of your personal expenses into allowable business deductions.
See also: 5 Retirement Options When You're Self-Employed
If you’re trying to profit from your business—and not just engaged in a hobby—you can turn some of your personal expenses into allowable business deductions.
4. Take the home office deduction.
If you operate a business from home, you’re eligible for even more money-saving tax deductions. You can claim a home office deduction whether you rent or own your home and no matter if it’s a full- or part-time venture.
Maybe you use a portion of your bedroom, a large walk-in closet, or a detached garage to work, store inventory, or meet with clients. You can deduct 100% of expenses that directly affect the areas of your home used for business, such as repairs or installation of internet. But you can never deduct expenses that are completely unrelated to your home office, such as remodeling in other parts of your home or the addition of a pool.
You’ll have indirect expenses for your office that you would incur whether you had a home office or not, such as maintenance, insurance, utilities, real estate taxes, and depreciation. For these, you’re allowed to deduct a certain amount based on the size of your office as a percentage of your home, using either a standard or a simplified calculation method.
For instance, if your apartment is 1,000 square feet and you use a spare bedroom and bath that’s 120 square feet to work, then you have a home office space that’s 12%. The standard method allows you to deduct 12% of your total indirect expenses for business use.
Starting in 2013, the IRS introduced a simplified method to calculate your home office deduction. You just multiply your allowable square footage by $5. In general, you can only claim a maximum space of 300 square feet, which caps your deduction at $1,500 per year. So, if your office space is bigger than 300 square feet, or the deduction would add up to more than $1,500, you’d come out ahead using the original, standard method.
And if you’re an employee who works remotely from home because you don’t have the option to go to a local office, you can also claim a home office deduction. For more details check out IRS Publication 587.
See also: How to Make Money from Home
5. Contribute to retirement accounts.
One of the best ways to protect your income from taxes and accumulate wealth for the future at the same time is to contribute to one or more retirement accounts.
One of the best ways to protect your income from taxes and accumulate wealth for the future at the same time is to contribute to one or more retirement accounts.
There are accounts designed for individuals, such as a traditional IRA or Roth IRA. Many employees have the option to participate in a traditional or Roth 401k or 403b at work. And there are retirement accounts just for the self-employed too.
Different retirement accounts come with different rules and annual contribution limits. But the important points to remember are that traditional accounts give you an immediate, upfront tax deduction. You don’t pay any tax on traditional contributions or their earnings in the account until you make withdrawals in the future.
The other main type of retirement account is called a Roth—like a Roth IRA or Roth 401k. These have an opposite tax structure from traditional accounts because you do pay tax upfront on contributions, but the big benefit comes later when you take withdrawals of contributions and earnings in retirement that are completely tax free.
Free Resource: Retirement Account Comparison Chart (PDF download)
6. Contribute to medical savings accounts.
The two most popular savings accounts for healthcare expenses are a flexible spending arrangement (FSA) and a health savings account (HSA).
An FSA can only be offered by employers. You and your employer can make contributions that are tax-free if they’re spent on qualified medical and childcare expenses by a certain deadline.
Anyone who has a qualified high deductible health plan, through an employer or on your own, is eligible for an HSA. It’s like an FSA, except that it doesn’t have a spending deadline. Any unused funds roll over from year to year in an HSA and eventually can be used like a retirement account after age 65.
Both accounts are fantastic vehicles to shelter your out-of-pocket medical expenses from taxes. Check out IRS Publication 969 for more information.
See also: Healthcare Q&A: Reform, Rules, and the Role of HSAs
7. Become a homeowner.
In addition to being a real shelter, real estate is a powerful tax shelter, too. When you purchase a home for your primary residence you cut taxes the year you buy it, every year you own it, and even on the back end when you sell it.
When you purchase a home for your primary residence you cut taxes the year you buy it, every year you own it, and even on the back end when you sell it.
Homeowners can deduct costs like mortgage points paid on a loan, your mortgage interest, private mortgage insurance, and property taxes from their taxable income. And if you tap into your home’s equity with a loan or line of credit, you may also be able to deduct some of the interest you pay on that debt, too.
If you decide to sell your main home, and have lived there for at least two years, you get to keep up to $250,000 of capital gains or profit on the sale tax free. If you’re married and file a joint tax return, double that amount for an impressive $500,000 you get to keep tax free.
See also: 3 Real Estate FAQs for Buyers, Sellers, and Investors
8. Hire a tax professional.
While hiring a tax pro does cost money, it’s been my experience that it’s one of the best ways to save. A good accountant can find additional tax deductions or credits you’re eligible for, help you make decisions, and keep you organized so you never pay more tax than you should.
See also: Financial Q&A: Tips to Pay Less Tax or Get a Bigger Refund
Get More Money Girl!
Want to know the best financial and productivity tools that I use and recommend to save time and money? Click here to check out 40+ tools I recommend!
If you're ready for help managing debt, building credit, and reaching big financial goals, check out Laura's private Facebook Group, Dominate Your Dollars! Request an invitation to join this growing community of like-minded people who want to take their financial lives to the next level.
To connect on social media, you’ll find Money Girl on Facebook, Twitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on iTunes or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile app!
Click here to subscribe to the weekly Money Girl audio podcast—it’s FREE!
There’s a huge archive of past articles and podcasts if you type in what you want to learn about in the search bar at the top of the page. Here are all the many places you can connect with me, learn more about personal finance, and ask your money question:
- Dominate Your Dollars - Laura's private Facebook Group
- Money Girl on Facebook
- Money Girl podcast on iTunes (it’s free to subscribe!)
- Money Girl on the Stitcher app (also free to subscribe!)
- Email: http://ift.tt/1JKBIyB
Click here to sign up for the free Money Girl Newsletter!
Download FREE chapters of Money Girl’s Smart Moves to Grow Rich
To learn about how to get out of debt, save money, and build wealth, get a copy of my award-winning book Money Girl’s Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don’t. It’s available at your favorite bookstore as a paperback or e-book. Click here to download 2 FREE book chapters now!
Couple Working on Documents image courtesy of Shutterstock
Tidak ada komentar:
Posting Komentar