You worked hard for your money this year, but now it’s time to give a big chunk of it back to Uncle Sam. The taxman cometh, as the saying goes. But don’t throw in the towel just yet—there are still a few tricks left in the book to lower your tax bill and keep more of your hard-earned cash. We’ve uncovered some insider tips from top tax experts and accountants to help you maximize your deductions and find hidden tax breaks. By the time you’re done reading, you’ll feel like a pro ready to take on the IRS. The tax code may be complicated, but saving money doesn’t have to be. So grab your tax documents, put on your thinking cap, and let’s get to it. This year, you’re going to owe less and keep more. The taxman can wait.
The Importance of Tax Planning All Year Round
The key to keeping more of your hard-earned money is planning ahead. Don't wait until the end of the year to start thinking about your taxes - make it an ongoing process.
Keep Good Records
Track business expenses, charitable donations, and other deductions throughout the year so you have records to back up the claims on your tax return. Things like receipts, invoices, and logs of mileage can add up to big savings. Staying organized will make filing your taxes so much easier come April.
Maximize Your Deductions
Look for every opportunity to lower your taxable income. Things like contributing to retirement accounts, paying mortgage interest, and donating to charities you support are all ways to reduce your tax burden. Review the deductions and credits you're eligible for to make sure you're taking advantage of all of them.
Consider a Tax Professional
For many people, doing your own taxes with tax software works great. But if you have a complex financial situation, it may be worth consulting an accountant or tax pro. They can help uncover deductions and loopholes you may miss on your own and potentially save you thousands. They stay up-to-date with the ever-changing tax code so you don't have to.
Planning and maximizing your tax efficiency should be an ongoing priority. Don't miss out on the sizable refund or tax savings you deserve by waiting until the last minute. Keep good records, claim all eligible deductions, and consider consulting a tax professional. Your future self will thank you when tax season rolls around again.
Top 5 Common Tax Deductions You Should Be Taking
One of the best ways to keep more money in your pocket is by claiming all the tax deductions and credits you're entitled to. Here are the top 5 common deductions that could save you thousands come tax time:
Medical Expenses
You can deduct qualified medical and dental expenses that exceed 7.5% of your adjusted gross income. This includes things like prescription drugs, insurance premiums, and transportation to healthcare appointments. Keep records of all your expenses to claim this deduction.
Charitable Donations
Donating to charities and nonprofits you support is a win-win. You're helping a good cause while lowering your tax bill. As long as you keep records of your charitable contributions, you can deduct up to 60% of your adjusted gross income.
Mortgage Interest
If you paid interest on your mortgage, that's deductible. This includes interest paid on your primary residence and a second home. The limit is $750,000 of debt for your primary home.
College Tuition
Paying for college? You may be eligible for higher education tax credits, like the American Opportunity Tax Credit or Lifetime Learning Credit. These can knock $2,500-$4,000 off your tax bill for each student.
State and Local Taxes
You can choose to deduct state and local income taxes or state and local sales taxes you paid. This includes property taxes and vehicle registration fees as well. The limit for the total deduction is $10,000 ($5,000 if married filing separately).
By claiming all the deductions you legitimately qualify for, you can save thousands of dollars on your taxes each year. Talk to your tax professional to make sure you're taking advantage of every break you deserve. The more you can deduct, the less you end up owing to Uncle Sam.
Tax Loss Harvesting - What It Is and How to Use It
Tax loss harvesting is a strategy where you sell investments that have declined in value to offset capital gains taxes on your winners. The losses from the sold investments offset the gains, reducing your tax bill.
How It Works
Let's say you have two stocks: Stock A has gained $10,000 this year and Stock B has lost $3,000. If you sell Stock B, you can use that $3,000 loss to offset the $10,000 gain from Stock A, reducing your capital gains tax. You only pay gains taxes on the $7,000 net gain.
The key is you must sell the losing investment to lock in the loss. If you don't sell and the investment recovers in value, the loss disappears. You can then use the loss to offset gains from other investments or take a deduction of up to $3,000 against your income. Any unused losses can be carried forward to future years.
What to Consider
A few things to keep in mind:
•Make sure you don't buy back the same investment within 30 days, or the loss will be disallowed under the "wash sale rule."
•Consider the long-term potential of the losing investment before selling. It may recover and go on to new highs. Only sell if you think it's unlikely to rebound or if tax savings outweigh future gains.
•The more investments you have, the more opportunities for tax loss harvesting. A well-diversified portfolio makes this strategy more effective.
•You must report both gains and losses on your taxes, so keep good records of your cost basis and proceeds from sales.
•Consult a tax professional to make sure you follow the rules and maximize the benefits. Tax loss harvesting can be complicated, and expert guidance is recommended.
Using tax loss harvesting, you can make the most of losses in down years and hold onto more of your gains during the good years. With the right plan and mindset, you'll keep the taxman's share to a minimum.
Tax-Advantaged Retirement Accounts: 401(k)s, IRAs and More
When it comes to saving money on taxes, tax-advantaged retirement accounts should be at the top of your list. These accounts allow your money to grow tax-free or tax-deferred, meaning you keep more of your money in the long run.
401(k)s
If your employer offers a 401(k) match, take full advantage of it. That's free money that can really add up over time through the power of compounding. Contribute at least enough to get any match offered. If possible, aim for the maximum annual contribution, which is $19,500 for 2020.
IRAs
IRAs, or Individual Retirement Accounts, allow you to contribute up to $6,000 in 2020, or $7,000 if over 50. With a traditional IRA, contributions may be tax deductible, and your money grows tax-deferred. Roth IRAs offer no tax deduction up front, but withdrawals in retirement are tax-free. Choose the one that suits your needs.
HSAs
If you have a high-deductible health plan, open a health savings account or HSA. Contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free. The limits for 2020 are $3,550 for individuals and $7,100 for families.
529 Plans
529 plans allow you to save and invest money for education expenses. Contributions are made with after-tax dollars but withdrawals for qualified expenses are tax-free. Limits vary by state but are usually over $200,000 per beneficiary.
The government provides incentives for these accounts because they want you to save for important life goals. Take advantage of these opportunities to keep more of the money you earn. Even small, consistent contributions to multiple accounts over many years can add up to a lot of tax-free or tax-deferred savings.
When to Work With a Tax Professional - Do You Need Help?
As tax season approaches, you may start to feel overwhelmed by the complexity of filing your taxes. For many people, the tax code seems like a foreign language. If you have a complicated tax situation, it can be easy to make mistakes that end up costing you money. When things get confusing, it may be worth considering working with a tax professional.
Do you need help from an expert?
There are a few signs it may be beneficial to hire an accountant or tax preparer to assist you:
Your income comes from multiple sources like investments, freelancing or rental property. The more complex your income, the more opportunities for errors or missed deductions.
You recently had a major life event like getting married, having a baby, buying a home or retiring. Significant life changes often mean changes to your taxes.
You have dependents to claim like children or elderly parents. Claiming dependents comes with additional rules to follow.
You have assets like investments, cryptocurrency or property that generate capital gains, losses or depreciation. Calculating and reporting these can be tricky.
You want to make sure you take advantage of every tax break and deduction you're entitled to. Experts stay up-to-date with the latest tax laws and can uncover more savings.
You simply don't have the time or patience to do your own taxes. Preparing and filing taxes is tedious and time-consuming. Outsourcing the work can save you time and frustration.
Using a tax professional for the first time may seem daunting, but it doesn't have to be complicated or expensive, especially if your tax needs are relatively straightforward. Many accountants and tax preparers offer simple tax return services at affordable rates. The money you save by working with a pro may far outweigh the cost of their services. Come tax time, getting expert help could be the smartest money move you make all year.
Conclusion
So there you have it, a few insider tips to help you keep thousands more in your pocket this tax season. While taxes may not be the most thrilling topic, saving big money sure is exciting. So do your research, talk to experts, look for deductions you may have missed in the past. A few hours of work now could mean a much fatter refund check - or a smaller tax bill - down the road. You work hard for your money, so make sure to take advantage of every opportunity to keep more of it. The tax code may be complicated but with the right strategies you can simplify things and come out ahead. So get ready, get set, get saving and good luck keeping Uncle Sam's hands out of your hard-earned cash this year!
